424B3: Prospectus filed pursuant to Rule 424(b)(3)
Published on April 8, 1997
Subject to Completion, dated April 4, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated March 24, 1997)
$125,000,000
Resource Mortgage Capital, Inc.
% Senior Notes due April , 2002
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Interest Payable and
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The % Senior Notes Due April , 2002 (the "Notes") offered hereby are being
issued by Resource Mortgage Capital, Inc., a Virginia corporation (the
"Company"), in an aggregate principal amount equal to $125 million.
Interest on the Notes will be payable semi-annually in arrears on and ,
commencing , 1997. The Notes are redeemable at any time at the option of the
Company, in whole or in part, at a redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed plus accrued interest to the
redemption date; and (ii) the Make-Whole Amount (as defined herein), if any. See
"Description of the Notes - Optional Redemption" herein. The Notes will mature
on April , 2002.
The Notes will be senior, unsecured obligations of the Company and will rank
prior to all subordinated indebtedness of the Company and pari passu with all
other senior unsecured indebtedness of the Company outstanding on the date of
the issuance of these Notes.
The Notes constitute a separate series of debt securities which will be
represented by a note in book-entry form ( "Global Note") registered in the name
of a nominee of The Depository Trust Company ("DTC"). Beneficial interests in
the Global Note will be shown on, and transfers thereof will be affected only
through, records maintained by DTC (with respect to beneficial interest of
beneficial owners). Owners of beneficial interests in the Global Note will be
entitled to physical delivery of Notes in certificated form equal in principal
amount to their respective beneficial interest only under the limited
circumstances described under "Description of the Notes - Book-Entry System."
Settlement for the Notes will be made in immediately available funds. The Notes
will trade in DTC's Same-Day Funds Settlement System until maturity or earlier
redemption, as the case may be, or until the Notes are issued in certificated
form, and secondary market trading activity in the Notes will therefor settle in
immediately available funds. All payments of principal and interest in respect
of the Notes will be made by the Company in immediately available funds. See
"Description of the Notes - Same-Day Settlement and Payment."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Notes offered by this Prospectus Supplement are offered by the
Underwriters, subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain further conditions. It is expected that delivery of the Notes will be
made in book-entry form through the facilities of DTC, against payment therefor
in immediately available funds, on or about April , 1997.
LEHMAN BROTHERS SMITH BARNEY INC.
APRIL , 1997
Information contained in this Prospectus Supplement is subject to completion or
amendment. This Prospectus Supplement and the accompanying Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF NOTES FOLLOWING THE PRICING OF THE
OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE NOTES OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE NOTES AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
THE COMPANY
Resource Mortgage Capital, Inc. and its Subsidiaries and Affiliates
(together, the "Company") is a specialty finance company which uses its
production operations to create investments for its portfolio. Currently, the
Company's primary production operations include the origination of mortgage
loans secured by multi-family properties and the origination of loans secured by
manufactured homes. The Company has recently expanded its production activities
to include commercial real estate loans and may expand into other financial
products in the future. The Company will generally securitize the loans funded
as Collateral for Collateralized Bonds, limiting its credit risk and providing
long-term financing for its portfolio. Resource Mortgage Capital, Inc. and its
Subsidiaries (together, "Resource REIT") have elected to be treated as a real
estate investment trust ("REIT") for federal income tax purposes and, as such,
must distribute substantially all of its taxable income to shareholders and will
generally not be subject to federal income tax. See "Federal Income Tax
Considerations" in the accompanying Prospectus.
Resource REIT has elected REIT status primarily for the tax advantages
associated with the REIT structure. Management believes that the REIT structure
is the most desirable structure for owning its investment portfolio due to the
elimination of corporate-level income taxation. In addition, because the Company
is not structured as a traditional lender which accepts deposits, it is subject
to substantially less regulatory oversight and incurs lower compliance expenses
compared to banks, thrifts and many other lenders and investors. The Company
also believes that it has an advantage over its competitors who securitize pools
of loans as pass-through securities, which generates immediate and fully taxable
gain-on-sale income. By contrast, when the Company securitizes pools of loans
through the issuance of collateralized bonds, it earns net interest income over
the life of these pools of loans, which is not subject to income tax because of
the Company's status as a REIT.
The Company's principal sources of earnings are net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
Collateral for Collateralized Bonds, adjustable-rate mortgage ("ARM") securities
and loans held for securitization. The Company funds its portfolio investments
with both borrowings and cash raised from the issuance of equity capital. For
the portion of the portfolio investments funded with borrowings, the Company
generates net interest income to the extent that there is a positive spread
between the yield on the earning assets and the cost of borrowed funds. For that
portion of the balance sheet that is funded with equity capital, net interest
income is primarily a function of the yield generated from the interest-earning
asset. The cost of the Company's borrowings may be increased or decreased by
interest rate swap, cap, or floor agreements.
USE OF PROCEEDS
The net proceeds from the sale of the Notes are estimated to be $ million.
The Company intends to initially use the net proceeds to reduce short-term debt
used to finance loans held for securitization during the accumulation period. In
the future, the Company intends to use the proceeds to support the accumulation
of additional loans held for securitization or for general corporate purposes
which may include financing future acquisitions, capital expenditures and
working capital.
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
financial statements of the Company at and for the years ended December 31,
1996, 1995, 1994, 1993 and 1992. The data should be read in conjunction with,
and is qualified by reference to, the more detailed information contained in the
Consolidated Financial Statements and Notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, which are
herein incorporated by reference.
Results of Operations
1996 compared to 1995
Net income and net income per common share increased for 1996 as compared to
1995 primarily as a result of the increase in net interest margin and the gain
on sale of the single-family mortgage operations. This increase was offset
partially by a decline in the gain on sale of assets and an increase in general
and administrative expenses.
Net interest margin for 1996 increased to $74.9 million, or 76.6%, over net
interest margin of $42.4 million for 1995. The increase in net interest margin
resulted from the overall increase in the net interest spread on all
interest-earning assets, which increased to 1.58% for 1996 versus 1.06% for
1995. The increase in net interest margin also resulted from the increased
contribution from the Company's net investment in Collateral for Collateralized
Bonds. The 0.52% increase in the net interest spread is attributable to the ARM
securities being fully-indexed during 1996 and the more favorable interest rate
environment which benefitted interest costs associated with Collateralized Bonds
and borrowings related to the ARM securities. During 1995, as a result of rising
short-term rates during both 1994 and early 1995, the Company's ARM securities
were generally not fully-indexed throughout the year.
The sale of the Company's single-family mortgage operations in 1996 generated
a net gain of $17.3 million. Previously, the single-family mortgage operations
had contributed to the Company's earnings through the securitization and sale of
loans funded through its production activities as pass-through securities,
recorded as gain on sale of assets, and through the funding of loans which were
securitized in Collateralized Bonds. In 1995, the Company recorded a net gain on
sale of assets related to the securitization and sale of loans amounting to $4.7
million. No gain on securitization or sale of loans was recorded in 1996. Net
gain on sale of assets during 1996 resulted primarily from the sale of certain
portfolio assets totaling approximately $2.0 million, offset partially by the
write-down of certain assets for permanent impairment totaling $1.5 million. In
1995, the Company sold portfolio assets for a net gain of $3.8 million and
recorded no write-downs. The Company also sold previously purchased mortgage
servicing rights for a gain of $1.2 million in 1995.
In 1996, general and administrative expenses increased $2.6 million, or
14.6%, to $20.8 million, as the Company continued to build its infrastructure
for its manufactured housing operations. General and administrative expenses
also increased from 1995 as a result of the Company's continued expansion of its
wholesale origination capabilities for its single-family mortgage operations
prior to its sale. The Company continues to expand its manufactured housing
operations, and in August 1996, acquired Multifamily Capital Markets ("MCM") to
expand its multi-family and commercial real estate lending businesses. The
growth of the production operations should continue to cause general and
administrative expenses to increase in 1997.
1995 compared to 1994
The decrease in the Company's earnings for 1995 as compared to 1994 was
primarily the result of the decrease in net gain on sale of assets and the
decrease in net interest margin. These decreases were partially offset by a
decrease in general and administrative expenses.
The net gain on sale of assets decreased $18.0 million, or 65.2%, to $9.7
million in 1995 from $27.7 million in 1994. This decrease resulted from the
combined effect of (i) the Company's change in securitization strategy in 1995
to the issuance of Collateralized Bonds which were accounted for as financing
transactions, versus the use of pass-through mortgage security structures used
in 1994, which were accounted for as sales, (ii) the lower mortgage loan funding
levels by the Company as a result of a decrease in overall industry-wide
mortgage loan originations, resulting from a higher level of price competition
for mortgage loans and (iii) the flatter yield curve, which had an adverse
impact on the Company's production of ARM loans.
Net interest margin decreased $2.0 million, or 4.4%, to $42.4 million in 1995
from $44.4 million for 1994. This decrease resulted primarily from the change in
the net interest spread on the interest-earning assets, which declined from
1.12% in 1994 to 1.06% in 1995. The decline in the net interest spread was
attributable to a temporary reduction in the net interest spread in ARM
securities. This temporary reduction resulted from the interest rate on
borrowings increasing at a faster rate than the ARM securities which
collateralize these borrowings. In December 1995, the net interest spread had
increased to 1.18% as a result of the upward resets on the ARM securities and
the more favorable short-term interest rate environment. Net interest margin
also declined as a result of the increase in the provision for credit losses,
which was $2.9 million and $2.1 million in 1995 and 1994, respectively.
General and administrative expenses decreased 14.9%, to $18.1 million for
1995 from $21.3 million for 1994. This decline resulted primarily from the
Company's effort to reduce costs in line with the reduced level of mortgage loan
originations.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company
at December 31, 1996, and as adjusted to give effect to the issuance of the
Notes and the application of the estimated net proceeds therefrom as described
under "Use of Proceeds" as described herein.
BUSINESS
Business Focus and Strategy
The Company is involved in two primary functions: (i) mortgage and consumer
lending, and (ii) management of a portfolio of investments created through
securitization and, to a lesser extent, secondary market purchases.
Lending Strategies
The Company generally adheres to the following business strategies in its
lending operations:
develop production capabilities to originate and acquire financial assets
in order to create attractively priced investments for its portfolio,
generally at a lower cost than if investments with comparable risk
profiles were purchased in the secondary market;
focus on loan products that maximize the advantages of the REIT tax
election;
emphasize direct relationships with the borrower and minimize, to the
extent practical, the use of origination intermediaries;
use internally generated guidelines to underwrite loans for all
product types and maintain centralized loan pricing;
perform the servicing function for loans on which the Company has credit
exposure; emphasize the use of early intervention, aggressive collection
and loss mitigation techniques in the servicing process to manage and seek
to reduce delinquencies and to minimize losses in its securitized loan
pools; and
vertically integrate the loan origination process by performing the
sourcing, underwriting, funding and servicing of loans to maximize
efficiency and provide superior customer service.
Investment Portfolio Strategies
The Company adheres to the following business strategies in its investment
portfolio operations:
use its loan origination capabilities to provide assets for its
investment portfolio, generally at a lower effective cost than if
investments of comparable risk profiles where purchased in the secondary
market;
securitize its loan production to provide long-term financing and to
reduce the Company's liquidity, interest rate and credit risk for these
long-term assets;
utilize leverage to finance purchases of loans and investments in line
with prudent capital allocation guidelines which are designed to balance
the risk in certain assets, thereby increasing potential returns to
shareholders while seeking to protect the Company's equity base;
structure borrowings to have interest rate adjustment indices and
interest rate adjustment periods that, on an aggregate basis, generally
correspond (within a range of one to six months) to the interest rate
adjustment indices and interest rate adjustment periods of the related
asset; and
utilize interest rate caps, swaps and similar instruments and
securitization vehicles with such instruments embodied in the structure to
mitigate the risk of the cost of its variable rate liabilities increasing
at a faster rate than the earnings on its assets during a period of rising
interest rates.
Generally, the Company does not seek gain-on-sale treatment in accounting for
its securitizations for financial accounting or tax reporting purposes. Rather,
the Company generally finances its assets through structured debt vehicles
(i.e., Collateralized Bonds) where the emphasis is on earning net interest
income over the life of the associated assets and not gains from the sales of
assets. The Company's strategy is to build and hold a portfolio of investments
that generates net interest margin over time and allows the Company to take full
advantage of its REIT status. While securitizing and selling assets (generally
through a security where a REMIC election has been made) results in greater
earnings and taxable income during the period of production (assuming constant
portfolio assumptions) due to the current income recognition of the present
value of future cash flows (i.e. the gain-on-sale), management believes that
over the long term the Company will produce a tax-advantaged stream of income
and a more stable dividend flow to shareholders because its earnings will be
dependent on the size of the Company's investment portfolio, rather than on its
quarterly loan production level. Gain-on-sale accounting for such sales presents
as current income the expected future cash flows from the loans. Actual
resulting cash flows are subject to revision due to loan pool performance
(should actual losses and prepayment experience differ from the assumed levels),
while net interest margin accounting records income essentially as cash flow is
received. Additionally, while management intends to aggressively manage costs in
all production cycles, net interest margin accounting provides management more
flexibility to reduce its loan production rate during periods in which
management believes the market conditions for loan production are unattractive,
without necessarily experiencing an immediate decline in net income. Companies
utilizing gain-on-sale accounting will typically experience a more exaggerated
decline in net income during periods of declining loan origination volume.
Production Operations
The Company's current production operations consist primarily of the
origination or purchase of loans and the securitization of such loans. The
production operations have historically enabled the Company to enhance its
return on shareholders' equity ("ROE") by earning a favorable net interest
spread while loans are being accumulated for securitization and creating
investments for its portfolio at a lower cost than if such investments were
purchased from third parties. The creation of investments involves the issuance
of Collateralized Bonds or pass-through securities collateralized by the loans
generated from the Company's production activities and the retention of one or
more classes of the Collateralized Bonds or securities relating to such
issuance. The issuance of Collateralized Bonds and pass-through securities
generally limits the Company's credit and interest rate risk in contrast to
retaining loans in its investment portfolio in whole-loan form.
Until May 1996, the Company's production operations were comprised mainly of
its single-family mortgage operations that concentrated on the "non-conforming"
segment of the residential loan market. The Company funded its single-family
loans directly through mortgage brokers (wholesale) and purchased loans through
a network of mortgage companies (correspondents). The single-family loans which
were originated or purchased by the Company were secured by properties
throughout the United States. The Company built this single-family production
operation from a start-up in 1988, funding $18.2 billion in principal amount of
loans since inception. Loans originated through the Company's former
single-family mortgage operations constitute the majority of loans underlying
the securities that comprise the Company's current investment portfolio.
On May 13, 1996, the Company sold its single-family mortgage operations to
Dominion Mortgage Services, Inc. ("Dominion"), a wholly-owned subsidiary of
Dominion Resources, Inc. (NYSE:D), for $68 million. Included in the sale of the
single-family mortgage operations were the Company's single-family
correspondent, wholesale and servicing operations. The sale resulted in a gain
of $17.3 million, which was net of a provision of $31.0 million for possible
losses on single-family loans where the Company has retained a portion of the
credit risk and where prior to the sale the Company had serviced such
single-family loans. The terms of the sale included an initial cash payment of
$20.5 million, with the remainder of the purchase price to be paid evenly over
the next five years pursuant to a note agreement. As a result of the sale, the
Company is precluded from originating certain types of single-family mortgage
loans through either correspondents or a wholesale network for a period of five
years from the date of sale. The Company may acquire, however, single-family
sub-prime mortgage loans through bulk purchases of $25 million or more.
Since the sale of the single-family mortgage operations to Dominion described
above, the Company's primary production operations have been focused on
multi-family and manufactured housing lending. The Company has recently
broadened its multi-family lending capabilities to include other types of
commercial real estate loans and expanded its manufactured housing lending to
include inventory financing to manufactured housing dealers. The Company may
also purchase single-family loans on a "bulk" basis from time to time and may
originate such loans on a retail basis.
The Company believes that it has been successful in operating its production
activities. Since its initial public offering in February 1988, the Company's
average total ROE has been 17%. The Company estimates that its ROE has averaged
4% higher than it would have been otherwise as a result of its production
operations. For purposes of the above percentages, ROE was calculated on a
weighted average basis prior to unrealized gains or losses on available-for-sale
mortgage securities. The single-family operations contributed $62 million to the
Company's net earnings since 1988, including the $17.3 million of net gain
recorded in May 1996, and produced a positive mark-to-market on related
single-family investments of $65.2 million as of December 31, 1996.
While there can be no assurances in this regard, the Company believes that
its future production activities will continue to have a favorable impact on its
ROE and to create investments for its portfolio at a lower all-in cost than if
investments with comparable risk profiles were purchased from third parties.
Multi-family Lending Operations
The Company currently originates multi-family mortgage loans which are
secured by apartment properties that have qualified for low-income housing tax
credits ("LIHTCs") under Section 42 of the Internal Revenue Code of 1986, as
amended. Since 1992, the Company has funded approximately $355 million of
multi-family mortgage loans through a brokerage arrangement with Multi-Family
Capital Markets ("MCM"), a Richmond, Virginia-based company which the Company
acquired in August 1996 for $4 million. The Company believes the acquisition of
MCM will accelerate the Company's efforts of expanding its multi-family lending
activities and improving its competitive position in the marketplace for such
loans. During the first quarter of 1997, the Company broadened its income
property lending beyond LIHTC apartment properties to include commercial
industrial warehouse properties. Future commercial lending efforts may include
apartment properties that have not received LIHTCs, assisted living and
retirement housing, limited and full service hotels, urban or suburban office
buildings, retail shopping strips and centers, other light industrial buildings
and manufactured housing parks. The Company contemplates that it would service
and securitize such loans from its multi-family production operations.
As of December 31, 1996, the Company had $208.2 million in principal balance
of multi-family loans held for securitization. Such loans had an average
principal balance of $3.6 million, and ranged in size from $0.6 million to $11.0
million. The Company has commitments to fund loans through 1998 of approximately
$517 million, as of March 31, 1997. As of such date, the Company had 19
employees directly involved in its multi-family lending operations.
Current federal law provides that LIHTCs are allocated under two methods. For
apartment properties that are not financed through the issuance of tax-exempt
bonds, each state receives an annual allocation of LIHTCs. Each state then
allocates portions of its LIHTC allocation to various developers for the purpose
of constructing or rehabilitating low-income housing apartment properties. Based
upon current allocation amounts, approximately 110,000 apartment units
nationwide are constructed or rehabilitated annually as a result of such LIHTCs.
For property owners to be eligible for, and remain in compliance with the LIHTC
regulations, owners must "set aside" at least 20% of the units for rental to
families with income of 50% or less of the median income for the locality as
determined by the Department of Housing and Urban Development ("HUD"), or at
least 40% of the units to families with income of 60% or less of the HUD median
income. Most owners elect the "40-60 set-aside" and designate 100% of the units
in the project as LIHTC units. Additionally, rents cannot exceed 30% of the
annual HUD median income adjusted for the unit's designated "family size."
Assuming the apartment properties are eligible for and remain in compliance with
the LIHTC regulations, the property owner receives a tax credit for each year of
a ten year period equal to approximately 9% of the eligible basis of the
apartment property (the "9% Credits").
For apartment properties that are financed through the issuance of tax-exempt
bonds, there is no allocation, and, subject to certain initial and on-going
requirements, restrictions and compliance that are similar to those set forth in
the prior paragraph, each apartment property automatically qualifies for LIHTCs
for each year of a ten year period equal to approximately 4% of the eligible
basis of the apartment property (the "4% Credits").
Generally, the LIHTCs are sold by the developers to investors prior to
construction in order to provide additional equity for the project. The sale of
the 9% Credits typically provides funds equal to approximately 50% of the
construction costs of the project; the sale of the 4% Credits typically provides
funds equal to approximately 20% of the construction costs of the project. The
multi-family loans made by the Company normally fund the difference between the
project cost (including a fee to the developer) and the funds generated from the
sale of the 9% Credits. Recently, the Company has entered into a "master
commitment" with a large investor in apartment properties with 4% Credits to
purchase the tax-exempt bonds related to such properties, and may administer the
construction process relating to certain of those properties. In addition to
providing substantial equity for the apartment project, the Company believes the
LIHTCs provide a strong on-going incentive to the owner of the property to
maintain the property and meet its debt service obligations, since the owner,
upon foreclosure, would lose any LIHTCs not already taken and may be subject to
recapture of a portion of the LIHTCs already taken.
With the acquisition of MCM, the Company's multi-family originations are now
sourced directly through the Company's relationships with developers and
syndicators, rather than through correspondent or broker relationships. Once a
sufficient volume of multi-family loans are accumulated, the Company plans to
securitize such loans through the issuance of Collateralized Bonds, or, in the
case of tax-exempt bonds, through the issuance of a pass-through security. The
Company anticipates that the issuance of the Collateralized Bonds and
pass-through securities will limit the Company's future credit and interest rate
risk on such multi-family originations. The Company presently intends to
accumulate approximately $250 million of multi-family loans for a series of
Collateralized Bonds to be issued during 1997. The Company has previously issued
one series of Collateralized Bonds backed by multi-family loans. The Company has
not issued any pass-through securities backed by tax-exempt bonds. See
"Securitization Strategy" below.
Underwriting. The Company underwrites all of its multi-family originations.
Among other criteria, the Company underwrites each multi-family loan or bond to
a minimum debt service coverage ratio of 1.15 times the property's net operating
income, with a maximum loan to value of 80% of appraised value, or in the case
of a bond, to 85% of appraised value. The Company believes that such criteria
are consistent with general underwriting standards for LIHTC multi-family
properties used in the industry. These underwriting criteria are designed to
assess the particular property's current and future capacity to meet all debt
service payments on a current basis and to ensure that adequate collateral value
exists to support the principal amount of the loan or bond in the event the
Company is required to foreclose on such properties.. Prior to committing to
make and fund such loans, the Company's internal loan committee, a majority of
whose members are not directly involved in such activities, review and approves
such lending transactions.
Because the Company funds such loans or bonds at fixed-interest rates and
also commits to funding future loans or bonds at fixed-interest rates, the
Company is exposed to interest rate risk to the extent that interest rates
increase in the future. The Company strives to mitigate such risk by the use of
futures contracts and forward contracts on United States treasury securities
with duration characteristics similar to the multi-family loans, bonds and
commitments.
Manufactured Housing Lending Operations
The Company began to build the infrastructure of its manufactured housing
lending operations during the fourth quarter of 1995 and commenced funding loans
on manufactured homes during the second quarter of 1996. The Company believes
that manufactured housing is a growing market with strong customer demand. The
Company entered this business primarily to diversify its existing product line
and to increase its overall production. Manufactured housing lending complements
the Company's residential lending and securitization expertise.
A manufactured home is distinguished from a traditional single-family home in
that the housing unit is constructed in a plant, transported to the site and
secured to a foundation, whereas a single-family home is built on the site.
Loans on manufactured homes may take the form of a consumer installment loan
(i.e., a personal property loan) when the borrower rents the lot underlying the
manufactured home or owns the lot and finances it separately, or a traditional
mortgage loan when the borrower finances both the lot and the manufactured home.
To date, the Company has only originated consumer installment loans on
manufactured homes, but plans to originate mortgage loans in the future. The
Company offers both fixed and adjustable rate loans with terms ranging from 7 to
30 years. As of December 31, 1996, the Company had $41 million in principal
balance of manufactured housing loans in inventory. The average funded amount
per loan was approximately $37,000. As of March 31, 1997, the Company had
commitments outstanding of approximately $72 million. As of such date, the
Company had 72 employees directly involved in its manufactured housing lending
operations.
The rising cost of site built single-family housing in the United States has
shifted consumer demand toward manufactured housing as an affordable alternative
to traditional single-family homes. According to the December 1996 Manufacturing
Report by the Manufactured Housing Institute, manufactured home sales,
approximately 52% of which were multi-section homes, represented an estimated
24% of all new housing units produced in the United States in 1996 compared to
17% in 1991. During 1996, approximately 363,000 manufactured homes were shipped
to retailers (i.e., dealers) which then sell the homes to consumers, with the
majority of such sales being financed as personal property loans using an
installment sales contract. As the manufactured home is generally transported on
public roads, each home is usually titled with the respective state department
of motor vehicles.
The Company's manufactured housing lending business is operated out of the
Company's main office in Glen Allen, Virginia (the "home" office) and is
supported currently with regional offices in North Carolina, Georgia, Texas and
Michigan. The Company is planning to establish a fifth regional office on the
West Coast during the second quarter of 1997. Each regional office supports
three to four district sales managers who establish and maintain relationships
with manufactured housing dealers. By using the home/regional/district office
structure, the Company has created a decentralized customer service and loan
origination organization with centralized controls and support functions. The
Company believes that this approach also provides the Company with a greater
ability to maintain customer service, to respond to market conditions, to enter
and exit local markets and to test new products.
The Company's current sources of originations are its dealer network and
direct marketing to consumers. In the future, the Company plans to expand its
sources of origination to nearly all sources for manufactured housing loans by
establishing relationships with park owners, developers of manufactured housing
communities, manufacturers of manufactured homes, brokers and correspondents.
The Company currently advertises in trade publications to reach dealers and
solicits loans through direct mail and telemarketing.
The Company's dealer qualification criteria includes minimum equity
requirements, minimum years of experience for principal officers, acceptable
historical financial performance and various business references. The dealer
application package is submitted by the dealer to the regional office manager
for review and approval. As of March 31, 1997, the Company had 590 approved
dealers with 1,115 sales locations. The Company plans to continue to expand its
dealer network.
Inventory Financing. In 1997, the Company began offering inventory financing,
or "lines of credit," to retail dealers for the purpose of purchasing
manufactured housing inventory to display and sell to customers. Under such
arrangements, the Company lends against the dealer's line of credit when an
invoice representing the purchase of a manufactured home by a dealer is
presented to the Company by the manufacturer of the manufactured home. Prior to
approval of the line of credit for the dealer, the Company performs a financial
review of the manufacturer as well as the dealer. The Company also performs
monthly inspections of the dealer's inventory, financed by the Company, and
annual reviews of both the dealer and the manufacturer. Entrance into this area
of financing is consistent with the Company's strategy to be a "full-service"
provider to the manufactured housing industry.
Underwriting. The Company underwrites 100% of the manufactured housing
loans it originates. The loans are underwritten at the regional offices based on
guidelines established by the Company. Home office approvals are required when
loan amounts exceed specified lines of credit authority. Turnaround for
approvals are within four to twenty-four hours, with fundings usually within
twenty-four to forty eight hours of receipt of complete documentation.
Because of the decentralization of the Company's manufactured housing
business, in addition to the Company's underwriting process and dealer approval
program, the Company also currently performs regional office reviews on a
periodic basis to ensure that required procedures are being followed. These
reviews include the collections area, the remarketing of foreclosed or
repossessed homes, underwriting, dealer performance and quality control. The
periodic regional quality control reviews are performed to ensure that the
underwriting guidelines are consistently applied. The Company also performs
customer audits both before and after funding of the loan.
Manufactured housing loans are primarily fixed-interest rate with some
adjustable-rate and step-rate loans. , The Company will seek to mitigate
interest rate risk associated with fixed-rate products through the use of
forward sales, futures and/or swaps until the pool of loans is securitized. As
of December 31, 1996, 95.3% of the loans were fixed-rate.
The Company perfects its security interest on the loans that are in the form
of installment sales contracts by filing title with the department of motor
vehicles or Uniform Commercial Code financing statements with the respective
state. Such loans are eligible REIT assets.
Single-family Lending
Pursuant to the terms of the sale of the Company's single-family operations
to Dominion during the second quarter of 1996, the Company is precluded from
originating or purchasing certain types of single-family loans through a
wholesale or correspondent network through April 2001. However, the Company may
purchase any type of single-family loans on a "bulk" basis, i.e., in blocks of
$25 million or more, and may originate loans on a retail basis. The Company
intends to purchase single-family loans in bulk to the extent that the Company
can generate a favorable return on investment upon securitization. Due to the
sale of its single-family operations, the Company does not currently have the
internal capability to directly underwrite or service single-family mortgage
loans. In the future, the Company may re-establish an internal underwriting and
servicing capability for single-family mortgage loans, similar to that which
existed prior to the sale of its single-family operations. In the interim, the
Company plans to occasionally bulk purchase "A" quality loans and the Company
may utilize independent contractors to assist in the underwriting and servicing
of such loans.
Other Production Activities
In addition to the production activities described above, the Company makes
secured loans against single-family homes that serve as model homes for its
builder and also extends leases on such homes that it has bought from the
builder. Prior to providing such a loan or purchasing a model home which is
leased back to the builder, the Company has an appraisal conducted on each model
home and will limit the amount of the loan or purchase price for such a house to
a predetermined percentage of the home's appraised value. When the Company
purchases a model home, it will simultaneously enter into a lease with the home
builder for a lease term of generally twelve to eighteen months. At the end of
the lease term, the builder may assist in selling the model home, at the option
of the Company. The lease rates are typically based on one-month London
Interbank Offered Rate ("LIBOR") plus a spread. When the Company provides a
loan, the model home serves as collateral for the loan. The loan generally has a
term of twelve to eighteen months with an interest rate based on one-month LIBOR
plus a spread.
In the future, the Company may enter into other forms of lending or leasing
activities, where it feels it can use its tax status as a REIT as a competitive
advantage. The Company may engage in these activities through internal growth or
through acquisition.
Loan Servicing
During 1996, the Company established the capability to service both
multi-family and manufactured housing loans funded through its production
operations. The purpose of servicing the loans funded through the production
operations is to better manage the Company's credit exposure while the loans are
held for securitization, as well as the exposure which is usually generated when
the Company retains a portion of the credit risk on a pool of the mortgage loans
after securitization. The multi-family servicing function is located in Glen
Allen, Virginia and includes collection and remittance of principal and interest
payments, administration of tax and insurance accounts, management of the
replacement reserve funds, collection of certain insurance claims and, if the
loan defaults, the resolution of such defaulted loan through either a
modification or the foreclosure and sale of the property.
The manufactured housing servicing function is operated in Fort Worth, Texas.
As servicer of such manufactured housing loans, the Company is responsible for
the collection of monthly payments, and if the loan defaults, the resolution of
such defaulted loan through either a modification or the repossession and sale
of the related property. Minimizing the time between the date the loan goes in
default and the time that the manufactured home is repossessed and sold is
critical to mitigating losses on these loans.
Securitization Strategy
When a sufficient volume of loans is accumulated, the Company will generally
securitize these loans through the issuance of Collateralized Bonds. The Company
believes that securitization is an efficient and cost effective way for the
Company to (i) reduce capital otherwise required to own the loans in whole loan
form; (ii) limit the Company's exposure to credit risk on the loans; (iii) lower
the overall cost of financing the loans; and (iv) depending on the
securitization structure, limit the Company's exposure to interest rate and/or
valuation risk. As a result of the reduction in the availability of mortgage
pool insurance, and the Company's desire to reduce both its recourse borrowings
as a percentage of its overall borrowings as well as the variability of its
earnings, the Company has utilized the Collateralized Bond structure for
securitizing substantially all of its loan production since the beginning of
1995. Prior to 1995, the Company issued pass-through securities, in a
senior-subordinated structure or with pool insurance.
The Company plans to securitize multi-family tax-exempt bonds through the
issuance of pass-through securities, as the tax-exempt nature of the interest
income must be "passed through" to the holders of such securities. As with other
classes of its assets, the Company believes that such a securitization will be
an efficient and cost effective way for the Company to (i) reduce capital
otherwise required to be maintained; (ii) limit the Company's exposure to credit
risk on the bonds; and (iii) limit the Company's exposure to interest rate
and/or valuation risk. As of the date hereof, the Company has not purchased or
securitized any tax-exempt bonds.
All securities are structured by the Company so that a substantial portion of
the securities are rated in one of the two highest rating categories by at least
one of the nationally recognized rating agencies (for example, AAA or AA by
Standard and Poor's Rating Services). Credit enhancement for these securities
may take the form of over-collateralization, subordination, reserve funds,
mortgage pool insurance, bond insurance, third-party limited guaranties or any
combination of the foregoing. The Company strives to use the most cost effective
security structure and form of credit enhancement available at the time of
securitization. Securities issued by the Company are not generally guaranteed by
a federal agency. Each series of securities is expected to be fully payable from
the collateral pledged to secure the series. Regardless of the form of credit
enhancement, the Company may retain a limited portion of credit risk related to
the loans or bonds after securitization.
Master Servicing
The Company performs the function of master servicer for certain of the
securities it has issued, including all of the securities it issued since 1995.
The master servicer's function typically includes monitoring and reconciling the
loan payments remitted by the servicers of the loans, determining the payments
due on the securities and determining that the funds are correctly sent to a
trustee or investors for each series of securities. Master servicing
responsibilities also include monitoring the servicers' compliance with its
servicing guidelines. As master servicer, the Company is paid a monthly fee
based on the outstanding principal balance of each such loan master serviced or
serviced by the Company as of the last day of each month. The Company has been
master servicing mortgage loans since November 1993.
Investment Portfolio
Strategy
The core of the Company's earnings is derived from its investment portfolio.
The Company's strategy for its investment portfolio is to create a diversified
portfolio of high quality assets that in the aggregate generates stable income
for the Company in a variety of interest rate and prepayment environments and
preserves the capital base of the Company. In many instances, the Company's
investment strategy involves not only the creation of the asset, but structuring
the related borrowing through the securitization process to create a stable
yield profile.
At December 31, 1996, the Company's investments included the following
amounts at their carrying basis:
The Company continuously monitors the aggregate projected net yield of its
investment portfolio under various interest rate and prepayment environments.
While certain investments may perform poorly in an increasing interest rate
environment, certain investments may perform well, and others may not be
impacted at all. Generally, the Company adds investments to its portfolio which
are designed to increase the diversification and reduce the variability of the
yield produced by the portfolio in different interest rate environments. The
Company may add new types of investments to its portfolio in the future.
Approximately $3.2 billion of the Company's portfolio assets as of December
31, 1996 are comprised of loans or securities that have coupon rates which
adjust over time (subject to certain periodic and lifetime limitations) in
conjunction with changes in short-term interest rates. Generally, during a
period of rising interest rates, the Company's net interest spread earned on its
investment portfolio will decrease. The decrease of the net interest spread
results from (i) the lag in resets of the ARM loans underlying the ARM
securities and certain Collateral for Collateralized Bonds relative to the rate
resets on the associated borrowings and (ii) rate resets on the ARM loans which
are generally limited to 1% every six months, while the associated borrowings
have no such limitation. As interest rates stabilize and the ARM loans reset,
the net interest margin may be restored to its former level as the yields on the
ARM loans adjust to market conditions. Conversely, net interest margin may
increase following a fall in short-term interest rates. This increase may be
temporary as the yields on the ARM loans adjust to the new market conditions
after a lag period. In each case, however, the Company expects that any increase
or decrease in the net interest spread due to changes in the short-term interest
rates will be temporary. The net interest spread may also be increased or
decreased by the cost or proceeds of interest rate swap, cap or floor
agreements.
Because of the 1% periodic cap nature of the ARM loans underlying the ARM
securities, these securities may decline in market value in a rising interest
rate environment. In a rapidly increasing rate environment, as was experienced
in 1994, a decline in value may be significant enough to impact the amount of
funds available under repurchase agreements to borrow against these securities.
In order to maintain liquidity, the Company may be required to sell certain
securities. To mitigate this potential liquidity risk, the Company strives to
maintain excess liquidity to cover any additional margin required in a rapidly
increasing interest rate environment, defined as a 3% increase in short-term
interest rates over a twelve-month time period. The Company has also entered
into an interest rate swap transaction aggregating $1.02 billion notional
amount, which is designed to protect the Company's cash flow and earnings on the
ARM securities and certain Collateral on Collateralized Bonds in a rapidly
rising interest rate environment. Under the terms of this interest rate swap
agreement, the Company receives payment if one-month LIBOR increases by 1% or
more in any six-month period. Finally, the Company has purchased $1.5 billion
notional of interest rate cap agreements to reduce the risk of the lifetime
interest rate limitation on the ARM securities and on certain Collateralized
Bonds owned by the Company. Liquidity risk also exists with all other
investments pledged as collateral for repurchase agreements, but to a lesser
extent.
The remaining portion of the Company's portfolio assets as of December 31,
1996, approximately $0.5 billion, are comprised of loans or securities that have
coupon rates that are either fixed or do not reset within the next 15 months.
The Company has limited its interest rate risk on such investments through (i)
the issuance of fixed-rate Collateralized Bonds and notes payable, (ii) interest
rate swap agreements (Company receives floating, pays fixed) and (iii) equity,
which in the aggregate totals approximately $0.8 billion as of the same date.
Overall, the Company's interest rate risk is primarily related to the rate of
change in short term interest rates, not the level of short term interest rates.
Investment in Collateralized Bonds. Collateral for Collateralized Bonds
represents the single largest investment in the Company's portfolio. Interest
margin on the net investment in Collateralized Bonds (defined as the principal
balance of Collateral for Collateralized Bonds less the principal balance of the
Collateralized Bonds outstanding) is derived primarily from the difference
between (i) the cash flow generated from the mortgage collateral pledged to
secure the Collateralized Bonds and (ii) the amounts required for payment on the
Collateralized Bonds and related insurance and administrative expenses.
Collateralized Bonds are generally non-recourse to the Company. The Company's
yield on its net investment in Collateralized Bonds is affected primarily by
changes in interest rates and prepayment rates and, to a lesser extent, credit
losses on the underlying loans. The Company may retain for its investment
portfolio certain classes of the Collateralized Bonds issued and pledge such
classes as collateral for repurchase agreements.
ARM securities. Another segment of the Company's portfolio is the investments
in ARM securities. The interest rates on the majority of the Company's ARM
securities reset every six months and the rates are subject to both periodic and
lifetime limitations. Generally, the repurchase agreements, which finance a
portion of the ARM securities, have a fixed rate of interest over a term that
ranges from 30 to 90 days and, therefore, are not subject to repricing
limitations. As a result, the net interest margin on the ARM securities could
decline if the spread between the yield on the ARM security versus the interest
rate on the repurchase agreement was to be reduced. The Company may increase its
return on equity by pledging the ARM securities as collateral for repurchase
agreements.
Fixed-rate mortgage securities. Fixed-rate mortgage securities consist of
securities that have a fixed-rate of interest for specified periods of time.
Certain fixed-rate mortgage securities have a fixed interest rate for the first
3, 5 or 7 years and an interest rate that adjusts at six- or twelve-month
intervals thereafter, subject to periodic and lifetime interest rate caps. The
Company's yields on these securities are primarily affected by changes in
prepayment rates. Such yields will decline with an increase in prepayment rates
and will increase with a decrease in prepayment rates. The Company generally
borrows against its fixed-rate mortgage securities through the use of repurchase
agreements.
Other mortgage securities. Other mortgage securities consist primarily of
interest-only securities ("I/Os"), principal-only securities ("P/Os") and
residual interests which were either purchased or were created through the
Company's production operations. An I/O is a class of a collateralized bond or a
mortgage pass-through security that pays to the holder substantially all
interest. A P/O is a class of a collateralized bond or a mortgage pass-through
security that pays to the holder substantially all principal. Residual interests
represent the excess cash flows on a pool of mortgage collateral after payment
of principal, interest and expenses of the related mortgage-backed security or
repurchase arrangement. Residual interests may have little or no principal
amount and may not receive scheduled interest payments. Included in the residual
interests at December 31, 1996 was $53.5 million of equity ownership in residual
trusts which own collateral financed with repurchase agreements. The collateral
consists of primarily agency ARM securities. The Company's borrowings against
its other mortgage securities is limited by certain loan covenants to 3% of
shareholders' equity. The yields on these securities are affected primarily by
changes in prepayment rates and by changes in short-term interest rates.
Other portfolio assets. Other portfolio assets consists of an installment
note from Dominion received as part of the consideration for the sale of the
single-family mortgage operations, single-family homes leased to home builders
and other financing lease receivables. The installment note received totaled
$47.5 million in the aggregate and bears interest at a rate of 6.5%, which is
paid quarterly. The principal balance of the note is being paid in five equal
installments of $9.5 million which began January 2, 1997. The single-family
homes leased to builders at December 31, 1996 totaled $33.3 million. The leases
average twelve to eighteen months with the Company selling the home at the end
of the lease. The lease rates are typically based on one-month LIBOR plus a
spread.
Loans held for securitization. Loans held for securitization consist
primarily of loans originated or purchased through the Company's production
operations that have not been securitized. During the accumulation period, the
Company is exposed to risks of interest rate fluctuations and may enter into
hedging transactions to reduce the change in value of such loans caused by
changes in interest rates. The Company is also at risk for credit losses on
these loans during accumulation. This risk is managed through the application of
loan underwriting and risk management standards and procedures and the
establishment of reserves.
Hedging and other portfolio transactions. As part of its asset/liability
management process, the Company enters into interest rate agreements such as
interest rate caps and swaps and financial futures contracts ("hedges"). These
agreements are used to reduce interest rate risk which arises from the lifetime
interest rate caps on the ARM securities, the mismatched repricing of portfolio
investments versus borrowed funds and assets repricing on indices such as the
prime rate which are different than the related borrowing indices. The
agreements are designed to protect the portfolio's cash flow and to stabilize
the portfolio's yield profile in a variety of interest rate environments.
Risks Inherent in the Company's Investment Portfolio
The Company is exposed to three types of risks inherent in its investment
portfolio. These risks include credit risk (inherent in the security structure
and underlying loan), prepayment/interest rate risk (inherent in the underlying
loan) and margin call risk (inherent in the security if it is used as collateral
for borrowings). The Company is exposed to credit risk while loans are held for
securitization as well as after securitization. The Company's credit risk is
managed primarily through applying loan underwriting and risk management
standards and procedures that the Company believes to be conservative, as well
as through establishing a reserve for potential losses. The Company's credit
risk on a pool of loans is generally limited when the loans are securitized.
The Company has historically securitized its loan production in
collateralized bond or pass-through securitization structures. With either
structure, the Company may use overcollateralization, subordination, reserve
funds, bond insurance, mortgage pool insurance or any combination of the
foregoing for credit enhancement. Regardless of the form of credit enhancement,
the Company may retain a limited portion of the direct credit risk of the
securitization. This risk can include credit risk on the overcollateralization
in a collateralized bond structure, credit risk from special hazard losses or
fraud losses not covered by pool insurance or credit risk through retention of
subordinated securities for which losses exceed the protection provided by
reserve funds or pool insurance. The Company has established reserves and
discounts for estimated losses on both credit risk during the accumulation
period and as a result of the securitization. The total of those reserves and
discounts as of December 31, 1996 was $94.3 million.
For prepayment/interest rate risk and margin call risk, the Company has
developed analytical tools and risk management strategies to monitor and address
these risks, including (i) weekly mark-to-market of a representative basket of
securities within the portfolio, (ii) monthly analysis using advanced
option-adjusted spread (OAS) methodology to calculate the expected change in the
market value of various representative securities within the portfolio under
various extreme scenarios and (iii) monthly static cash flow and yield
projections under forty-nine different scenarios. Such tools allow the Company
to continually monitor and evaluate its exposure to these risks and to manage
the risk profile of the investment portfolio in response to changes in the risk
profile. While the Company may use such tools, there can be no assurance the
Company will accomplish the goal of adequately managing the risk profile of the
investment portfolio.
The Company also views its hedging activities as a tool to manage these
identified risks. For the risks associated with the periodic and lifetime
interest rate caps on the ARM securities and certain Collateral for
Collateralized Bonds, the Company uses interest rate cap and interest rate swap
agreements. The purpose of these transactions is to protect the Company in the
event that interest rates increase to levels higher on the index than the
periodic and/or lifetime caps on the underlying ARM loans will allow the ARM
loans to reset. The caps effectively lift the lifetime cap on a portion of the
ARM securities and certain Collateral for Collateralized Bonds in the Company's
portfolio while the various interest rate swap agreements limit the Company's
exposure to changes in the financing rates on a portion of these securities.
Eurodollar financial futures and options contracts may be utilized to hedge
the risks associated with financing a portion of the investment portfolio with
variable-rate repurchase agreements. These instruments synthetically lengthen
the duration of the repurchase agreement financing, typically from one month to
three and six months. The Company will receive additional cash flow if the
related Eurodollar index increases above the contracted rates. If, however, the
Eurodollar index decreases below contracted rates, the Company will pay
additional cash flow. As of December 31, 1996, the Company had lengthened the
duration of $1.0 billion of its repurchase agreements and certain Collateralized
Bonds to three months.
As the Company uses repurchase agreements to finance a portion of its ARM
investment portfolio, the Company is exposed to liquidity risk in the form of
margin calls if the market value of the securities pledged as collateral for the
repurchase agreements decline. The Company has established equity requirements
for each type of investment to take into account the price volatility and
liquidity of each such investment. The Company models and plans for the margin
call risk related to its repurchase borrowings through the use of its OAS model
to calculate the projected change in market value of its investments that are
pledged as collateral for repurchase borrowings under various adverse scenarios.
The Company generally maintains enough immediate or available liquidity to meet
margin call requirements if short-term interest rates were to increase by up to
300 basis points over a one-year period. As of December 31, 1996, the Company
had total repurchase agreements outstanding of $756.4 million, secured by ARM
securities, fixed-rate mortgage securities and other mortgage securities at
their market values of $757.4 million, $28.5 million and $20.1 million,
respectively. To a lesser extent, the Company also has liquidity risk inherent
to its investment in certain residual trusts. These trusts are subject to margin
calls and the Company, at its option, can provide additional equity to the trust
to meet the margin call. Should the Company not provide the additional equity,
the assets of the trust could be sold to meet the trusts' obligation, resulting
in a potential loss to the Company.
During 1996, the Company structured all of its ARM loan securitizations as
collateralized bonds, with the financing, in effect, incorporated into the bond
structure. This structure eliminates the need for repurchase agreements,
consequently eliminating the margin call risk and to a lesser degree the
interest rate risk. During 1996, the Company issued approximately $2.04 billion
in Collateralized Bonds, primarily collateralized by ARM loans. The Company
plans to continue to use collateralized bonds as its primary securitization
vehicle.
REIT Status
Resource REIT has elected to be treated as a REIT for federal income tax
purposes. A REIT must distribute annually substantially all of its taxable
income to shareholders. The Company and its qualified REIT subsidiaries
generally will not be subject to federal income tax to the extent that certain
REIT qualifications are met. Certain other affiliated entities which are
consolidated with Resource REIT for financial reporting purposes, are not
consolidated for federal income tax purposes because such entities are not
qualified REIT subsidiaries. All taxable income of these affiliated entities is
subject to federal and state income taxes, where applicable. See "Federal Income
Tax Considerations" in the accompanying Prospectus.
DESCRIPTION OF THE NOTES
The following description of the specific terms of the Notes offered hereby
supplements, and to the extent is inconsistent therewith replaces, the
description of the general terms and provisions of "Debt Securities" set forth
in the accompanying Prospectus under the caption "Description of Securities."
Capitalized terms not otherwise defined herein shall have the meanings given to
them in the accompanying Prospectus.
The Notes constitute a separate series of debt securities (which are more
fully described in the accompanying Prospectus) each to be issued pursuant to an
indenture (the "Indenture") dated as of April , 1997, among the Company and
Texas Commerce Bank National Association, as trustee (the "Trustee"), and will
be limited to an aggregate principal amount of $125 million. The terms of the
Notes include those provisions contained in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and holders of
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below.
The Notes will be senior, unsecured obligations of the Company and will rank
prior to all subordinated indebtedness of the Company and pari passu with all
other senior unsecured indebtedness of the Company outstanding on the date of
the issuance of these Notes. The Notes will be recourse to all of the
unencumbered assets of the Company.
Subject to certain limitations set forth in the Indenture, under Article
Eight, entitled "Consolidation, Merger, Sale, Lease or Conveyance", and in
addition as described below under "Limitations on Incurrence of Debt" and
"Maintenance of Net Unencumbered Asset Value," the Indenture will permit the
Company to incur additional secured and unsecured indebtedness.
As of , 1997, the Company, on a consolidated basis, will have approximately $
million of senior, secured indebtedness other than Collateralized Bonds, and, on
a pro forma basis and, assuming the completion of the offering of the Notes, $
million of senior, unsecured indebtedness, including the Notes. In addition, the
Company funds its operations through the issuance of Collateralized Bonds, which
are payable solely from the Collateral for Collateralized Bonds and are
otherwise non-recourse to the Company, and by entering into repurchase
agreements, which are secured by mortgage securities and loans held for
securitization and are generally recourse to the Company. See "Capitalization"
herein.
The Notes will mature on April , 2002 (the "Maturity Date"). The Notes are
not subject to any sinking fund provisions. The Notes will be issued only in
book-entry form without coupons, in denominations of $1,000 and integral
multiples thereof, except under the limited circumstances described below under
"Book-Entry System."
Except as set forth in the Indenture under Article Eight, entitled
"Consolidation, Merger, Sale, Lease or Conveyance", and, in addition, as
described below under "Limitations on Incurrence of Debt" and "Maintenance of
Net Unencumbered Asset Value," the Indenture does not contain any provisions
that would limit the ability of the Company to incur indebtedness or that would
afford holders of the Notes protection in the event of: (i) a highly leveraged
or similar transaction involving the Company; (ii) a change of control; or (iii)
a reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect the holders of the Notes. However, certain
restrictions on the ownership and transfer of shares of Common Stock designed to
preserve Resource REIT's status as a REIT may act to prevent or hinder a change
of control. See "Description of Securities - Repurchase of Shares and
Restrictions on Transfer" in the accompanying Prospectus. The Company and its
management have no present intention of engaging in a highly leveraged or
similar transaction involving the Company.
The provision of Article Fourteen of the indenture with respect to defeasance
and covenant defeasance shall apply to the Notes.
Principal and Interest
The Notes will bear interest at % per annum and from April , 1997 or from the
immediately preceding Interest Payment Date (as defined below) to which interest
has been paid, payable semi-annually in arrears on each and , commencing , 1997
(each, an "Interest Payment Date"), and on the applicable Maturity Date, to the
persons (the "Holders") in whose names the applicable Notes are registered in
the Security Register applicable to the Notes as provided in the Indenture.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months.
The principal of each Note payable on the Maturity Date will be paid against
presentation and surrender of such Note at the corporate trust office of the
Trustee, located initially at 712 Main Street, Houston, Texas, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
If any Interest Payment Date or the Maturity Date falls on a day that is not
a Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or the Maturity Date, as the case may be. "Business Day" means any day, other
than a Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in New York City are authorized or required by law,
regulation or executive order to close.
Certain Covenants
In addition to the covenants set forth in the Indenture, the Resolutions of
the Board of Directors of the Company, setting forth the terms of the Notes
pursuant to the Indenture, provide that the Notes will be subject to the
following additional covenants.
Limitations on Incurrence of Debt. The Company may not incur any Debt other
than Collateralized Bonds, if immediately after giving effect to the incurrence
of such Debt, the aggregate principal amount of all outstanding Debt of the
Company excluding Collateralized Bonds, on a consolidated basis determined in
accordance with generally accepted accounting principles, is greater than 95% of
the sum of: (i) the Company's Total Investments excluding Collateral for
Collateralized Bonds as of the end of the calendar quarter prior to the
incurrence of such additional Debt; (ii) unrestricted cash and Cash Equivalents,
and (iii) any Letters of Credit Collateral.
In addition, the Company may not incur any Unsecured Debt if the ratio of
Income Available for Interest Payments to Interest Expense for the four
consecutive fiscal quarters most recently ended prior to the date such
additional Debt is to be incurred shall have been less than 2 to 1 on a pro
forma basis, after giving effect thereto and the application of proceeds
therefrom.
Maintenance of Net Unencumbered Asset Value. The Company must maintain, as of
any quarter end, a Net Unencumbered Asset Value equal to or greater than 135% of
the aggregate principal amount of all outstanding Unsecured Debt of the Company
on a consolidated basis.
Provision of Financial Information. Whether or not the Company is subject to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), the Company must, to the extent permitted under the Exchange
Act, file with the Securities and Exchange Commission (the "SEC") the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the SEC pursuant to such Section 13 or 15(d) (the
"Financial Statements") if the Company were so subject, on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required to file such documents. The Company must also in any event: (i)
within 15 days after each Required Filing Date (a) transmit by mail to all
Holders of Notes, as their names and addresses appear in the Security Register,
without cost to such Holders, copies of the annual reports and quarterly reports
which the Company would have been required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act if the Company were subject to such
Sections; and (ii) if filing such documents by the Company with the SEC is not
permitted under the Exchange Act, promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such documents
to any prospective Holder of the Notes.
Definitions. As used herein,
"Affiliate" of the Company means (i) any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such specified Person; or (ii) any other Person in which such specified Person
has a non-controlling ownership interest exceeding 50%. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of Voting Stock, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Assets" of the Company means total assets of the Company determined on a
consolidated basis and in accordance with generally accepted accounting
principles.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights to purchase, warrants, options, or other
equivalents (however designated) of the capital stock of a corporation, and any
and all equivalent ownership interests in a Person other than a corporation, in
each case whether now outstanding or hereafter issued.
"Cash Equivalents" means, at any time, (a) any evidence of Indebtedness with
a maturity of 180 days or less from the date of acquisition issued or directly
and fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (b) certificates of deposit,
money market deposit accounts and acceptances with a maturity of 180 days or
less from the date or acquisition of any financial institution that is a member
of the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500 million; (c) commercial paper with a maturity of
180 days or less from the date of acquisition issued by a corporation that is
not an Affiliate of the Company and is organized under the laws of any state of
the United States or the District of Columbia whose debt rating, at the time as
of which such investment is made, is at least "A-1" by Standard & Poor's Ratings
Services or at least "P-1" by Moody's Investors Service, Inc. or rated at least
an equivalent rating category of another nationally recognized securities rating
agency; (d) repurchase agreements and reverse repurchase agreements having a
term of not more than 30 days for underlying securities of the types described
in clause (a) above entered into with a financial institution meeting the
qualifications described in clause (b) above; (e) any security, maturing not
more than 180 days after the date of acquisition, backed by standby or direct
pay letters of credit issued by a bank meeting the qualifications described in
clause (b) above; and (f) any security, maturing not more than 180 days after
the date of acquisition, issued or fully guaranteed by any state, commonwealth,
or territory of the United States of America, or by any political subdivision
thereof, and rated at least "A" by Standard & Poor's Ratings Services or at
least "A" by Moody's Investors Service, Inc. or rated at least an equivalent
rating category of another nationally recognized securities rating agency.
"Collateralized Bonds" means non-recourse debt securities of the Company,
that are collateralized by, and are to be repaid solely with proceeds from, the
Collateral for Collateralized Bonds.
"Collateral for Collateralized Bonds" means loans, securities or any funds
pledged as security for Collateralized Bonds, at fair market value as determined
in accordance with generally accepted accounting principles.
"Company" means Resource Mortgage Capital, Inc., and all of its
Subsidiaries and Affiliates.
"Debt" of the Company means any indebtedness of the Company, whether or not
contingent, in respect of: (i) borrowed money or other indebtedness evidenced by
bonds, notes, debentures or similar instruments; (ii) indebtedness secured by
any mortgage, pledge, lien, charge, encumbrance or any security interest
existing on property owned by the Company, including but not limited to
collateralized bonds and collateralized repurchase agreements; (iii) letters of
credit or amounts representing the balance deferred and unpaid of the purchase
price of any property except any such balance that constitutes an accrued
expense or trade payable; (iv) the principal amount of all obligations of the
Company with respect to redemption, repayment or other repurchase of any
Disqualified Stock; or (v) any lease of property by the Company as lessee which
is reflected on the Company's consolidated balance sheet as a capitalized lease
in accordance with generally accepted accounting principles; in the case of
items in indebtedness under (i) through (iii) above to the extent that any such
items (other than letters of credit) would appear as a liability on the
Company's consolidated balance sheet in accordance with generally accepted
accounting principles, and also includes, to the extent not otherwise included,
any obligation of the Company to be liable for, or to pay, as obligor, guarantor
or otherwise (other than for purposes of collection in the ordinary course of
business), indebtedness of another person (other than the Company), it being
understood that Debt shall be deemed to be incurred by the Company, whenever the
Company or such Subsidiary shall create, assume, guarantee or otherwise become
liable in respect thereof.
"Disqualified Stock" means, with respect to any person, any capital stock or
partnership interest of such person which by the terms of such capital stock or
partnership interest (or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable), upon the occurrence
of any event or otherwise: (i) matures or is mandatory redeemable, pursuant to a
sinking fund obligation or otherwise; (ii) is convertible into or exchangeable
or exercisable for Debt or Disqualified Stock; or (iii) is redeemable at the
option of the holder thereof, in whole or in part, in each case on or prior to
the maturity of the relevant series of Notes.
"Income Available for Interest Payments" for any periods means Net Income
plus Interest Expense; minus (i) extraordinary gains and losses; (ii) any other
gains and losses that do not otherwise relate to the sale or securitization of
Assets in the ordinary course of business; and (iii) the effect of any non-cash
charge resulting from a change in accounting principles in determining Net
Income for such period.
"Interest Expense" means for any period,, the sum of (a) interest and related
expense relating solely to Unsecured Debt of the Company on a consolidated basis
(including, but not limited to, amortization of original issue discount or
premium, as the case may be, non-cash interest payments, the interest component
of any deferred payment obligations, commissions, discounts and other fees and
charges incurred in respect of letters of credit or bankers' acceptances
financings and net payments (if any) pursuant to obligations under hedging
instruments but excluding amortization of deferred financing fees) and (b)
capitalized interest relating to Unsecured Debt of the Company, whether paid or
accrued, all as determined on a consolidated basis and in accordance with
generally accepted accounting principles.
"Letters of Credit Collateral" means the fair market value of any collateral
not included in Assets, which is pledged to secure letters of credit issued on
behalf of the Company, adjusted for the fair market value of any hedge
instruments entered into by the Company relating to such collateral.
"Net Income" means net income as presented in the consolidated financial
statements of the Company as determined in accordance with generally accepted
accounting principles, and is calculated excluding the deduction for dividends
on preferred stock.
"Net Unencumbered Asset Value" of the Company as of any date equals: (i) the
sum of (a) Total Investments, (b) unrestricted cash and Cash Equivalents and (c)
accrued interest receivable not otherwise included in Total Investments, less
accrued interest payable; minus (ii) the sum of (a) Collateral for
Collateralized Bonds, (b) subordinated or other classes of mortgage securities
that are included in Total Investments, which are or would be rated below
investment grade rating by Standard & Poor's Rating Services or other equivalent
rating agency, (c) the fair market value of any Asset pledged to secure
repurchase agreements and (d) the fair market value of any Asset which secures
and is required to secure any other secured debt, excluding the fair market
value of Assets available as collateral for additional borrowings under any such
secured debt, determined on a consolidated basis in accordance with generally
accepted accounting principles.
"Person" means an individual, partnership, corporation, business trust, joint
stock company, trust, unincorporated association, joint venture, governmental
authority or other entity of whatever nature.
"Subsidiary" means a corporation, a majority of the outstanding Voting Stock,
of which is owned directly or indirectly, by the Company or by one or more other
Subsidiaries of the Company.
"Total Investments" as of any date means the total investments of the Company
on a consolidated basis, including but not limited to portfolio assets
(including but not limited to Collateral for Collateralized Bonds, mortgage
securities, other portfolio assets and available-for-sale investments) and loans
held for securitization, all as determined in on a consolidated basis in
accordance with generally accepted accounting principles.
"Unsecured Debt" as of any date means the sum of any Debt of the Company that
is not secured or collateralized by any mortgage, lien, charge, pledge or other
security interest, determined on a consolidated basis in accordance with
generally accepted accounting principles, excluding (i) any amounts owed under
accrued interest payable and (ii) any letters of credit that are secured or will
be secured by other than Assets in the event such letters of credit are drawn
upon.
"Voting Stock" means all outstanding classes of Capital Stock of any entity
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof.
Reference is made to Article Ten of the Indenture, entitled "Covenants" for a
description of additional covenants applicable to the Notes.
Optional Redemption
The Notes may be redeemed at any time at the option of the Company, in whole
or from time to time in part, at a redemption price equal to the sum of: (i) the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date; and (ii) the Make-Whole Amount (as defined below), if any,
with respect to such Notes (the "Redemption Price").
If notice of redemption has been given as provided in the Indenture and funds
for the redemption of any Notes called for redemption shall have been made
available on the redemption date referred to in such notice, such Notes will
cease to bear interest on the date fixed for such redemption specified in such
notice and the only right of the Holders of the Notes from and after the
redemption date will be to receive payment of the Redemption Price upon
surrender of such Notes in accordance with such notice.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the Security Register for the Notes, not more than
60 nor less than 30 days prior to the date fixed for redemption as defined in
the Indenture. The notice of redemption will specify, among other items, the
Redemption Price and principal amount of the Notes held by such Holder to be
redeemed.
If less than all the Notes are to be redeemed at the option of the Company,
the Company will notify the Trustee at least 60 days prior to giving notice of
redemption (or such shorter period as may be satisfactory to the Trustee) of the
aggregate principal amount of Notes to be redeemed and their redemption date.
The Trustee shall select, in such manner as it shall deem fair and appropriate,
Notes to be redeemed in whole or in part.
Definitions: As used herein:
"Make-Whole Amount" means, in connection with any optional redemption of any
Notes, the excess, if any, of: (i ) the aggregate present value as of the date
of such redemption of each dollar of principal being redeemed and the amount of
interest (exclusive of interest accrued to the date of redemption) that would
have been payable in respect of each such dollar if such redemption had not been
made, determined by discounting, on a semi-annual basis, such principal and
interest at the Reinvestment Rate (determined on the third Business Day
preceding the date notice of such redemption is given) from the respective dates
on which such principal and interest would have been payable if such redemption
had not been made, to the date of redemption; over (ii) the aggregate principal
amount of the Notes being redeemed.
"Reinvestment Rate" means the yield on Treasury securities at a constant
maturity corresponding to the remaining life (as of the date of redemption, and
rounded to the nearest month) to Stated Maturity of the principal being redeemed
(the "Treasury Yield"), plus 0.25%. For purposes hereof, the Treasury Yield
shall be equal to the arithmetic mean of the yields published in the Statistical
Release (as defined below) under the heading "Week Ending" for "U.S. Government
Securities -- Treasury Constant Maturities" with a maturity equal to such
remaining life; provided, that if no published maturity exactly corresponds to
such remaining life, then the Treasury Yield shall be interpolated or
extrapolated on a straight-line basis from the arithmetic means of the yields
for the next shortest and next longest published maturities. For purposes of
calculating the Reinvestment Rate, the most recent Statistical Release published
prior to the date of determination of the Make-Whole Amount shall be used. If
the format or content of the Statistical Release changes in a manner that
precludes determination of the Treasury Yield in the above manner, then the
Treasury yield shall be determined in the manner that most closely approximates
the above manner, as reasonably determined by the Company.
"Statistical Release" means the statistical release designated "H.15 (519)"
or any successor publication which is published weekly by the Federal Reserve
System and which reports yields on actively traded United States government
securities adjusted to constant maturities, or, if such statistical release is
not published at the time of any determination under the Indenture, then such
other reasonably comparable index which shall be designated by the Company.
Book-Entry System
The following are summaries of certain rules and operating procedures of DTC
that affect the payment of principal and interest and transfers in the Global
Note. Upon issuance, the Notes will only be issued in the form of a Global Note
which will be deposited with, or on behalf of, DTC and registered in the name of
Cede & Co., as nominee of DTC. Unless and until it is exchanged in whole or in
part for Notes in definitive form under the limited circumstances described
below, the Global Note may not be transferred except as a whole: (i) by DTC to a
nominee of DTC; (ii) by a nominee of DTC to DTC or another nominee of DTC; or
(iii) by DTC or any such nominee to a successor or a nominee of such successor.
Ownership of beneficial interests in the Global Note will be limited to
persons that have accounts with DTC for such Global Note ("participants") or
persons that may hold interests through participants. Upon the issuance of the
Global Note, DTC will credit, on its book-entry registration and transfer
system, the participants' accounts with the respective principal amounts of the
Notes represented by such Global Note beneficially owned by such participants.
Ownership of beneficial interests in such Global Note will be shown on, and the
transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of participants) and on the records
of participants (with respect to interests of persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may limit or impair the ability to own, transfer or pledge beneficial
interests in the Global Note.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or its nominee, as the case may be, will be considered the sole owner or Holder
of the Notes represented by such Global Note for all purposes under the
Indenture. Except as set forth below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of such Notes in certificated form and will not be considered the
registered owners or Holders thereof under the Indenture. Accordingly, each
person owning a beneficial interest in a Global Note must rely on the procedures
of DTC and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a Holder under the Indenture. The Company understands that under existing
industry practices, if the Company requests any action of Holders or if an owner
of a beneficial interest in a Global Note desires to give or take any action
that a Holder is entitled to give or take under the Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instructions of beneficial owners holding through them. In the case of
an Event of Default under the Indenture, DTC, acting upon instructions furnished
to DTC by the participants holding the relevant beneficial interests in a Global
Note, may institute proceedings in respect of such Event of Default in
accordance with the terms of the Indenture.
Principal and interest payments on interests represented by the Global Note
will be made to DTC or its nominee, as the case may be, as the registered owner
of such Global Note. None of the Company, the Trustee or any agent of the
Company or agent of the Trustee will have any responsibility or liability for
any aspect of the records relating to or payment made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that DTC, upon receipt of any payment of principal or
interest in respect of the Global Note, will immediately credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in such Global Note as shown on the records of DTC. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note held through such participants will be governed by standing customer
instructions and customary practice, as is now the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participants.
If DTC is at any time unwilling or unable to continue as depository for the
Notes and the Company fails to appoint a successor depository registered as a
clearing agency under the Exchange Act within 90 days, the Company will issue
the Notes in definitive form in exchange for the Global Note. Any Notes issued
in definitive form in exchange for the Global Note will be registered in such
name or names, and will be issued in denominations of $1,000 and such integral
multiples thereof, as DTC shall instruct the Trustee. It is expected that such
instructions will be based upon directions received by DTC from participants
with respect to ownership of beneficial interests in the Global Note.
DTC has advised the Company of the following information regarding DTC. DTC
is a limited-purpose trust company organized under the Banking Law of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities of its participants and to facilitate
the clearance and settlement of transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
which (and/or their representatives) own DTC. Access to the DTC book-entry
system is also available to others, such as banks, brokers and dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Same-Day Settlement and Payment
Settlement for the Notes will be made by the Underwriters (as defined herein)
in immediately available funds. All payments of principal and interest in
respect of the Notes will be made by the Company in immediately available funds.
The Notes will trade in DTC's Same-Day Funds Settlement System until maturity
or until the Notes are issued in certificated form, and secondary market trading
activity in the Notes will therefore be required by DTC to settle in immediately
available funds. No assurance can be given as to the effect, if any, of
settlement in immediately available funds on trading activity in the Notes.
Trustee
The Trustee has other banking, depository, custodian and lending
relationships in the ordinary course of business with the Company.
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company the principal amount of the Notes set forth opposite
their respective names below:
The Underwriting Agreement provides that the obligation of the several
Underwriters to purchase the Notes are subject to the certain conditions
contained therein, and that if any of the Notes are purchased by the
Underwriters pursuant to the Underwriting Agreement, all the Notes agreed to be
purchased by the Underwriters must be so purchased.
The Company has been advised that the Underwriters propose to offer the Notes
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement, and to certain selected dealers (who may include
the Underwriters) at such price less a concession not in excess of % of the
principal amount of the Notes. The selected dealers may reallow a concession to
certain other dealers not in excess of % of the principal amount of the Notes.
After the initial public offering, the public offering price, the concession to
selected dealers and the reallowance may be changed.
Settlement for the Notes will be made in immediately available funds and
all secondary trading in the Notes will settle in immediately available
funds. See "Description of the Notes--Same-Day Settlement and Payment."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company does not intend to apply for listing of the Notes on any national
securities exchange, but has been advised by the Underwriters that they
presently intend to make a market in the Notes, as permitted by applicable laws
and regulations. The Underwriters are not obligated, however, to make a market
in the Notes and any such market making may be discontinued at any time at the
sole discretion of the Underwriters. Accordingly, no assurance can be given as
to the liquidity of, or the existence of trading markets for, the Notes.
Until the distribution of the Notes is completed, rules of the Securities and
Exchange Commission may limit the ability of the Underwriters to bid for and
purchase the Notes. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions may consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
If an Underwriter creates a short position in the Notes in connection with
the offering, (i.e., if it sells more Notes than are set forth on the cover page
of this Prospectus Supplement), the Underwriters may reduce that short position
by purchasing Notes in the open market. In general, purchases of a security for
the purpose of stabilization or to reduce a syndicate short position could cause
the price of the security to be higher than it might otherwise be in the absence
of such purchases. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Notes. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transaction, once commenced, will not be discontinued without notice.
LEGAL MATTERS
Certain legal matters in connection with the offering of the Notes are being
passed upon for the Company by Venable, Baetjer and Howard, LLP, Baltimore,
Maryland. Certain legal matters have been passed upon for the Underwriters by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.
PROSPECTUS
[GRAPHIC OMITTED]
Resource Mortgage Capital, Inc.
Common Stock, Preferred Stock, Debt Securities
Warrants to Purchase Common Stock, Warrants
to Purchase Preferred Stock and Warrants to
Purchase Debt Securities
----------------
Resource Mortgage Capital, Inc., a Virginia corporation (the "Company"),
directly or through agents, dealers or underwriters designated from time to
time, may issue and sell from time to time one or more of the following types of
its securities (the "Securities"): (i) shares of its common stock, par value
$0.01 per share ("Common Stock"); (ii) shares of its preferred stock, no par
value, in one or more series ("Preferred Stock"); (iii) debt securities, in one
or more series, any series of which may be either senior debt securities or
subordinated debt securities (collectively, "Debt Securities" and, as
appropriate, "Senior Debt Securities" or "Subordinated Debt Securities"); (iv)
warrants to purchase shares of Common Stock ("Common Stock Warrants"); (v)
warrants to purchase Preferred Stock ("Preferred Stock Warrants"); (vi) warrants
to purchase debt securities ("Debt Warrants"); and (vii) any combination of the
foregoing, either individually or as units consisting of one or more of the
foregoing types of Securities. The Securities offered pursuant to this
Prospectus may be issued in one or more series, in amounts, at prices and on
terms to be determined at the time of the offering of each such series. The
Securities offered by the Company pursuant to this Prospectus will be limited to
$450,000,000 aggregate initial public offering price, including the exercise
price of any Common Stock Warrants, Preferred Stock Warrants and Debt Warrants
(collectively, "Securities Warrants").
The specific terms of each offering of Securities in respect of which this
Prospectus is being delivered are set forth in an accompanying Prospectus
Supplement (each, a "Prospectus Supplement") relating to such offering of
Securities. Such specific terms include, without limitation, to the extent
applicable the following: (1) in the case of any series of Preferred Stock, the
specific designations, rights, preferences, privileges and restrictions of such
series of Preferred Stock, including the dividend rate or rates or the method
for calculating same, dividend payment dates, voting rights, liquidation
preferences, and any conversion, exchange, redemption or sinking fund
provisions; (2) in the case of any series of Debt Securities, the specific
designations, rights and restrictions of such series of Debt Securities,
including without limitation whether the Debt Securities are Senior Debt
Securities or Subordinated Debt Securities, the currency in which such Debt
Securities are denominated and payable, the aggregate principal amount, stated
maturity, method of calculating and dates for payment of interest and premium,
if any, and any conversion, exchange, redemption or sinking fund provisions; (3)
in the case of the Securities Warrants, the Debt Securities, Preferred Stock or
Common Stock, as applicable, for which each such warrant is exercisable, and the
exercise price, duration, detachability and call provisions of each such
warrant; and (4) in the case of any offering of Securities, to the extent
applicable, the initial public offering price or prices, listing on any
securities exchange, certain federal income tax consequences and the agents,
dealers or underwriters, if any, participating in the offering and sale of the
Securities. If so specified in the applicable Prospectus Supplement, any series
of Securities may be issued in whole or in part in the form of one or more
temporary or permanent Global Securities, as defined herein.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The Company may sell all or a portion of any offering of its Securities
through agents, to or through underwriters or dealers, or directly to other
purchasers. See "Plan Distribution." The related Prospectus Supplement for each
offering of Securities sets forth the name of any agents, underwriters or
dealers involved in the sale of such Securities and any applicable fee,
commission, discount or indemnification arrangement with any such party. See
"Use of Proceeds."
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. The delivery in any jurisdiction of this
Prospectus together with a Prospectus Supplement relating to specific Securities
shall not constitute an offer in such jurisdiction of any other Securities
covered by this Prospectus but not described in such Prospectus Supplement.
The date of this Prospectus is March 24, 1997
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT
TO THIS PROSPECTUS AND AN ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION
CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF
OR THEREOF. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE
SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, NW, Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following regional offices: Midwest Regional Office, Citicorp
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, NW, Judiciary
Plaza, Washington, D.C. 20549. The Common Stock of the Company is listed on the
New York Stock Exchange ("NYSE") and such reports, proxy statements and other
information concerning the Company may also be inspected at the offices of such
Exchange at 20 Broad Street, New York, New York 10005. The Commission maintains
a Web site that contains reports, proxy and information statements and other
information regarding the Company at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities offered hereby, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other documents are not necessarily complete,
and in each instance, reference is made to the copy of such contract or
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the Company
are incorporated in this Prospectus by reference: Annual Report on Form 10-K for
the year ended December 31, 1995; Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996; Quarterly Report on Form 10-Q for the quarter ended June
30, 1996; Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
as amended by Form 10-Q/A filed on March 6, 1997; Current Report on Form 8-K
dated October 15, 1996; Current Report on Form 8-K dated February 27, 1997; and
the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A under the Exchange Act, including any
amendment or report filed to update the description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of all Securities shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any accompanying Prospectus Supplement relating to a
specific offering of Securities or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any accompanying Prospectus Supplement. Subject to the foregoing,
all information appearing in this Prospectus is qualified in its entirety by the
information appearing in the documents incorporated herein by reference.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any and all of the documents described above under "Incorporation of
Certain Documents by Reference", other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein. Written
requests should be directed to: Resource Mortgage Capital, Inc., 10900 Nuckols
Road, Glen Allen, Virginia, 23060, Attention: Investor Relations, Telephone:
(804) 217-5800.
THE COMPANY
Resource Mortgage Capital, Inc. (the Company) is a mortgage and consumer
finance company, which uses its production operations to create investments for
its portfolio. Currently, the Company's primary production operations include
the origination of mortgage loans secured by multi-family properties and the
origination of loans secured by manufactured homes. From its inception in 1987
through May 13, 1996, the Company's principal production operations included the
purchase or origination of single-family loans. The Company sold such operations
on May 13, 1996 to Dominion Mortgage Services, Inc., a wholly-owned subsidiary
of Dominion Resources, Inc. (NYSE: D).
The Company will generally securitize the loans funded as collateral for
collateralized bonds, limiting its credit risk and providing long-term financing
for its portfolio. The majority of the Company's current investment portfolio is
comprised of loans or securities (ARM loans or ARM securities) that have coupon
rates which adjust over time (subject to certain limitations) in conjunction
with changes in short-term interest rates. The Company intends to expand its
production sources in the future to include other financial products, such as
commercial real estate loans. The Company has elected to be treated as a real
estate investment trust (REIT) for federal income tax purposes and as such must
distribute substantially all of its taxable income to shareholders, and will
generally not be subject to federal income tax.
The Company's principal sources of earnings are net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
collateral for collateralized bonds, ARM securities and loans held for
securitization. The Company funds its portfolio investments with both borrowings
and cash raised from the issuance of equity capital. For the portion of the
portfolio investments funded with borrowings, the Company generates net interest
income to the extent that there is a positive spread between the yield on the
earning assets and the cost of borrowed funds. For that portion of the balance
sheet that is funded with equity capital, net interest income is primarily a
function of the yield generated from the interest-earning asset. The cost of the
Company's borrowings may be increased or decreased by interest rate swap, cap,
or floor agreements.
Generally, during a period of rising interest rates, the Company's net
interest spread earned on its investment portfolio will decrease. The decrease
of the net interest spread results from (i) the lag in resets of the ARM loans
underlying the ARM securities and collateral for collateralized bonds and (ii)
the fact that the resets on the ARM loans are limited to generally 1% every six
months, while the associated borrowings have no such limitation. As interest
rates stabilize and the ARM loans reset, the net interest margin may be restored
to its former level as the yields on the ARM loans adjust to market conditions.
Conversely, net interest margin may increase following a fall in short-term
interest rates; this increase may be temporary as the yields on the ARM loans
adjust to the new market conditions after a lag period. In each case, however,
the Company expects that the increase or decrease in the net interest spread due
to changes in the short-term interest rates is temporary. The net interest
spread may also be increased or decreased by the cost or proceeds of the
interest rate swap, cap or floor agreements.
The Company seeks to generate growth in earnings and dividends per share in a
variety of ways, including (i) adding investments to its portfolio when
opportunities in the market are favorable, (ii) developing production
capabilities to originate and acquire financial assets in order to create
investments for the portfolio at a lower effective cost then if such assets were
purchased and (iii) increasing the efficiency with which the Company utilizes
its equity capital over time.
The Company elects to be taxed as a real estate investment trust and, as a
result, is required to distribute substantially all of its earnings annually to
its shareholders. In order to grow its equity base, the Company may issue
additional preferred or common stock. Management strives to issue such
additional shares when it believes existing shareholders are likely to benefit
from such offerings through higher earnings and dividends per share than as
compared to the level of earnings and dividends the Company would likely
generate without such offerings.
Other Information
The Company, and its qualified REIT subsidiaries, have elected to be treated
as a REIT for federal income tax purposes. A REIT must distribute annually
substantially all of its income to shareholders. The Company and its qualified
REIT subsidiaries (collectively, "Resource REIT") generally will not be subject
to federal income tax to the extent that certain REIT qualifications are met.
Certain other affiliated entities which are consolidated with the Company for
financial reporting purposes, are not consolidated for federal income tax
purposes because such entities are not qualified REIT subsidiaries. All taxable
income of these affiliated entities are subject to federal and state income
taxes, where applicable.
See "Federal Income Tax Considerations."
The principal executive office of the Company is located at 10900 Nuckols
Road, Glen Allen, Virginia 23060, telephone number (804) 217-5800.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for any
offering of Securities, the net proceeds from the sale of Securities offered by
the Company will be available for the general corporate purposes of the Company.
These general corporate purposes may include, without limitation, repayment of
maturing obligations, redemption of outstanding indebtedness, financing future
acquisitions (including acquisitions of loans and other related products),
capital expenditures and working capital. Pending any such uses, the Company may
invest the net proceeds from the sale of any Securities or may use them to
reduce short-term indebtedness. If the Company intends to use the net proceeds
from a sale of Securities to finance a significant acquisition, the related
Prospectus Supplements will describe the material terms of such acquisition.
If Debt Securities are issued to one or more persons in exchange for the
Company's outstanding debt securities, the accompanying Prospectus Supplement
related to such offering of Debt Securities will set forth the aggregate
principal amount of the outstanding debt securities which the Company will
receive in such exchange and which will cease to be outstanding, the residual
cash payment, if any, which the Company may receive from such persons or which
such persons may receive from the Company, as appropriate, the dates from which
the Company will pay interest accrued on the outstanding debt securities to be
exchanged for the offered Debt Securities and an estimate of the Company's
expenses in respect of such offering of the Debt Securities.
RATIO OF AVAILABLE EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges of the Company for the periods indicated:
DESCRIPTION OF SECURITIES
The following is a brief description of the material terms of the Company's
securities which may be offered under this prospectus. This description does not
purport to be complete and is subject in all respects to applicable Virginia law
and to the provisions of the Company's Articles of Incorporation and Bylaws,
copies of which are on file with the Commission as described under "Available
Information" and are incorporated by reference herein.
General
The Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Common Stock, par value $0.01
per share; (ii) shares of its Preferred Stock, par value $0.01 per share, in one
or more series; (iii) Debt Securities, in one or more series, any series of
which may be either Senior Debt Securities or Subordinated Debt Securities; (iv)
Common Stock Warrants; (v) Preferred Stock Warrants; (vi) Debt Warrants; and
(vii) any combination of the foregoing, either individually or as units
consisting of one or more of the types of Securities described in clauses (i)
through (vi). The terms of any specific offering of Securities, including the
terms of any units offered, will be set forth in a Prospectus Supplement
relating to such offering.
The Company's authorized equity capitalization consists of 50 million shares
of Common Stock, par value $0.01 per share and 50 million shares of Preferred
Stock, par value $0.01 per share. Neither the holders of the Common Stock nor of
any Preferred Stock, now or hereafter authorized, will be entitled to any
preemptive or other subscription rights. The Common Stock is listed on the New
York Stock Exchange. The Company intends to list any additional shares of its
Common Stock which are issued and sold hereunder. The Company may list any
series of its Preferred Stock which are offered and sold hereunder, as described
in the Prospectus Supplement relating to such series of Preferred Stock.
Common Stock
As of February 28, 1997, there were 20,890,742 outstanding shares of Common
Stock held by 3,344 holders of record. Holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor. Dividends on any outstanding shares of
preferred stock must be paid in full before payment of any dividends on the
Common Stock. Upon liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in assets available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of any holders of any preferred stock then outstanding.
Holders of Common Stock are entitled to one vote per share with respect to
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the Common Stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the Common Stock. All the outstanding shares of Common
Stock are validly issued, fully paid and nonassessable.
Preferred Stock
As of February 28, 1997, there were 1,515,000 shares of Series A Cumulative
Convertible Preferred Stock, 2,184,824 shares of Series B Cumulative Convertible
Preferred Stock, and 1,840,000 shares of Series C Cumulative Convertible
Preferred Stock (together, the Preferred Stock) issued and outstanding.
The Board of Directors is authorized to designate with respect to each series
of Preferred Stock the number of shares in each such series, the dividend rates
and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, whether or not dividends shall be cumulative and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions, if any, for redemption or purchase of shares, the
rights, if any, and the terms and conditions on which shares can be converted
into or exchanged for shares of another class or series, and the voting rights,
if any.
All preferred shares issued will rank prior to the Common Stock as to
dividends and as to distributions in the event of liquidation, dissolution or
winding up of the Company. The ability of the Board of Directors to issue
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting powers of holders of Common Stock.
Securities Warrants
General
The Company may issue Securities Warrants for the Purchase of Common Stock,
Preferred Stock or Debt Securities. Such warrants are referred to herein as
Common Stock Warrants, Preferred Stock Warrants or Debt Warrants, as
appropriate. Securities Warrants may be issued independently or together with
any other Securities covered by the Registration Statement and offered by this
Prospectus and any accompanying Prospectus Supplement and may be attached to or
separate from such other Securities. Each series of Securities Warrants will be
issued under a separate agreement (each, a "Securities Warrant Agreement") to be
entered into between the Company and a bank or trust company, as agent (each, a
"Securities Warrant Agent"), all as set forth in the Prospectus Supplement
relating to the particular issue of offered Securities Warrants. Each issue of
Securities Warrants will be evidenced by warrant certificates (the "Securities
Warrant Certificates"). The Securities Warrant Agent will act solely as an agent
of the Company in connection with the Securities Warrant Certificates and will
not assume any obligation or relationship of agency or trust for or with any
holders of Securities Warrant Certificates or beneficial owners of Securities
Warrants. Copies of the definitive Securities Warrant Agreements and Securities
Warrant Certificates will be filed with the Commission by means of a Current
Report on Form 8-K in connection with the offering of such series of Securities
Warrants.
If Securities Warrants are offered, the applicable Prospectus Supplement will
describe the terms of such Securities Warrants, including in the case of
Securities Warrants for the purchase of Debt Securities, the following where
applicable: (i) the offering price; (ii) the currencies in which such Debt
Warrants are being offered; (iii) the designation, aggregate principal amount,
currencies, denominations and terms of the series of Debt Securities purchasable
upon exercise of such Debt Warrants; (iv) the designation and terms of any
Securities with which such Debt Warrants are being offered and the number of
such Debt Warrants being offered with each such Security; (v) the date on and
after which such Debt Warrants and the related Securities will be transferable
separately; (vi) the principal amount of the series of Debt Securities
purchasable upon exercise of each such Debt Warrant and the price at which the
currencies in which such principal amount of Debt Securities of such series may
be purchased upon such exercise; (vii) the date on which the right to exercise
such Debt Warrants shall commence and the date on which such right shall expire
(the "Expiration Date"); (viii) whether the Debt Warrant will be issued in
registered or bearer form; (ix) certain federal income tax consequences; and (x)
any other material terms of such Debt Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants, and in the case of Securities Warrants for Preferred
Stock, the designation, aggregate number and terms of the series of Preferred
Stock purchasable upon exercise of such Securities Warrants; (iii) the
designation and terms of the Securities with which such Securities Warrants are
being offered and the number of such Securities Warrants being offered with each
such Security; (iv) the date on and after which such Securities Warrants and the
related Securities will be transferable separately; (v) the number of shares of
Preferred Stock or shares of Common Stock purchasable upon exercise of each such
Securities Warrant and the price at which such number of shares of Preferred
Stock of such series or shares of Common Stock may be purchased upon such
exercise; (vi) the date on which the right to exercise such Securities Warrants
shall commence and the Expiration Date on which such right shall expire; (vii)
certain federal income tax consequences; and (viii) any other material terms of
such Securities Warrants.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the appropriate Securities Warrant Agent or other office
indicated in the applicable Prospectus Supplement. Prior to the exercise of any
Securities Warrant to purchase Debt Securities, holders of such Debt Warrants
will not have any of the rights of Holders of the Debt Securities purchasable
upon such exercise, including the right to receive payments of principal,
premium, if any, or interest, if any, on the Debt Securities purchasable upon
such exercise or to enforce covenants in the applicable Indenture. Prior to the
exercise of any Securities Warrants to purchase Preferred Stock or Common Stock,
holders of such Preferred Stock Warrants or Common Stock Warrants will not have
any rights of holders of the respective Preferred Stock or Common Stock
purchasable upon such exercise, including the right to receive payments of
dividends, if any, on the Preferred Stock or Common Stock purchasable upon such
exercise or to exercise any applicable right to vote.
Exercise of Securities Warrants
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of shares of Preferred Stock or
shares of Common Stock, as the case may be, at such exercise price as shall in
each case be set forth in, or calculable from, the Prospectus Supplement
relating to the offered Securities Warrants. After the close of business on the
Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities Warrant
Agent payment, as provided in the applicable Prospectus Supplement, of the
amount required to purchase the applicable Debt Securities, Preferred Stock or
Common Stock purchasable upon such exercise together with certain information
set forth on the reverse side of the Securities Warrant Certificate. Upon
receipt of such payment and the definitive Securities Warrant Certificates
properly completed and duly executed at the corporate trust office of the
Securities Warrant Agent or any other office indicated in the applicable
Prospectus Supplement, the Company will, as soon as practicable, issue and
deliver the applicable Debt Securities, Preferred Stock or Common Stock
purchasable upon such exercise. If fewer than all of the Securities Warrants
represented by such Securities Warrant Certificate are exercised, a new
Securities Warrant Certificate will be issued for the remaining amount of
Securities Warrants.
Amendments and Supplements to Securities Warrant Agreements
Each Securities Warrant Agreement may be amended or supplemented without the
consent of the holders of the Securities Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Securities Warrants
and that do not adversely affect the interests of the holders of the Securities
Warrants.
Common Stock Warrant Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a Common
Stock Warrant are subject to adjustment in certain events, including: (i) the
issuance of Common Stock as a dividend or distribution on the Common Stock; (ii)
subdivisions and combinations of the Common Stock; (iii) the issuance to all
holders of Common Stock of certain rights or warrants entitling them to
subscribe for or purchase Common Stock within the number of days, specified in
the applicable Prospectus Supplement, after the date fixed for the determination
of the stockholders entitled to receive such rights or warrants, at less than
the current market price (as defined in the Securities Warrant Agreement
governing such series of Common Stock Warrants); and (iv) the distribution to
all holders of Common Stock of evidences of indebtedness or assets of the
Company (excluding certain cash dividends and distributions described below).
The terms of any such adjustment will be specified in the related Prospectus
Supplement for such Common Stock Warrants.
No Rights as Stockholders
Holders of Common Stock Warrants will not be entitled by virtue of being such
holders, to vote, to consent, to receive dividends, to receive notice as
stockholders with respect to any meeting of stockholders for the election of
directors of the Company of any other matter, or to exercise any rights
whatsoever as stockholders of the Company.
Existing Securities Holders
The Company may issue, as a dividend at no cost, such Securities Warrants to
holders of record of the Company's Securities or any class thereof on the
applicable record date. If Securities Warrants are so issued to existing holders
of Securities, the applicable Prospectus Supplement will describe, in addition
to the terms of the Securities Warrants and the Securities issuable upon
exercise thereof, the provisions, if any, for a holder of such Securities
Warrants who validly exercises all Securities Warrants issued to such holder to
subscribe for unsubscribed Securities (issuable pursuant to unexercised
Securities Warrants issued to other holders) to the extent such Securities
Warrants have not been exercised.
Debt Securities
General
The Company may offer one or more series of its Debt Securities representing
general, unsecured obligations of the Company. Any series of Debt Securities may
either (1) rank prior to all subordinated indebtedness of the Company and pari
passu with all other unsecured indebtedness of the Company outstanding on the
date of the issuance of such Debt Securities ("Senior Debt Securities") or (2)
be subordinated in light of payments to certain other obligations of the Company
outstanding on the date of issuance ("Subordinated Debt Securities"). In this
Prospectus, any indenture relating to Subordinated Debt Securities is referred
to as a "Subordinated Indenture" and the term "Indenture" refers to Senior and
Subordinated Indentures, collectively.
The aggregate principal amount of Debt Securities which may be issued by the
Company will be set from time to time by the Board of Directors. Further, the
amount of Debt Securities which may be offered by this Prospectus will be
subject to the aggregate initial offering price of Securities specified in the
Registration Statement. Each Indenture will permit the issuance of an unlimited
amount of Debt Securities thereunder from time to time in one or more series.
Additional debt securities may be issued pursuant to another registration
statement for issuance under any Indenture. Any offering of Debt Securities may
be denominated in any currency composite designated by the Company.
The following description of the Debt Securities which may be offered by the
Company hereunder describes certain general terms and provisions of the Debt
Securities to which any Prospectus Supplement may relate. The particular terms
and provisions of the Debt Securities and the extent to which the following
general provisions may apply to such offering of Debt Securities will be
described in the accompanying Prospectus Supplement relating to such offering of
Debt Securities. The following descriptions of certain provisions of the
Indentures do not purport to be complete and are qualified in their entirety by
reference to the form of Senior Indenture or Subordinated Indenture, as
appropriate. The definitive Indenture relating to each offering of Debt
Securities will be filed with the Commission by means of a Current Report on
Form 8-K in connection with the offering of such Debt Securities. All article
and section references appearing herein are references to the articles and
sections of the appropriate Indenture and, unless defined herein, all
capitalized terms have the respective meanings specified in the appropriate
Indenture.
The Prospectus Supplement relating to any offering of Debt Securities will
set forth the following terms and other information to the extent applicable
with respect to the Debt Securities being offered thereby; (1) the designation,
aggregate principal amount, authorized denominations and priority of such Debt
Securities; (2) the price (expressed as a percentage of the aggregate principal
amount of such Debt Securities) at which such Debt Securities will be issued;
(3) the currency or currency units for which the Debt Securities may be
purchased and in which the principal of, and any interest on such Debt
Securities may be payable; (4) the stated maturity of such Debt Securities or
means by which a maturity date may be determined; (5) the rate at which such
Debt Securities will bear interest or the method by which such rate of interest
is to be calculated (which rate may be zero in the case of certain Debt
Securities issued at a price representing a discount from the principal amount
payable at maturity); (6) the periods during which such interest will accrue,
the dates on which such interest will be payable (or the method by which such
dates may be determined, including without limitation that such rate of interest
may bear an inverse relationship to some index or standard) and the
circumstances under which the Company may defer payment of interest; (7)
redemption provisions, including any optional redemption, required repayment or
mandatory sinking fund provisions; (8) any terms by which such Debt Securities
may be convertible into shares of the Company's Common Stock, Preferred Stock or
any other Securities of the Company, including a description of the Securities
into which any such Debt Securities are convertible; (9) any terms by which the
principal of such Debt Securities will be exchangeable for any other Securities
of the Company; (10) whether such Debt Securities are issuable as definitive
Fully-Registered Securities (as defined below) or Global Securities and, if
Global Securities are to be issued, the terms thereof, including the manner in
which interest thereon will be payable to the beneficial owners thereof and
other book-entry procedures, any terms for exchange of such Global Securities
into definitive Fully-Registered Securities (as defined below) and any
provisions relating to the issuance of a temporary Global Security; (11) any
additional restrictive covenants included for the benefit of the holders of such
Debt Securities; (12) any additional events of default provided with respect to
such Debt Securities; (13) the terms of any Securities being offered together
with such Debt Securities, (14) whether such Debt Securities represent general,
unsecured obligations of the Company and (15) any other material terms of such
Debt Securities.
If any of the Debt Securities are sold for foreign currency units, the
restrictions, elections, tax consequences, specific terms, and other information
with respect to such issue of Debt Securities and such currencies or currency
units will be set forth in the Prospectus Supplement relating to thereto.
Indenture Provisions
The Debt Securities may be issued in definitive, fully registered form
without coupons ("Fully Registered Securities"), or in a form registered as to
principal only with coupons or in bearer form with coupons. Unless otherwise
specified in the Prospectus Supplement, the Debt Securities will only be Fully
Registered Securities. In addition, Debt Securities of a series may be issuable
in the form of one or more Global Securities, which will be denominated in an
amount equal to all or a portion of the aggregate principal amount of such Debt
Securities. See "Global Securities" below.
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
that at the time of issuance is below market rates. Federal income tax
consequences and special considerations applicable to any such series will be
described in the Prospectus Supplement relating thereto.
Unless otherwise indicated in the related Prospectus Supplement for a series
of Debt Securities, there are no provisions contained in the Indentures that
would afford holders of Debt Securities protection in the event of a highly
leveraged transaction involving the Company.
Global Securities. Any series of Debt Securities may be issued in whole or in
part in the form of one or more Global Securities that will be deposited with,
or on behalf of, the Depositary identified in the Prospectus Supplement relating
to such series. Unless and until it is exchanged in whole or in part for Debt
Securities in individually certificated form, a Global Security may not be
transferred except as a whole to a nominee of the Depositary for such Global
Security, or by a nominee for the Depositary to the Depositary, or to a
successor of the Depositary or a nominee of such successor.
The specific terms of the Depositary arrangement with respect to any series
of Debt Securities and the rights of, and limitations on, owners of beneficial
interests in a Global Security representing all or a portion of a series of Debt
Securities will be described in the Prospectus Supplement relating to such
series.
Modification of Indentures. Unless otherwise specified in the related
Prospectus Supplement, each Indenture, the rights and obligations of the
Company, and the rights of the Holders may be modified with respect to one or
more series of Debt Securities issued under such Indenture with the consent of
the Holders of not less than a majority in principal amount of the outstanding
Debt Securities of each such series affected by the modification or amendment.
No modification of the terms of payment of principal or interest, and no
modification reducing the percentage required for modification, is effective
against any Holder without his consent.
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, each Indenture, will provide that the following are Events of
Default with respect to any series of Debt Securities issued thereunder: (1)
default in the payment of the principal of any Debt Security of such series when
and as the same shall be due and payable; (2) default in making a sinking fund
payment, if any, when and as the same shall be due and payable by the terms of
the Debt Securities of such series; (3) default for 30 days in payment of any
installment of interest on any Debt Securities of such series; (4) default for a
specified number of days after notice in the performance of any other covenants
in respect of the Debt Securities of such series contained in the Indenture; (5)
certain events of bankruptcy, insolvency or reorganization, or court appointment
of a receiver, liquidator, or trustee of the Company or its property; and (6)
any other Event of Default provided in the applicable supplemental indenture
under which such series of Debt Securities is issued. An Event of Default with
respect to a particular series of Debt Securities issued under an Indenture will
not necessarily constitute an Event of Default with respect to any other series
of Debt Securities issued under such Indenture. The trustee under an Indenture
may withhold notice to the Holders of any series of Debt Securities of any
default with respect to such series (except in the payment of principal or
interest) if it considers such withholding in the interests of such Holders.
If an Event of Default with respect to any series of Debt Securities shall
have occurred and be continuing, the appropriate trustee under the Indenture or
the Holders of not less than 25% in the aggregate principal amount of the Debt
Securities of such series may declare the principal, or in the case of
discounted Debt Securities, such portion thereof as may be described in the
Prospectus Supplement, of all the Debt Securities of such series to be due and
payable immediately.
Within four months after the close of each fiscal year, the Company will file
with each trustee under the indentures a certificate, signed by specified
officers, stating whether or not such officers have knowledge of any default,
and, if so, specifying each such default and the nature thereof.
Subject to provisions relating to its duties in case of default, a trustee
under the Indentures shall be under no obligation to exercise any of its rights
or powers under the applicable Indenture at the request, order, or direction of
any Holder, unless such Holders shall have offered to such trustee reasonable
indemnity. Subject to such provisions for indemnification, the Holders of a
majority in principal amount of the Debt Securities of any series may direct the
time, method, and place of conducting any proceeding for any remedy available to
the appropriate trustee, or exercising any trust or power conferred upon such
trustee, with respect to the Debt Securities of such series.
Payment and Transfer. Principal of, and premium and interest, if any, on,
fully Registered Securities will be payable at the Place of Payment as specified
in the applicable Prospectus Supplement, provided that payment of interest, if
any, may be made, unless otherwise provided in the applicable Prospectus
Supplement, by check mailed to the person in whose names such Debt Securities
are registered at the close of business on the day or days specified in the
Prospectus Supplement or transfer to an account maintained by the payee located
inside the United States. The principal of, and premium and interest, if any,
on, Debt Securities in other forms will be payable in the manner and at the
place or places as designated by the Company and specified in the applicable
Prospectus Supplement. Unless otherwise provided in the Prospectus Supplement,
payment of interest may be made, in the case of Bearer Security by transfer to
an account maintained by the payee with a bank outside the United States.
Fully Registered Securities may be transferred or exchanged at the corporate
trust office of the trustee or any other office or agency maintained by the
Company for such purposes, subject to the limitations in the applicable
Indenture, without the payment of any service charge except for any tax or
governmental charge incidental thereto. Provisions with respect to the transfer
and exchange of Debt Securities in other forms will be set forth in the
applicable Prospectus Supplement.
Defeasance. The Indentures provide that each will cease to be of further
effect with respect to a certain series of Debt Securities (except for certain
obligations to register the transfer or exchange of Securities) if (a) the
Company delivers to the Trustee for the Securities of such series for
cancellation of all Securities of all series and the coupons, if any,
appertaining thereto, or (b) if the Company deposits into trust with the Trustee
money or United States government obligations, that, through the payment of
interest thereon and principal thereof in accordance with their terms, will
provide money in an amount sufficient to pay all of the principal of, and
interest on, the Securities of such series on the dates such payments are due or
redeemable in accordance with the terms of such Securities.
Certain Charter and Virginia Law Provisions
Unless the amendment effects an extraordinary transaction, the Articles of
Incorporation of the Company may be amended with the approval of the holders of
a majority of the outstanding shares of Common Stock, subject to the voting
rights (if any) of any series of Preferred Stock that may be outstanding from
time to time. Amendments that effect extraordinary transactions, which include
mergers, share exchanges, a sale of substantially all the assets of the Company,
the dissolution of the Company or the share ownership restrictions described
below, require the approval of the holders of more than two-thirds of the
outstanding shares of Common Stock (subject to any voting rights of any series
of preferred stock outstanding).
Special meetings of the shareholders of the Company may be called by a
majority of the Board of Directors, a majority of the unaffiliated directors,
the Chairman of the Board, the President or generally by shareholders holding at
least 25% of the outstanding shares of Common Stock entitled to be voted at the
meeting.
Virginia law and the Articles of Incorporation of the Company provide that
the directors and officers of the Company shall have no liability to the Company
or its shareholders in certain actions brought by or on behalf of shareholders
of the Company unless such officer or director has engaged in willful misconduct
or violations of federal or state securities laws and certain other activities.
Repurchase of Shares and Restrictions on Transfer
Two of the requirements for qualification for the tax benefits accorded a
REIT under the Internal Revenue Code of 1986, as amended ("the Code"), are that
(i) during the last half of each taxable year not more than 50% of the
outstanding shares may be owned directly or indirectly by five or fewer
individuals and (ii) there must be at least 100 shareholders for at least 335
days in each taxable year. Those requirements apply for all taxable years after
the year in which a REIT elects REIT status.
The Articles of Incorporation prohibit any person or group of persons from
acquiring or holding, directly or indirectly, ownership of a number of shares of
Common Stock in excess of 9.8% of the outstanding shares. Shares of Common Stock
owned by a person or group of persons in excess of such amounts are referred to
as "Excess Shares." For this purpose the term "ownership" is defined in
accordance with the Code, the constructive ownership provisions of Section 544
of the Code and Rule 13d-3 promulgated under the Exchange Act, and the term
"group" is defined to have the same meaning as that term has for purposes of
Section 13(d)(3) of the Exchange Act. Accordingly, shares of Common Stock owned
or deemed to be owned by a person who individually owns less than 9.8% of the
shares outstanding may nevertheless be Excess Shares.
For purposes of determining whether a person holds Excess Shares, a person or
group will be treated as owning not only shares of Common Stock actually or
beneficially owned, but also any shares of Common Stock attributed to such
person or group under the constructive ownership provisions contained in Section
544 of the Code.
The Articles of Incorporation provide that in the event any person acquires
Excess Shares, each Excess Share may be redeemed at any time by the Company at
the closing price of a share of Common Stock on the New York Stock Exchange on
the last business day prior to the redemption date. From and after the date
fixed for redemption of Excess Shares, such shares shall cease to be entitled to
any distribution and other benefits, except only the right to payment of the
redemption price for such shares.
Under the Articles of Incorporation any acquisition of shares that would
result in failure to qualify as a REIT under the Code is void to the fullest
extent permitted by law, and the Board of Directors is authorized to refuse to
transfer shares to a person if, as a result of the transfer, that person would
own Excess Shares. Prior to any transfer or transaction which, if consummated,
would cause a shareholder to own Excess Shares, and in any event upon demand by
the Board of Directors, a shareholder is required to file with the Company an
affidavit setting forth, as to that shareholder, the information required to be
reported in returns filed by shareholders under Treasury Regulation Section
1.857-9 under the Code and in reports filed under Section 13(d) of the Exchange
Act. Additionally, each proposed transferee of shares of Common Stock, upon
demand of the Board of Directors, also may be required to file a statement or
affidavit with the Company setting forth the number of shares already owned by
the transferee and any related person.
The Common Stock may not be purchased by nonresident aliens or foreign
entities. In addition, the Common Stock may not be held by "disqualified
organizations" within the meaning of Section 860E(e)(5) of the Code, which
generally includes governmental entities and other tax-exempt persons not
subject to the tax on unrelated business taxable income.
Transfer Agent and Registrar
The transfer agent and the registrar for the Company's Common Stock is First
Union National Bank of North Carolina, Charlotte, North Carolina.
PLAN OF DISTRIBUTION
The Company may sell Securities (1) through underwriters or dealers, (2)
directly to one or more purchasers, or (3) through agents designated from time
to time.
The distribution of Securities may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of the sale, or at prices related to such
prevailing market prices or at negotiated prices. The Prospectus Supplement will
describe the method of distribution of the Securities offered.
If underwriters are used in the sale in a firm commitment underwriting, the
Securities will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of the underwriters to purchase the
Securities will be subject to certain conditions precedent, and the underwriters
will be obligated to purchase all the Securities of the series offered by the
Company's Prospectus Supplement if any of the Securities are purchased. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
Only underwriters named in the Prospectus Supplement are deemed to be
underwriting in connection with the Securities in respect of which such
Prospectus Supplement and this Prospectus are delivered and any firms not named
therein are not parties to the underwriting agreement in respect of such
Securities and will have no direct or indirect participation in the underwriting
thereof, although they may participate in the discussion of such Securities
under circumstances where they may be entitled to a dealer's commission.
Securities may also be sold directly by the Company or through agents
designated by the Company from time to time. The Securities offered hereby may
also be sold from time to time through agents for the Company by means of (i)
ordinary broker's transactions, (ii) block transactions (which may involve
crosses) in accordance with the rules of the Exchanges, in which such agents may
attempt to sell Securities as agent but may purchase and resell all or a portion
of the blocks as principal, (iii) "fixed price offerings" in accordance with the
rules of the Exchanges, or (iv) a combination of any such methods of sale. In
connection therewith, distributors' or sellers' commissions may be paid or
allowed which will not exceed those customary in the types of transactions
involved. A Prospectus Supplement will set forth the terms of any such "fixed
price offering," "exchange distributions" and "special offerings." If the agent
purchases Securities as principal, it may sell such Securities by any of the
methods described above. Any such agent involved in the offering and sale of
Securities in respect of which this Prospectus is delivered will be named, and
any commissions payable by the Company to such agent set forth in the Prospectus
Supplement. Unless otherwise indicated herein or in the Prospectus Supplement,
any such agent is acting on a best-efforts basis for the period of its
appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers by certain institutional
investors to purchase Securities providing for payment and delivery on a future
date specified in the Prospectus Supplement. There may be limitations on the
minimum amount which may be purchased by any such institutional investor or on
the portion of the aggregate principal amount of the particular Securities which
may be sold pursuant to such arrangements. Institutional investors to which such
offers may be made, when authorized, include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and such other institutions as may be approved by the
Company. The obligations of any such purchasers pursuant to such delayed
delivery and payment arrangements will not be subject to any conditions except
(1) the purchase by an institution of the particular Securities shall not at the
time of delivery be prohibited under the laws of any jurisdiction in the United
States to which such institution is subject, and (2) if the particular
Securities are being sold to underwriters, the Company shall have sold to such
underwriters the total principal amount of such Securities less the principal
amount thereof covered by such arrangements. Underwriters will not have any
responsibility in respect of the validity of such arrangements or the
performance of the Company or such institutional investors thereunder.
Agents, underwriters and dealers may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents, underwriters and dealers may engage
in transactions with, or perform services for, the Company in the ordinary
course of business.
If an agent or agents are utilized in the sale, such persons may be deemed to
be "underwriters", and any documents, commissions or concessions received by
them from the Company or any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
Any such person who may be deemed to be an underwriter and any such compensation
received from the Company will be described in the Prospectus Supplement.
FEDERAL INCOME TAX CONSIDERATIONS
Federal Income Taxation of Shareholders
The following section is a general summary of certain federal income tax
aspects of an investment in the Company that should be considered by prospective
shareholders. The discussion in this section is based on existing provisions of
the Code, existing and proposed Treasury regulations, existing court decisions,
and existing rulings and other administrative interpretations. There can be no
assurance that future Code provisions or other legal authorities will not alter
significantly the tax consequences described below. No rulings have been
obtained from the Internal Revenue Service concerning any of the matters
discussed in this section.
The Company and its qualified REIT subsidiaries (collectively "Resource
REIT") believes it has complied, and intends to comply in the future, with the
requirements for qualification as a REIT under the Code. The federal income tax
provisions governing REITs and their shareholders are extremely complicated, and
what follows is only a very brief and general summary of the most important
considerations for shareholders. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF THE
COMPANY.
General Considerations
Resource REIT believes it has complied, and intends to comply in the future,
with the requirements for qualification as a REIT under the Code. Venable,
Baetjer and Howard, LLP, counsel to the Company, has given the Company its
opinion to the effect that, as of the date hereof and based on the various
representations made to it by the Company with respect to its income, assets,
and activities since its inception, and subject to certain assumptions and
qualifications stated in such opinion, (i) Resource REIT qualifies for treatment
as a REIT under the Code and (ii) the organization and contemplated method of
operation of Resource REIT are such as to enable it to continue so to qualify in
subsequent years, provided the various operational requirements of REIT status
are satisfied in those years. However, investors should be aware that opinions
of counsel are not binding on the courts or the Internal Revenue Service. To the
extent that Resource REIT qualifies as a REIT for federal income tax purposes,
it generally will not be subject to federal income tax on the amount of its
income or gain that is distributed to shareholders. However, certain
nonqualified REIT subsidiaries of the Company, which operate the Company's
production operations and are included in the Company's consolidated GAAP
financial statements, are not qualified REIT subsidiaries. Consequently, all of
the nonqualified REIT subsidiarys' taxable income is subject to federal and
state income taxes.
The REIT rules generally require that a REIT invest primarily in real
estate-related assets, its activities be passive rather than active, and it
distribute annually to its shareholders a high percentage of its taxable income.
The Company could be subject to a number of taxes if it failed to satisfy those
rules or if it acquired certain types of income-producing real property through
foreclosure. Although no complete assurances can be given, the Company does not
expect that it will be subject to material amounts of such taxes.
Resource REIT's failure to satisfy certain Code requirements could cause the
Company to lose its status as a REIT. If Resource REIT failed to qualify as a
REIT for any taxable year, it would be subject to federal income tax (including
any applicable minimum tax) at regular corporate rates and would not receive
deductions for dividends paid to shareholders. As a result, the amount of
after-tax earnings available for distribution to shareholders would decrease
substantially. While the Board of Directors intends to cause Resource REIT to
operate in a manner that will enable it to qualify as a REIT in all future
taxable years, there can be no certainty that such intention will be realized
because, among other things, qualification hinges on the conduct of the business
of Resource REIT.
Taxation of Distributions by the Company
Assuming that Resource REIT maintains its status as a REIT, any distributions
that are properly designated as "capital gain dividends" generally will be taxed
to shareholders as long-term capital gains, regardless of how long a shareholder
has owned his shares. Any other distributions out of Resource REIT current or
accumulated earnings and profits will be dividends taxable as ordinary income.
Shareholders will not be entitled to dividends-received deductions with respect
to any dividends paid by Resource REIT. Distributions in excess of Resource
REIT's current or accumulated earnings and profits will be treated as tax-free
returns of capital, to the extent of the shareholder's basis in his shares of
Common Stock, and as gain from the disposition of shares, to the extent they
exceed such basis. Shareholders may not include on their own returns any of
Resource REIT ordinary or capital losses. Distributions to shareholders
attributable to "excess inclusion income" of Resource REIT will be characterized
as excess inclusion income in the hands of the shareholders. Excess inclusion
income can arise from Resource REIT's holdings of residual interests in real
estate mortgage investment conduits and in certain other types of
mortgage-backed security structures created after 1991. Excess inclusion income
constitutes unrelated business taxable income ("UBTI") for tax-exempt entities
(including employee benefit plans and individual retirement accounts), and it
may not be offset by current deductions or net operating loss carryovers. In the
unlikely event that the Company's excess inclusion income is greater than its
taxable income, the Company's distribution would be based on the Company's
excess inclusion income. In 1995 the Company's excess inclusion was
approximately 31% of its taxable income. Although Resource REIT itself would be
subject to a tax on any excess inclusion income that would be allocable to a
"disqualified organization" holding its shares, Resource REIT's by-laws provide
that disqualified organizations are ineligible to hold Resource REIT's shares.
Dividends paid by Resource REIT to organizations that generally are exempt
from federal income tax under Section 501(a) of the Code should not be taxable
to them as UBTI except to the extent that (i) purchase of Shares of Resource
REIT was financed by "acquisition indebtedness," (ii) such dividends constitute
excess inclusion income or (iii) with respect to the trusts owning more than 10%
of the shares of Resource REIT, under certain circumstances a portion of such
dividend is attributable to UBTI. Because an investment in Resource REIT may
give rise to UBTI or trigger the filing of an income tax return that otherwise
would not be required, tax-exempt organizations should give careful
consideration to whether an investment in Resource REIT is prudent.
Taxation of Dispositions of Shares of the Common Stock
In general, any gain or loss realized upon a taxable disposition of shares
will be treated as long-term capital gain or loss if the shares have been held
for more than twelve months and otherwise as short-term capital gain or loss.
However, any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. All or a portion of
any loss realized upon a taxable disposition of Shares of Resource REIT may be
disallowed if other Shares of Resource REIT are purchased (under a dividend
reinvestment plan or otherwise) within 30 days before or after the disposition.
Backup Withholding
Resource REIT generally is required to withhold and remit to the United
States Treasury 31% of the dividends paid to any shareholder who (i) fails to
furnish Resource REIT with a correct taxpayer identification number, (ii) has
notified Resource REIT that a shareholder has underreported dividend or interest
income to the Internal Revenue Service, or (iii) under certain circumstances,
fails to certify to Resource REIT that he is not subject to backup withholding.
An individual's taxpayer identification number is his social security number.
Debt Securities
The Debt Securities will be taxable as indebtedness. Interest and original
issue discount, if any, on a Debt Security will be treated as ordinary income to
a holder. Any special tax considerations applicable to a Debt Security will be
described in the related Prospectus Supplement.
Exercise of Securities Warrants
Upon a holder's exercise of a Securities Warrant, the holder will, in
general, (i) not recognize any income, gain or loss for federal income tax
purposes, (ii) receive an initial tax basis in the Security received equal to
the sum of the holder's tax basis in the exercised Securities Warrant and the
exercise price paid for such Security and (iii) have a holding period for the
Security received beginning on the date of exercise.
Sale or Expiration of Securities Warrants
If a holder of a Securities Warrant sells or otherwise disposes of such
Securities Warrant (other than by its exercise), the holder generally will
recognize capital gain or loss (long term capital gain or loss if the holder's
holding period for the Securities Warrant exceeds twelve months on the date of
disposition; otherwise, short term capital gain or loss) equal to the difference
between (i) the cash and fair market value of other property received and (ii)
the holder's tax basis (on the date of disposition) in the Securities Warrant
sold. Such a holder generally will recognize a capital loss upon the expiration
of an unexercised Securities Warrant equal to the holder's tax basis in the
Securities Warrant on the expiration date.
State and Local Tax Considerations
State and local tax laws may not correspond to the federal income tax
principles discussed in this section. Accordingly, prospective investors should
consult their tax advisers concerning the state and local tax consequences of an
investment in Resource REIT.
LEGAL OPINIONS
The validity of the Securities will be passed upon for the Company by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of the Company included in the
Company's Report on Form 10-K for the year ended December 31, 1995 and Current
Report on Form 8-K for the year ended December 31, 1996 dated March 6, 1997 have
been audited by KPMG Peat Marwick LLP, independent auditors, as set forth in
their reports included therein, and incorporated herein by reference. Such
financial statements have been incorporated by reference herein in reliance upon
the reports of that firm and upon the authority of that firm as experts in
auditing and accounting.