424B3: Prospectus filed pursuant to Rule 424(b)(3)
Published on October 20, 1995
FILED PURSUANT TO RULE 424(B)(3)
FILE NUMBER 33-50705
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 19, 1995)
[LOGO] 2,100,000 SHARES
RESOURCE MORTGAGE CAPITAL, INC.
SERIES B 9.55% CUMULATIVE CONVERTIBLE PREFERRED STOCK
Dividends on the shares of the Series B 9.55% Cumulative Convertible
Preferred Stock (the "Preferred Stock") of Resource Mortgage Capital, Inc. (the
"Company") are cumulative from the date of issue and are payable quarterly in
arrears on January 31, April 30, July 31, and October 31 (or the next succeeding
business day) of each year, commencing January 31, 1996 in an amount per share
equal to the greater of (i) the Base Rate of $0.585 per quarter (equal to a
9.55% annual dividend rate), or (ii) the quarterly dividend declared on the
number of shares of Common Stock (or portion thereof) into which the Preferred
Stock is convertible. The record date for determination of shareholders entitled
to receive dividends on the Preferred Stock for the period from the date of
issuance through December 31, 1995 is expected to be December 31, 1995. The
dividend for the partial period ending December 31, 1995 will be prorated from
the date of issuance and will be determined by reference to the Base Rate. See
"The Offering."
Each share of Preferred Stock is convertible at any time at the option of
the holder thereof into one share (subject to possible future adjustment in
certain circumstances) of Common Stock. See "The Offering." On October 19, 1995,
the last reported sale price of the Common Stock (RMR) on the New York Stock
Exchange (the "NYSE") was $20 per share.
The Preferred Stock will not be redeemable by the Company prior to October
31, 1998. On and after October 31, 1998, the Preferred Stock will be redeemable
by the Company, in whole or in part, at the option of the Company (i) for one
share (subject to possible future adjustment in certain circumstances) of Common
Stock (plus accumulated, accrued and unpaid dividends through the end of the
prior dividend period, which are to be paid in cash), provided that for 20
trading days within any period of 30 consecutive trading days, including the
last trading day of such period, the closing price of the Common Stock on the
NYSE equals or exceeds the Conversion Price then in effect (initially equal to
the issue price of $24.50 per share (the "Issue Price")), or (ii) for cash at a
redemption price equal to the Issue Price, plus any accumulated, accrued and
unpaid dividends.
The Preferred Stock represents preferred stock in a real estate investment
trust ("REIT"), and as such, the dividends on the Preferred Stock are not
eligible for the dividends received deduction for federal income tax purposes.
With certain exceptions, no person may own, or be deemed to own by virtue of the
attribution provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), more than 9.8% of the Company's capital stock. The Preferred Stock of
the Company may not be purchased or held by tax-exempt entities that are not
subject to tax on unrelated business taxable income or by nonresident aliens or
foreign entities. See "Description of Securities."
The shares of Preferred Stock have been approved for listing on the
National Association of Securities Dealers Automated Quotation National Market
System (the "Nasdaq National Market") under the symbol "RMRPO."
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.
(1) See "Underwriting."
(2) Before deducting expenses estimated at $140,000, which are payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 additional shares of the Preferred Stock on the same terms and
conditions as set forth above to cover over-allotments, if any. If all such
shares are purchased, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $59,167,500, and $2,514,015 and $56,653,485,
respectively. See "Underwriting."
THE SHARES OF PREFERRED STOCK ARE OFFERED BY THE UNDERWRITERS SUBJECT TO
RECEIPT AND ACCEPTANCE BY THEM, PRIOR TO SALE AND THE UNDERWRITERS' RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART AND TO WITHDRAW, CANCEL OR MODIFY THE OFFER
WITHOUT NOTICE. IT IS EXPECTED THAT DELIVERY OF THE PREFERRED STOCK WILL BE MADE
IN NEW YORK, NEW YORK THROUGH THE FACILITIES OF THE SECURITIES INDUSTRY
AUTOMATION CORPORATION ON OR ABOUT OCTOBER 25, 1995.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
SCOTT & STRINGFELLOW, INC.
STEPHENS INC.
The date of this Prospectus Supplement is October 19, 1995
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein or therein by reference.
THE COMPANY
Resource Mortgage Capital, Inc. ("the Company") is a real estate investment
trust whose primary objective is to maximize long-term return on equity through
investment in a portfolio of residential mortgage securities. The Company's
primary strategy is to use its mortgage operations to create investments for its
portfolio that generally have higher yields than could be obtained through
purchase in the market. The Company's mortgage operations consist of the
origination, purchase, securitization and servicing of residential mortgage
loans.
BUSINESS FOCUS
The Company strives to create a diversified portfolio of mortgage securities
that in the aggregate generates stable income for the Company in a variety of
interest rate environments and preserves the capital base of the Company. The
Company creates the majority of the investments for its portfolio by retaining a
portion of the mortgage securities or other assets that are generated from its
mortgage operations. The Company employs leverage to increase potential returns
to shareholders by using collateralized borrowings, repurchase agreements and
its capital base, to fund its mortgage investments. By pursuing these
strategies, the Company believes it can structure the portfolio to have more
favorable net yields in a variety of interest rate environments than if it
purchased mortgage investments in the market, although there can be no assurance
that the Company will be successful in accomplishing this strategy.
A substantial portion of the mortgages originated by the Company through its
mortgage operations are to borrowers with a non-conforming credit profile,
primarily with respect to borrower income, credit history and or required
documentation (i.e. "non-conforming credit profile"). Conforming mortgage loans
qualify for guarantees from government agencies, whereas non- conforming loans
do not qualify for such guarantees. The Company's strategy of originating and
securitizing mortgage loans to borrowers with such non-conforming credit
profiles involves three primary components (i) geographic diversification of
mortgage assets provided by a growing network of mortgage loan brokers
throughout the country who source these mortgage loans for the Company, (ii)
prudent loan selection through the use of the Company's internally-developed
non-conforming credit underwriting standards and procedures executed by the
underwriting and risk management departments, and (iii) aggressive loan
monitoring and default management through the Company's servicing operation
which services substantially all loans for which the Company retains credit risk
upon securitization. The Company believes it can achieve a greater return for
its shareholders by focusing on mortgage loans to borrowers with a
non-conforming credit profile.
STRATEGY
The Company's portfolio investments and mortgage operations, in conjunction
with its REIT tax status, have contributed to the Company's four year average
return on equity in excess of 20%. The Company has recently implemented three
key strategies in order to continue to meet its goal of maximizing long-term
return on equity in response to an increasingly competitive mortgage market.
(bullet) The Company expects that in future periods, a greater percentage of its
mortgage loan funding volume will be wholesale originations (direct
originations by the Company through a network of mortgage loan brokers)
and a lower percentage will be correspondent purchases (the purchase of
closed loans from Company approved mortgage loan originators) relative
to recent periods. During the six months ended June 30, 1995, $309.0
million of mortgage loans, representing 71% of total loan fundings,
were purchased from correspondents, with the remainder being originated
through wholesale broker relationships. The Company believes that the
funding of mortgage loans through its wholesale operations will be at a
lower all-in cost than if such mortgage loans were purchased from
correspondents. Additionally, the Company believes that by originating
loans directly through brokers, it can (i) be more responsive to the
marketplace by more quickly developing and introducing new loan
products and adjusting mortgage loan terms and pricing, and (ii)
maintain a higher level of control over the credit quality of the
mortgage loans.
S-2
(bullet) The Company expects that a significant portion of the future growth in
its portfolio of mortgage assets will be from the issuance of
collateralized mortgage obligations ("CMOs"), which is the issuance of
a debt security collateralized by a pool of mortgage loans. These CMOs
will be collateralized primarily by mortgage loans to borrowers with a
non-conforming credit profile. As such, the mortgage loans which
collateralize the CMOs are treated as assets of the Company and the
CMOs are treated as liabilities of the Company. The Company earns the
difference between the interest income on the mortgage loans which
collateralize the CMOs and the interest and other expenses associated
with the CMO financing. The net interest spread will be directly
impacted by the levels of prepayment of and credit losses on the
underlying mortgage loans. The Company may issue CMOs from time to
time based on the Company's portfolio management strategy, loan funding
volume, market conditions and other factors.
The Company's CMO securitization strategy differs from its
securitization strategy in recent years. As a debt issuance, a CMO
securitization does not result in the immediate recognition of a gain
or loss on sale of mortgage loans as would have resulted using the
securitization strategies of recent years. Rather, income from these
security structures will be recognized over the life of the security as
net interest margin on portfolio investments which is generally not
taxable to the Company as a REIT. Conversely, income recognized as
gain on sale of mortgage loans are generated primarily by a taxable
affiliated entity and as such are fully taxable. Recognizing income
over time as a result of utilizing the CMO securitization strategy may
reduce the earnings volatility that could have been experienced by
utilizing former securitization strategies. As of September 30, 1995,
the Company had securitized $527.4 million principal amount of mortgage
loans to borrowers with a non-conforming credit profile using a CMO
security structure.
(bullet) The Company generally will assume a portion of the credit risk for the
mortgage loans which it originates and securitizes through the
issuance of CMOs. Such loans are originated at a higher yield relative
to the loan to value ratio than conforming mortgage loans to compensate
for the higher credit risk. The Company's loss exposure is limited to
its net investment in these CMOs, primarily related to
over-collateralization. Additionally, the Company attempts to manage
this risk through its underwriting process and strategy of servicing
substantially all loans for which the Company assumes any credit risk.
NON-CONFORMING MORTGAGE LOANS
Substantially all of the mortgage loans funded through the mortgage
operations are "non-conforming" mortgage loans secured by residential properties
throughout the United States. Non-conforming mortgage loans will not qualify
for purchase by Federal Home Loan Mortgage Association ("FHLMC") or Federal
National Mortgage Association ("FNMA") or for inclusion in a loan guarantee
program sponsored by Government National Mortgage Association ("GNMA").
Non-conforming mortgage loans generally are originated based upon different
underwriting criteria than are required by the federal agencies' programs (i.e.
"non-conforming credit profile") or have outstanding principal balances in
excess of the program guidelines of these federal agencies ($203,150 as of
September 30, 1995). A borrower with a non-conforming credit profile cannot
easily qualify for a loan from the federal agencies for reasons other than loan
size. Such qualification criteria includes borrower income, credit history and/
or required documentation. Non-conforming loans may have higher risks than
conforming mortgage loans due to their lower liquidity, different underwriting
or qualification criteria, or higher loan balances.
S-3
Mortgage loans funded by the Company in its mortgage operations are secured
by single (one-to-four) family residential properties and have either fixed or
adjustable interest rates. Adjustable-rate mortgage ("ARM") loans provide for
the periodic adjustment to the rate of interest equal to the sum of a fixed
margin and an index, generally subject to certain periodic and lifetime interest
rate caps ("caps"). Fixed-rate mortgage loans generally have a constant
interest rate over the life of the loan, primarily 15 or 30 years. In addition,
fixed-rate mortgage loans funded by the Company may also have a fixed interest
rate for the first 3, 5, or 7 years and an interest rate which adjusts at six or
twelve month intervals thereafter, subject to periodic and lifetime interest
rate caps.
MORTGAGE LOAN FUNDING
The Company has two primary methods for sourcing mortgage loans funded
through its mortgage operations. Mortgage loans funded through the Company's
wholesale operations are originated directly by the Company through brokers.
Mortgage loans funded through the Company's correspondent operations are
purchased from various Company approved mortgage loan originators. The Company
purchases mortgage loans for immediate delivery or for a specific period of time
at an established price and yield, in a specified principal amount.
Wholesale operations. Mortgage loans originated by the Company through its
wholesale operations are sourced by independent brokers and underwritten and
closed by the Company. The wholesale operation provides geographic
diversification of mortgage assets and allows the Company to be more directly
involved in the origination process of the loan, but without the direct cost and
overhead of a retail branch operation. The Company's mortgage loan wholesale
operation targets borrowers with a non-conforming credit profile. The Company's
wholesale origination capability was established during 1994 and $125.6 million
or 29% of the total mortgage loans funded by the Company during the six months
ended June 30, 1995 were funded through its wholesale operations. The Company
expects that wholesale originations will represent a greater percentage of total
mortgage loans funded during 1995 relative to 1994 as the Company continues to
grow its wholesale origination capability.
Correspondent operations. The mortgage loans funded through the Company's
correspondent operations are originated by various sellers that meet the
Company's qualification criteria. These sellers include savings and loan
associations, banks, mortgage bankers and other mortgage lenders. During the
six months ended June 30 1995, $309.0 million or 71% of the total mortgage loans
funded by the Company were funded through its correspondent operations.
MORTGAGE LOAN UNDERWRITING
Each mortgage loan funded by the Company must meet the Company's
underwriting standards. Underwriting standards vary dependent upon the specific
loan program under which the loan is being funded. The Company's in-house
underwriting process improves quality control and allows the Company to quickly
respond to changes in the market. The Company now underwrites principally all
mortgage loans that it funds. Additionally, the Company may allow certain
correspondent sellers to underwrite mortgage loans according to the Company's
underwriting guidelines.
MORTGAGE LOANS IN WAREHOUSE
During the mortgage loan accumulation period prior to sale or
securitization, which is typically 60 to 90 days, the Company is exposed to
risks of interest rate fluctuations and may enter into hedging transactions to
reduce the change in value of such mortgage loans caused by changes in interest
rates. Gains and losses on these hedging transactions are deferred as an
adjustment to the carrying value of the related mortgage loans until the
mortgage loans are sold. The Company is also at risk for credit losses on
mortgage loans in inventory during the accumulation period. The Company manages
this risk through application of its mortgage loan underwriting and risk
management standards and procedures, and the establishment of reserves.
S-4
MORTGAGE LOAN SECURITIZATION AND SALES STRATEGY
When a sufficient volume of mortgage loans is accumulated, typically a
minimum of $100 million, the Company generally securitizes a pool of mortgage
loans through the issuance of mortgage securities or may sell such pool of
mortgage loans directly to an investment banking firm or an institutional
investor. The Company may securitize mortgage loans funded through its mortgage
operations by issuing CMOs or pass-through securities. The mortgage-backed
securities are structured so that a substantial portion of the securities are
rated in one of the two highest rating categories (i.e. AA or AAA) by at least
one of the nationally recognized rating agencies. Credit enhancement for these
mortgage securities may take the form of over- collateralization, subordination,
reserve funds, mortgage pool insurance, bond insurance, 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. Mortgage-backed securities issued by the Company are not
generally guaranteed by the federal agencies. Each series of mortgage
securities is expected to be fully payable from the collateral pledged to secure
the series. It is expected that the recourse of investors in the series
generally will be limited to the collateral underlying the securities. Except in
the case of a breach of the standard representations and warranties made by the
Company when loans are sold or securitized, the securities are non-recourse to
the Company.
CREDIT ENHANCEMENT AND RISK RETENTION
Regardless of the form of credit enhancement, the Company may retain a
limited portion of the direct credit risk after securitization, including the
risk of loss related to hazards not covered under standard hazard insurance
policies. Such credit loss exposure is generally limited to an amount equal to
a fixed percentage of the principal balance of the pool of mortgage loans at the
time of securitization. Additionally, the Company may be contingently exposed
to losses due to fraud during the origination of a mortgage loan if the
originator of such mortgage loan defaults on its repurchase obligation. The
Company has established discounts and reserves for estimated expected losses
related to these various risks. The Company's results will be negatively
impacted in future periods to the extent actual losses exceed the amount of such
discounts and reserves.
Over-collateralization. Over-collateralization is generally used in
conjunction with bond insurance in the issuance of CMOs. Losses are first
applied to the over-collateralization amount, and any losses in addition to that
amount would be borne by the bond insurer or holders of the CMOs. The Company
generally receives an excess yield on the mortgage loans relative to the yield
on the CMOs to compensate the Company for retaining such loss exposure.
Subordination. Subordination is generally used in conjunction with the
issuance of pass-through securities, and may also be used in conjunction with
reserve funds, mortgage pool insurance and bond insurance. The credit risk is
concentrated in the subordinated classes (which may partially be credit enhanced
with reserve funds or pool insurance) of the securities, thus allowing the
senior classes of the securities to receive the higher credit ratings. To the
extent credit losses are greater than expected (or exceed the protection
provided by any reserve funds or pool insurance), the holders of the
subordinated securities will experience a lower yield (which may be negative)
than expected on their investments.
Insurance. As mentioned above, the Company may use mortgage pool insurance
and reserve funds for credit enhancement. Mortgage pool insurance is currently
less available as a form of credit enhancement than it had been in the past.
Credit losses covered by the mortgage pool insurance policies are borne by the
pool insurers to the limits of their policies and by the security holders (or a
bond insurer, if any) if losses exceed those limits. To the extent a loan is to
be covered by mortgage pool insurance, the Company may rely upon the credit
review and analysis of each loan, which is performed by the mortgage insurer, in
deciding to fund the mortgage loan.
MORTGAGE LOAN SERVICING
During 1994, the Company established, through an acquisition, the capability
to service mortgage loans funded through its mortgage operations. Servicing
functions include collection and remittance of principal and interest payments,
administration of mortgage escrow accounts, collection of certain insurance
claims and, if necessary, foreclosure and sale of the property. The Company
plans to enhance its servicing capability with an emphasis on technology to
minimize credit risk and maximize credit recovery. The Company has recently
implemented a computerized default management system to track and manage
foreclosures and liquidations, and is in the process of prototyping an imaging
system which will provide instantaneous access to documents, and enhance
collection capabilities. If the Company retains a portion of the credit risk on
a pool of mortgage loans after securitization, the Company will generally
utilize its servicing capabilities in an effort to better manage its credit
exposure.
S-5
PORTFOLIO INVESTMENT STRATEGY
The Company's investment strategy is to create a diversified portfolio of
mortgage securities that in the aggregate generates stable income for the
Company in a variety of interest rate environments and preserves the capital
base of the Company. The Company creates the majority of the investments for
its portfolio by retaining a portion of the mortgage securities or other assets
that are generated from its mortgage operations. The Company employs leverage
to increase potential returns to shareholders by using collateralized
borrowings, repurchase agreements and its capital base, to fund its mortgage
investments. By pursuing these strategies, the Company believes it can
structure the portfolio to have more favorable yields in a variety of interest
rate environments than if it purchased mortgage investments in the market,
although there can be no assurance that the Company will be successful in
accomplishing this strategy.
At June 30, 1995, the Company's mortgage investments included the following
(amounts in thousands):
Collateral for CMOs $ 882,825 29%
Adjustable-rate mortgage securities 2,058,661 67
Fixed-rate mortgage securities 69,007 2
Other mortgage securities 66,814 2
Mortgage warehouse lines of credit 4,233 -
Total mortgage investments $ 3,081,540 100%
The Company continuously monitors the aggregate projected net yield of its
investment portfolio under various interest rate environments. While certain
investments may perform very poorly in an increasing interest rate environment,
certain investments may perform very 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 mortgage investments to its portfolio in the future.
Investment in CMOs. A segment of the portfolio which the Company intends
to grow significantly consists of its net investment in CMOs. The net margin on
CMOs is derived primarily from the difference between the cash flow generated
from the mortgage collateral pledged to secure the CMOs, and the amounts
required for payment on the CMOs and administrative expenses. The CMOs are
generally non-recourse to the Company. The Company's yield on its investment in
CMOs is affected primarily by changes in prepayment rates (the yield will
decline with an increase in prepayment rates, and the yield will increase with a
decrease in prepayment rates) and secondarily by credit losses (the yield will
decline with higher than expected credit losses, and the yield will increase
with lower than expected credit losses).
The Company's CMO securitization strategy differs from the Company's
securitization strategy in recent years. As a debt issuance, a CMO
securitization does not result in the immediate recognition of a gain or loss on
sale of mortgage loans. Rather, income from these security structures will be
recognized over the life of the security as net interest margin on portfolio
investments which is generally not taxable to the Company, as a REIT.
Conversely, income recognized as gain on sale of mortgage loans are generated
primarily by a taxable affiliated entity and as such are fully taxable.
Recognizing income over time as a result of utilizing the CMO securitization
strategy may reduce the earnings volatility that could have been experienced by
utilizing former securitization strategies.
Adjustable-rate mortgage securities. The majority of the Company's
portfolio is comprised of investments in ARM securities. The Company may
increase its return on equity by pledging the ARM securities as collateral for
repurchase agreements. 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 ("caps"). Generally, the repurchase agreements have a
fixed rate of interest over a term that ranges from 30 to 180 days. As a
result, the interest rates on repurchase agreements are not subject to repricing
limitations. Thus, the net interest on the ARM investments could decline if the
spread between the yield on the ARM security versus the interest rate on the
repurchase agreement was to be reduced.
S-6
In the event of a rapidly rising interest rate environment, as was
experienced during 1994, the interest rate on certain repurchase borrowings,
which are not subject to caps, will increase at a faster rate than the interest
rate earned on the ARM securities which collateralize these borrowings,
decreasing the net interest spread on these securities. Similarly, a rapidly
rising interest rate environment may cause the value of the Company's ARM
securities to decline. Such a decline in value may reduce the amount of funds
available to be borrowed against these assets. As a result of such a decline in
market value, the Company may be required to sell certain mortgage assets in
order to maintain liquidity. If required, these sales could be made at prices
lower than the carrying value of the assets, which could result in losses. To
mitigate this risk, the Company (i) may establish a reserve to hedge against the
impact on earnings when the spread is reduced, (ii) has purchased interest rate
cap agreements to reduce the risk of the lifetime interest rate limitation on
the ARM securities and (iii) strives to maintain excess equity in the event of
significant declines in market value.
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. At
June 30, 1995, $29 million or approximately 42% of fixed-rate mortgage
securities had a fixed rate of interest for the first three years and an
interest rate that adjusts at six 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 yield
will decline with an increase in prepayment rates, and the yield will increase
with a decrease in prepayment rates. The Company generally borrows against its
fixed-rate mortgage securities, through the use of repurchase agreements. The
spread between the interest rate on a repurchase agreement and the interest rate
on any fixed-rate security that the Company plans to hold is generally fixed by
using an interest rate swap.
Other mortgage securities. Other mortgage securities consist primarily of
interest-only securities ("I/O"s), principal-only securities ("P/O"s) and
residual interests which were either purchased or created through the Company's
mortgage operations. An I/O is a class of a CMO or a mortgage pass-through
security that pays to the holder substantially all interest. A P/O is a class
of a CMO 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. The Company may borrow against its other mortgage
securities for working capital purposes. The yields on these securities are
affected primarily by changes in prepayment rates, and to a lesser extent, by
changes in short-term interest rates.
Hedging and other portfolio transactions. The Company may enter into
transactions to protect its portfolio of mortgage investments and related debt
from interest rate fluctuations. Such transactions may include the purchase or
sale of interest rate futures, options on interest rate futures and interest
rate caps. These transactions are designed to stabilize the portfolio yield
profile in a variety of interest rate environments. The Company may also enter
into such type of transactions to enhance the yield on its portfolio, although
there can be no assurance that such transactions will provide additional income,
and could result in losses.
REIT STATUS
The Company, and its qualified real estate investment trust subsidiaries,
have 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 (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 is subject to federal and state income taxes, where
applicable. The Preferred Stock represents preferred stock in a REIT, and as
such, the dividends on the Preferred Stock are not eligible for the dividends
received deduction for federal income tax purposes. See "Federal Income Tax
Considerations."
S-7
RECENT DEVELOPMENTS
The Company's results were negatively impacted during 1994 by the rapid
increase in interest rates and the resulting decline in overall mortgage loan
originations in the market. Industry-wide mortgage loan originations declined
from $1 trillion during 1993 to $773 billion during 1994. Lower mortgage loan
funding levels during 1994 relative to 1993 resulted in lower gain on sale
relating to loans securitized or sold. Industry-wide loan origination volume
declined further during the first six months of 1995 relative to prior year
levels. Lower anticipated mortgage loan origination volume and increased price
competition for mortgage loans is expected to substantially reduce the gain on
securitization or sale of mortgage assets during the remainder of 1995.
ARM securities, which constitute a significant portion of the portfolio of
mortgage investments, pay an interest rate that is based on the underlying ARM
loans, have interest rates that reset generally on a semiannual basis. These
interest rates are subject to certain periodic and lifetime interest rate caps.
Due to the nature of the periodic caps, semiannual rate increases are generally
limited to 1.00%. As a result of rapidly increasing short-term interest rates
since February 1994, the interest rate on certain repurchase borrowings, which
are not subject to caps, increased at a faster rate than the interest rate
earned on the ARM securities which collateralize these borrowings, decreasing
the net interest spread on these securities. This trend continued until March
1995, when borrowing costs reached their peak. Due to the effect of periodic
interest rate caps during 1994, ARM securities are expected to continue to reset
upwards until the fourth quarter of 1995 when these securities are anticipated
to be fully indexed (i.e., a pass-through rate based on spread to a specified
interest rate index, without any current limitation due to periodic or lifetime
interest rate caps). A separate factor contributing to the decline in the net
interest spread during 1994 and early 1995 was the increase in securities
retained in the portfolio during late 1993 and early 1994 with low initial
pass-through rates (i.e., a teaser rate). As of June 30, 1995, the pass-through
rates on ARM securities in the Company's portfolio were approximately 1.15%
lower on a weighted average basis than the related fully indexed rate compared
to 1.90% as of March 31, 1995, 1.45% as of December 31, 1994, 1.50% as of
September 30, 1994 and 0.85% as of June 30, 1994.
Primarily as a result of the decreased spread on ARM securities, the
Company's net interest yield on portfolio assets decreased to 1.15% for 1994
from 1.55% for 1993. Similarly, the net yield on portfolio assets declined to
0.77% for the six months ended June 30, 1995 from 1.29% for the six months ended
June 30, 1994. As the Company's ARM securities become fully- indexed, the
related net yield may improve to historical levels. The spread on ARM
securities may change to the extent the rates on the related repurchase
borrowings reset differently than these securities.
On October 17, 1995, the Company announced its results for the quarter ended
September 30, 1995. Net income from the quarter ended September 30, 1995 was
$10.1 million ($.46 per common share) compared to net income for the prior
quarter of $8.0 million ($.40 per common share) and for the quarter ended
September 30, 1994 of $13.0 million ($.65 per common share). Net interest margin
was $12.2 million for the quarter ended September 30, 1995 compared to $9.5
million in the second quarter of 1995 and $12.6 for the third quarter of 1994.
The improvement in net interest margin resulted from the increase in net
interest margin on CMOs due to the issuance of CMOs in the second quarter and
the continued upward reset of interest rates on ARM securities held in the
Company's portfolio. The unrealized loss on the Company's available for sale
mortgage securities declined during the quarter ended September 30, 1995 from
$13.3 million as of June 30, 1995 to $8.8 million at September 30, 1995.
S-8
THE OFFERING
Securities Offered....... 2,100,000 shares of Series B 9.55% Cumulative
Convertible Preferred Stock ("Series B Preferred
Stock").
Dividends................ Cumulative commencing on the date of issue in an
amount per share equal to the greater of (i) the Base
Rate of $0.585 per quarter, or (ii) an amount equal to
the quarterly dividend declared on the number of
shares of the Company's Common Stock (or portion
thereof) into which the Series B Preferred Stock is
convertible. Dividends are payable in arrears on
January 31, April 30, July 31 and October 31 (or the
next succeeding business day) of each year, commencing
January 31, 1996. The dividend for the partial period
ending December 31, 1995 will be prorated from the
date of issuance and will be determined by reference
to the Base Rate. Dividends on the Series B Preferred
Stock are determined on each of the quarterly dividend
declaration dates. Dividends on the Series B
Preferred Stock are cumulative from the date of
original issuance. No dividends will be paid or set
apart for payment on shares of Common Stock unless
full cumulative dividends have been paid on the Series
B Preferred Stock.
Conversion Rights........ Each share of the Series B Preferred Stock will be
convertible at the option of the holder at any time,
unless previously redeemed, into one share of Common
Stock, subject to possible future adjustment in
certain circumstances. See "Description of Preferred
Stock."
Liquidation Preference... The holders of the Series B Preferred Stock will be
entitled to receive out of the assets of the Company
or the proceeds thereof available for distribution to
shareholders, before any distribution is made on the
Common Stock, the Issue Price per share in cash plus
accumulated, accrued but unpaid dividends.
Redemption at Option
of the Company........ The Series B Preferred Stock will not be redeemable by
the Company prior to October 31, 1998. On and after
October 31, 1998, the Series B Preferred Stock will be
redeemable by the Company, in whole or in part, at the
option of the Company as follows:
(i) for one share of Common Stock, subject to
adjustment in certain circumstances (plus accumulated,
accrued and unpaid dividends, which are to be paid in
cash through the end of the prior dividend period),
provided that for 20 trading days within any period of
30 consecutive trading days, including the last
trading day of such period, the closing price of the
Common Stock on the NYSE equals or exceeds the
Conversion Price; or
(ii) for cash at the Issue Price per share, plus any
accumulated, accrued and unpaid dividends.
S-9
Voting Rights............ Except as otherwise expressly required by applicable
law or as described below, the holders of the Series B
Preferred Stock will not be entitled to vote on any
matter and will not be entitled to notice of any
meeting of shareholders of the Company. If at any
time the Company falls in arrears in the payment of
dividends on the Series B Preferred Stock in an
aggregate amount equal to the full accrued dividends
for six quarterly dividend periods, or upon failure of
the Company to maintain consolidated shareholders'
equity (determined in accordance with generally
accepted accounting principles and giving effect to
any adjustment for the net unrealized gain or loss on
available-for-sale mortgage securities) of at least
150% of the aggregate Issue Price of the then
outstanding Series B Preferred Stock and the aggregate
original issue price of the then outstanding Series A
Preferred Stock, the number of the Company's directors
will be increased (if not already increased by reason
of similar types of provisions with respect to any
Parity Stock) by two and the holders of the Series B
Preferred Stock with all classes of stock ranking on a
parity with the Series B Preferred Stock, voting
separately as a single class, will have the right to
elect two directors to fill the positions created, and
such right will continue until all dividends in
arrears shall have been paid, and such shareholders'
equity has been restored to at least 150% of the
aggregate Issue Price of the then outstanding Series B
Preferred Stock and the aggregate original issue price
of the then outstanding Series A Preferred Stock. If
any other class of Parity Stock with which the Series
B Preferred Stock is entitled to vote is entitled to
elect two directors as a result of a failure to
maintain a specified level of consolidated
shareholders' equity, then, when such entitlement to
vote is triggered, the separate entitlement of the
Series B Preferred Stock to vote for directors
described in this paragraph shall be suspended.
Ranking.................. The Series B Preferred Stock will rank senior to the
Common Stock with respect to the payment of dividends
and amounts payable upon liquidation, dissolution or
winding up of the Company. The Series B Preferred
Stock will rank pari passu with the Series A Preferred
Stock. The Company is not permitted to issue any
stock ranking senior to the Series B Preferred Stock
as to the payment of dividends or amounts upon
liquidation without the approval of the holders of
two-thirds of Series B Preferred Stock.
Nasdaq National
Market Listing......... The Series B Preferred Stock has been approved
(subject to notice of issuance) for listing on the
Nasdaq National Market under the symbol "RMRPO."
Use of Proceeds.......... The net proceeds from the Offering will be used
primarily to pay down short- term debt and for general
corporate purposes. See "Use of Proceeds."
S-10
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
consolidated financial statements of the Company at and for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990 and from the unaudited financial
information at and for the six months ended June 30, 1995 and 1994. 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, 1994, and the Quarterly Report on Form 10-Q for the six
months ended June 30, 1995, which are incorporated herein by reference. The
results for the six months ended June 30, 1995, as reported, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995. Per common share data does not include any impact of the Series A
Preferred Stock.
(1) Excludes the unrealized loss on available for sale mortgage securities of
$13,296, $10,060 and $72,678 at June 30, 1995, June 30, 1994 and December
31, 1994, respectively.
(2) Mortgage investments are shown at fair value at June 30, 1995, December 31,
1994 and June 30, 1994 and at amortized cost at December 31, 1993 and prior
periods.
(3) This debt is non-recourse to the Company except for $302,060 and $70,922 at
June 30, 1995 and December 31, 1994, respectively.
(4) For purposes of computing the ratios, "available earnings" consist of net
earnings plus interest and debt expense and excludes fixed charges related
to CMOs issued by the Company which are non-recourse to the Company. This
sum is divided by the total interest and debt expense to determine the ratio
of available earnings to fixed charges.
S-11
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The following table sets forth the high and low closing sales prices per
share of the Common Stock on the NYSE during the respective periods indicated
according to published financial sources and the cash dividends declared per
share of Common Stock:
. . . . . . . . . . . .
(1) The $0.26 January 1994 dividend which was declared in December 1993 is
included in the dividends for the fourth quarter of 1993.
S-12
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1995, and as adjusted to give effect to the issuance of the
shares of Preferred Stock and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds."
. . . . . . . . . . . .
(1) Assumes estimated net proceeds of $ 49,124. Amount does not include up to
315,000 shares subject to the Underwriters' over-allotment option for Series B
Preferred Stock or the application of the proceeds from the sale thereof. See
"Underwriting." Amount includes net proceeds of $4,511 from 202,500 shares of
underwriters' over-allotment option for Series A Preferred Stock issued during
July 1995.
(2) This debt is non-recourse to the Company except for $302,060.
(3) The retained deficit results from dividends declared exceeding net income
determined in accordance with generally accepted accounting principles ("GAAP").
Because the Company is a REIT, the dividend amount is based on taxable income
which differs from GAAP net income as reported.
S-13
DESCRIPTION OF PREFERRED STOCK
The summary of certain terms and provisions of the Preferred Stock contained
in this Prospectus Supplement does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the terms and provisions of the
Company s Articles of Incorporation, as amended (the "Articles of
Incorporation"), Bylaws, as amended, and the amendment to the Articles of
Incorporation setting forth the particular terms of the Preferred Stock (the
"Amendment"). The Articles of Incorporation authorize the issuance of 50,000,000
shares of preferred stock, $.01 par value per share, of which 1,552,500 shares
of Series A Preferred Stock are currently outstanding.
GENERAL
When issued and delivered against payment pursuant to the Underwriting
Agreement between the Company and the Underwriters, the Preferred Stock will be
validly issued, fully paid and non assessable. The holders of the Preferred
Stock will have no preemptive rights with respect to any shares of capital stock
of the Company or any other securities of the Company convertible into or
carrying rights or options to purchase any such shares. The Preferred Stock
will not be subject to any sinking fund or other obligation of the Company to
redeem or retire the Preferred Stock. Unless converted into shares of Common
Stock or redeemed by the Company, the Preferred Stock will have a perpetual
term, with no maturity. The Series B Preferred Stock has been approved (subject
to notice of issuance) for listing on the Nasdaq National Market under the
symbol "RMRPO"
RANKING
The Preferred Stock will rank senior to the Common Stock and pari passu with
the Series A Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") with respect to payment of dividends and amounts upon liquidation,
dissolution or winding up of the Company.
While any shares of Preferred Stock are outstanding, the Company may not
authorize, create or increase the authorized amount of any class or series of
stock that ranks prior or senior to the Preferred Stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or winding up
without the consent of the holders of two-thirds of the outstanding shares of
Preferred Stock. However, the Company may create additional classes of stock or
issue series of preferred stock which rank on a parity with the Preferred Stock
with respect, in each case, to the payment of dividends and amounts upon
liquidation, dissolution or winding up of the Company ("Parity Stock") without
the consent of any holder of Preferred Stock. Series A Preferred Stock is
Parity Stock. See "Voting Rights" below.
DIVIDENDS
Holders of shares of Preferred Stock will be entitled to receive, when and
as declared by the Board of Directors of the Company, out of funds of the
Company legally available for payment thereof, cumulative cash dividends payable
in an amount per share equal to the greater of (i) $0.585 per quarter ("Base
Rate") or (ii) the cash dividends for such quarter declared on a number of
shares of the Company s Common Stock equal to the number of shares of Common
Stock (or portion thereof) into which a share of Preferred Stock is convertible
(determined on each of the quarterly dividend record dates referred to below).
The dividend for the partial period ending December 31, 1995 will be prorated
from the date of issuance and will be determined by reference to the Base Rate.
Dividends on the Preferred Stock will be payable quarterly in arrears on the
last day (or the next succeeding business day) of January, April, July, and
October, commencing January 31, 1996 with respect to the period commencing on
the date of issue and ending December 31, 1995. Each such dividend will be
payable to holders of record as they appear on the stock records of the Company
at the close of business on such record dates not exceeding 60 days preceding
the payment dates thereof, as shall be fixed by the Board of Directors of the
Company. Such record dates shall coincide with the record date for the regular
quarterly dividends, if any, payable with respect to the Common Stock; provided,
however, that the record dates may be separated to fall on December 31 and
January 1. Dividends will accrue from the date of original issuance of the
Preferred Stock. Dividends will be cumulative from such date, whether or not in
any dividend period or periods such dividends shall be declared or there shall
be funds of the Company legally available for the payment of such dividends.
Accumulated dividends on shares of Preferred Stock will not bear interest.
Dividends payable on the Preferred Stock for any period shorter than a full
dividend period will be computed on the basis of twelve 30-day months and a
360-day year.
S-14
Upon a final administrative determination by the Internal Revenue Service
that the Company does not qualify as a real estate investment trust in
accordance with Section 856 of the Code, the Base Rate will be increased to
$0.615 per quarter until such time as the Company regains its status as a real
estate investment trust; provided, however, that if the Company contests its
loss of real estate investment trust status in Federal Court, following its
receipt of an opinion of nationally recognized tax counsel to the effect that
there is a reasonable basis to contest such loss of status, the Base Rate shall
not be increased during the pendency of such judicial proceeding; provided
further, however, that upon a final judicial determination in Federal Tax Court,
Federal District Court, or the Federal Claims Court that the Company does not
qualify as a real estate investment trust, the Base Rate as stated above will be
increased.
Except as provided in the next sentence, no dividend will be declared or
paid or other distribution of cash or other property declared or made directly
by the Company on any Parity Stock unless full cumulative dividends have been
declared and paid or are contemporaneously declared and funds sufficient for
payment set aside on the Preferred Stock for all prior and contemporaneous
dividend periods. If accumulated and accrued dividends on the Preferred Stock
for all prior and contemporaneous dividend periods have not been paid in full,
then any dividend declared on the Preferred Stock for any dividend period and on
any Parity Stock will be declared ratably in proportion to accumulated, accrued
and unpaid dividends on the Preferred Stock and the Parity Stock.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution of cash or other property with respect to any
Junior Stock (as defined below) or (ii) redeem, purchase or otherwise acquire
for consideration any Junior Stock through a sinking fund or otherwise (other
than a redemption or purchase or other acquisition of shares of Common Stock
made for purposes of an employee incentive or benefit plan of the Company or any
subsidiary) or (iii) pay or distribute any cash or other property for the
benefit of any holder of Junior Stock in respect thereof, directly or
indirectly, unless (A) all cumulative dividends with respect to the Preferred
Stock and any Parity Stock at the time such dividends are payable have been paid
or such dividends have been declared and funds have been set apart for payment
of such dividends and (B) sufficient funds have been paid or set apart for the
payment of the dividend for the current dividend period with respect to the
Preferred Stock and any Parity Stock. The foregoing limitations do not restrict
the Company s ability to take the foregoing actions with respect to any Parity
Stock.
As used herein, (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock,
and (ii) the term "Junior Stock" means the Common Stock, and any other class of
capital stock of the Company now or hereafter issued and outstanding that ranks
junior to the Preferred Stock as to the payment of dividends or amounts upon
liquidation, dissolution or winding up of the Company.
REDEMPTION
Shares of Preferred Stock will not be redeemable by the Company prior to
October 31, 1998. On and after October 31, 1998, the shares of Preferred Stock
will be redeemable at the option of the Company, in whole or in part, either (i)
for such number of authorized but previously unissued shares of Common Stock as
equals the per share Issue Price of the Preferred Stock to be redeemed divided
by the Conversion Price (as defined below under "Conversion Rights") as of the
opening of business on the date set for such redemption (initially equivalent to
a conversion rate of one share of Common Stock for each share of Preferred
Stock, subject to adjustment as described below), or (ii) for cash at a
redemption price equal to the Issue Price. In the event of a redemption for
cash, the Company must also pay in cash all cumulative, accrued and unpaid
dividends for all dividend periods prior to the dividend period in which the
redemption occurs, plus the dividend accrued from the beginning of the current
dividend period to the date of redemption determined by reference solely to the
Base Rate. In the event of a redemption for Common Stock, the Company must also
pay in cash all cumulative, accrued and unpaid dividends for all dividend
periods prior to the period in which the redemption occurs; however, no dividend
will be payable with respect to the Preferred Stock for the dividend period in
which such a redemption occurs unless such redemption occurs after the record
date for the dividend on Common Stock in which event the dividend on the
Preferred Stock will be payable through the redemption date. In the case of a
redemption date falling after a dividend record date and prior to the related
dividend payment date, the holders of the Preferred Stock at the close of
business on such record date will be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date, notwithstanding the
redemption of such shares following such dividend record date. Except as
provided for in the preceding sentences, no payment or allowance will be made
for accumulated or accrued dividends on any shares of Preferred Stock called for
redemption or on the shares of Common Stock issuable upon such redemption.
S-15
The Company may exercise the option to deliver Common Stock upon redemption
only if for 20 trading days, within any period of 30 consecutive trading days,
including the last trading day of such period, the closing price of the Common
Stock on the NYSE (or such other exchange or quotation system as the Common
Stock is listed or quoted on) equals or exceeds the Conversion Price,
(initially, the Issue Price), in effect on such trading days, subject to
adjustments as described below. In order to exercise this redemption option,
the Company must issue a press release announcing the redemption prior to the
opening of business on the second trading day after the conditions in the
preceding sentences have, from time to time, been met.
Notice of redemption will be given by mail or by publication (with
subsequent prompt notice by mail) to the holders of record of the Preferred
Stock not more than ten business days after the Company issues the press
release, in the case of a redemption for Common Stock, or not less than 30 nor
more than 60 days prior to the date of redemption, in the case of a redemption
for cash. The redemption date will be a date selected by the Company not less
than 30 nor more than 60 days after the date on which the Company gives the
notice of redemption or issues the press release announcing its intention to
redeem the Preferred Stock, as the case may be. If fewer than all of the shares
of Preferred Stock are to be redeemed, the shares to be redeemed shall be
selected by lot or pro rata or in some other equitable manner determined by the
Company.
In the event that full cumulative dividends on the Preferred Stock and any
Parity Stock have not been paid or declared and set apart for payment, the
Preferred Stock may not be redeemed in part and the Company may not purchase or
acquire shares of Preferred Stock otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of shares of Preferred
Stock.
On and after the date fixed for redemption, provided that the Company has
made available at the office of the Registrar and Transfer Agent a sufficient
number of shares of Common Stock and/or an amount of cash to effect the
redemption, dividends will cease to accumulate or accrue on the Preferred Stock
called for redemption, such shares shall no longer be deemed to be outstanding
and all rights of the holders of such shares of Preferred Stock shall cease
except the right to receive the shares of Common Stock upon such redemption
and/or any cash payable upon such redemption, without interest from the date of
such redemption. At the close of business on the redemption date, each holder
of Preferred Stock to be redeemed (unless the Company defaults in the delivery
of the Common Stock or cash) will be, without any further action, deemed a
holder of the number of shares of Common Stock and/or the amount of cash for
which such Preferred Stock is redeemable.
Fractional shares of Common Stock will not be issued upon redemption of the
Preferred Stock, but, in lieu thereof, the Company will pay an amount in cash
based on the current market price of the Common Stock on the day prior to the
redemption date.
LIQUIDATION PREFERENCE
The holders of shares of Preferred Stock will be entitled to receive in the
event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the Issue Price (the "Liquidation Preference") plus an
amount per share of Preferred Stock equal to all dividends (whether or not
earned or declared) accumulated, accrued and unpaid thereon to the date of final
distribution to such holders and no more.
Until the holders of the Preferred Stock have been paid the Liquidation
Preference in full, no payment will be made to any holder of Junior Stock upon
the liquidation, dissolution or winding up of the Company. If, upon any
liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Preferred Stock are insufficient to pay in full the Liquidation Preference and
the liquidation preference with respect to any other shares of Parity Stock,
then such assets, or the proceeds thereof, will be distributed among the holders
of shares of Preferred Stock and such Parity Stock ratably in accordance with
the respective amounts which would be payable on such shares of Preferred Stock
and such Parity Stock if all amounts payable thereon were paid in full. Neither
a consolidation or merger of the Company with another corporation, a statutory
share exchange by the Company nor a sale or transfer of all or substantially all
of the Company s assets will be considered a liquidation, dissolution or winding
up, voluntary or involuntary, of the Company.
S-16
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time required
by applicable law, the holders of shares of Preferred Stock will have no voting
rights.
If (i) six quarterly dividends payable on the Preferred Stock or any other
Parity Stock are in arrears, whether or not earned or declared or (ii) the
consolidated shareholders equity of the Company (determined in accordance with
generally accepted accounting principles and giving effect to any adjustment for
the net unrealized gain or loss on available-for-sale mortgage securities) at
the end of any calendar quarter is less than 150% of the aggregate Issue Price
of the then outstanding Preferred Stock and the aggregate original issue price
of the then outstanding Series A Preferred Stock, the number of directors then
constituting the Board of Directors of the Company will be increased (if not
already increased by reason of similar types of provisions with respect to
Voting Preferred Stock (defined below)) by two and the holders of shares of
Preferred Stock, voting together as a class with the holders of any other series
of Parity Stock (any such other series, the "Voting Preferred Stock"), will have
the right to elect two additional directors to serve on the Company s Board of
Directors at an annual meeting of stockholders or special meeting held in place
thereof, or at a properly called special meeting of the holders of the Preferred
Stock and such Voting Preferred Stock and at each subsequent annual meeting of
stockholders or special meeting held in place thereof, until, in the case of
arrearage in dividends in clause (i) all such dividends in arrears and dividends
for the current quarterly period on the Preferred Stock and such Voting
Preferred Stock have been paid or declared and set aside for payment and until,
in the case of a shortfall in consolidated shareholders equity described in
clause (ii), such consolidated shareholders equity of the Corporation at the
end of any subsequent calendar quarter equals or exceeds 150% of the aggregate
Issue Price of the then outstanding Preferred Stock and the aggregate original
issue price of the then outstanding Series A Preferred Stock. If any other
class of Parity Stock with which the Preferred Stock is entitled to vote is
entitled to elect two directors as a result of a failure to maintain a specified
level of consolidated shareholders' equity, then, when such entitlement to vote
is triggered, the separate entitlement of the Preferred Stock to vote for
directors described in this paragraph shall be suspended. As a result, in no
event shall the holders of Preferred Stock (voting together as a class with the
Voting Preferred Stock) be entitled to elect more than two directors in the case
of the Company's consolidated shareholder equity falling below 150% of the
aggregate Issue Price of the then outstanding Preferred Stock and the aggregate
original issue price of the then outstanding Series A Preferred Stock whether
pursuant to the provision described in clause (ii) above or in respect of
another class or series of Voting Preferred Stock.
The approval of the holders of two-thirds of the outstanding shares of
Preferred Stock will be required in order to amend the Articles of Incorporation
to affect materially and adversely the rights, preferences or voting power of
the holders of the Preferred Stock or to authorize, create, or increase the
authorized amount of, any class of stock having rights prior or senior to the
Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up. However, the Company may create
additional classes of Parity or Junior Stock, increase the authorized number of
shares of Parity or Junior Stock and issue additional series of Parity or Junior
Stock without the consent of any holder of Preferred Stock.
Except as required by law, the holders of Preferred Stock will not be
entitled to vote on any merger or consolidation involving the Company or a sale
of all or substantially all of the assets of the Company. See "Conversion
Price Adjustments" below.
CONVERSION RIGHTS
Shares of Preferred Stock will be convertible, in whole or in part, at any
time, at the option of the holder thereof, into authorized but previously
unissued shares of Common Stock at a conversion price equal to the Issue Price
(initially equivalent to a conversion rate of one share of Common Stock for each
share of Preferred Stock), subject to adjustment as described below (the
"Conversion Price"). The right to convert shares of Preferred Stock called for
redemption will terminate at the close of business on the redemption date for
such shares. For information as to notices of redemption, see Redemption
above.
Conversion of shares of Preferred Stock, or a specified portion thereof, may
be effected by delivering certificates evidencing such shares, together with
written notice of conversion and a proper assignment of such certificates to the
Company or in blank, to the office or agency to be maintained by the Company for
that purpose. Initially such office will be at the corporate trust office of
First Union National Bank of North Carolina, Charlotte, North Carolina.
S-17
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of
Preferred Stock shall have been surrendered and notice shall have been received
by the Company as aforesaid and the conversion shall be at the Conversion Price
in effect at such time and on such date. If the record dates for the payment of
dividends on the Common Stock and the Preferred Stock do not coincide, no
conversion after the earlier of such record dates will be accepted until after
the latter of such record dates.
Holders of shares of Preferred Stock at the close of business on a dividend
record date will be entitled to receive the dividend payable on such shares on
the corresponding dividend payment date notwithstanding the conversion of such
shares following such dividend record date and prior to such dividend payment
date. Except as provided above, the Company will make no payment or allowance
for unpaid dividends, whether or not in arrears, on converted shares or for
dividends on the shares of Common Stock issued upon such conversion.
Fractional shares of Common Stock will not be issued upon conversion but, in
lieu thereof, the Company will pay an amount in cash based on the current market
price of the Common Stock on the day prior to the conversion date.
CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events, including
(i) dividends (and other distributions) payable in Common Stock or any class of
capital stock of the Company, (ii) the issuance to all holders of Common Stock
of certain rights or warrants entitling them to subscribe for or purchase Common
Stock at a price per share less than the fair market value per share of Common
Stock, and (iii) subdivisions, combinations and reclassifications of Common
Stock. In addition to the foregoing adjustments, the Company will be permitted
to make such reductions in the Conversion Price as it considers to be advisable
in order that any event treated for federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common Stock or,
if that is not possible, to diminish any income taxes that are otherwise payable
because of such event.
In case the Company shall be a party to any transaction (including without
limitation a merger, consolidation, statutory share exchange, tender offer for
all or substantially all of the shares of Common Stock or sale of all or
substantially all of the Company s assets), in each case as a result of which
shares of Common Stock will be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Preferred Stock, if convertible after the consummation of the
transaction, will thereafter be convertible into the kind and amount of shares
of stock, securities and other property receivable (including cash or any
combination thereof) upon the consummation of such transaction by a holder of
that number of shares or fraction thereof of Common Stock into which one share
of Preferred Stock was convertible immediately prior to such transaction. The
Company may not become a party to any such transaction unless the terms thereof
are consistent with the foregoing.
No adjustment of the Conversion Price will be required to be made in any
case until cumulative adjustments amount to 1% or more of the Conversion Price.
Any adjustments not so required to be made will be carried forward and taken
into account in subsequent adjustments.
DIVIDEND REINVESTMENT PLAN
The Company may establish a Dividend Reinvestment Plan (the "Plan") pursuant
to which each holder of the Preferred Stock whose shares are registered in his
own name may elect to have dividends reinvested automatically in shares of the
Preferred Stock of the Company.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
With certain exceptions, no person may own, or be deemed to own by virtue of
the attribution provisions of the Code, more than 9.8% of the Company s capital
stock. See "Restrictions on Transfers of Capital Stock" in the accompanying
Prospectus.
TRANSFER AGENT, REGISTRAR, DIVIDEND DISBURSING AGENT AND REDEMPTION AGENT
The transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of Preferred Stock will be First Union National Bank of
North Carolina, Charlotte, North Carolina.
S-18
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations to the
stockholders, is for general information only and is not tax advice. This
discussion does not purport to deal with all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or tax
circumstances, or except to the extent discussed under the heading "Taxation of
Tax-Exempt Stockholders" to certain types of stockholders (including insurance
companies, financial institutions or broker-dealers) subject to special
treatment under the federal income tax law.
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, EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE,
OWNERSHIP AND SALE OF THE PREFERRED STOCK, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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 Resource REIT, has given the Resource
REIT its opinion to the effect that, as of the date hereof and based on the
various representations made to it by the Resource REIT 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, a nonqualified REIT subsidiary of the Resource REIT,
which conducts the mortgage operations and is included in the Resource REIT s
consolidated GAAP financial statements, is not a qualified REIT subsidiary.
Consequently, all of the nonqualified REIT subsidiary s taxable income is
subject to federal and state corporate 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. Resource
REIT 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, Resource REIT does
not expect that it will be subject to material amounts of such taxes.
Resources REIT's failure to satisfy certain requirements of the Code could
cause the Resource REIT 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.
S-19
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as Resource REIT qualifies as a REIT, distributions made to the
Resource REIT's taxable domestic stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. (Under the Code and IRS rulings,
Resource REIT's earnings and profits will first be allocable to distributions
made on the Preferred Stock and then (the balance, if any) to distributions made
on the Common Stock.) Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed Resource REIT's actual net capital gain for the taxable year) without
regard to the period for which the stockholder has held its stock. Distributions
in excess of current and accumulated earnings and profits will not be taxable to
a stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's shares, but rather will be a non-taxable return of capital and
will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a stockholder s shares they will be
included in income as long-term gain (or short-term capital gain if the shares
have been held for one year or less) assuming the shares are a capital asset in
the hands of the stockholder. In addition, any dividend declared by Resource
REIT in October, November or December of any year payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
Resource REIT and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by Resource REIT during January of
the following calendar year. Stockholders may not include in their individual
income tax return any net operating losses or capital losses of Resource REIT.
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 Resource
REIT's excess inclusion income is greater than its taxable income, Resource
REIT's distribution would be based on its excess inclusion 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.
Upon any sale or other disposition of shares of the Preferred Stock, a
domestic stockholder will recognize gain or loss for federal income tax purposes
in an amount equal to the difference between (a) the amount of cash and the fair
market value of any property received on such sale or other disposition (less
any portion thereof attributable to accumulated and declared but unpaid
dividends, which will be taxable as a dividend to the extent of Resource REIT's
current and accumulated earnings and profits), and (b) the stockholder's
adjusted tax basis in such shares. Such gain or loss will be capital gain or
loss if the shares have been held by the domestic stockholder as a capital
asset, and will be long-term capital gain or loss if such shares have been held
for more than one year. In general, any loss upon a sale or exchange of shares
by a stockholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from Resource REIT required to be treated by such
stockholder as long-term capital gain.
REDEMPTION AND CONVERSION
S-20
Cash Redemption of Preferred Stock
A cash redemption of shares of the Preferred Stock will be treated under
Section 302 of the Code as a distribution taxable as a dividend (to the extent
of Resource REIT's current and accumulated earnings and profits) at ordinary
income rates unless the redemption satisfies one of the tests set forth in
Section 302(b) of the Code and is therefore treated as a sale or exchange of the
redeemed shares. The cash redemption will be treated as a sale or exchange if
it (i) is "substantially disproportionate" with respect to the holder, (ii)
results in a "complete termination" of the holder's stock interest in Resource
REIT, or (iii) is not essentially equivalent to a "dividend" with respect to
the holder, all within the meaning of Section 302(b) of the Code. In
determining whether any of these tests have been met, shares of capital stock
(including Common Stock and other equity interests in Resource REIT) considered
to be owned by the holder by reason of certain constructive ownership rules set
forth in the Code, as well as shares of capital stock actually owned by the
holder, must generally be taken into account. Because the determination as to
whether any of the alternative tests of Section 302(b) of the Code will be
satisfied with respect to any particular holder of the Preferred Stock depends
upon the facts and circumstances at the time that the determination must be
made, prospective holders of the Preferred Stock are advised to consult their
own tax advisors to determine such tax treatment.
If a cash redemption of shares of the Preferred Stock is not treated as a
distribution taxable as a dividend to a particular holder, it will be treated,
as to that holder, as a taxable sale or exchange. As a result, such holder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received (less any portion thereof attributable to accumulated and
declared but unpaid dividends, which will be taxable as a dividend to the extent
of the Resource REIT's current and accumulated earnings and profits), and (ii)
the holder s adjusted basis in the shares of the Preferred Stock for tax
purposes. Such gain or loss will be capital gain or loss if the shares of the
Preferred Stock have been held as a capital asset, and will be long-term gain or
loss if such shares have been held for more than one year.
If a cash redemption of shares of the Preferred Stock is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
the Preferred Stock for tax purposes will be transferred to the holder s
remaining shares of capital stock in Resource REIT, if any.
A redemption of shares of the Preferred Stock for shares of Common Stock
will be treated as a conversion of the Preferred Stock into Common Stock. See
"-Conversion of Preferred Stock into Common Stock."
Conversion of Preferred Stock into Common Stock
In general, no gain or loss will be recognized for federal income tax
purposes upon conversion of the Preferred Stock solely into shares of Common
Stock. The basis that a holder will have for tax purposes in the shares of
Common Stock received upon conversion will be equal to the adjusted basis for
the holder in the shares of Preferred Stock so converted, and, provided that the
shares of Preferred Stock were held as a capital asset, the holding period for
the shares of Common Stock received would include the holding period for the
shares of Preferred Stock converted. A holder will, however, generally
recognize gain or loss on the receipt of cash in lieu of fractional shares of
Common Stock in an amount equal to the difference between the amount of cash
received and the holder s adjusted basis for tax purposes in the Preferred Stock
for which cash was received. Furthermore, under certain circumstances, a holder
of shares of Preferred Stock may recognize gain or dividend income to the extent
that there are dividends in arrears on the shares at the time of conversion into
Common Stock.
Adjustments to Conversion Price
Adjustments in the Conversion Price (or the failure to make such
adjustments) pursuant to the antidilution provisions of the Preferred Stock or
otherwise may result in constructive distributions to the holders of Preferred
Stock that could, under certain circumstances, be taxable to them as dividends
pursuant to Section 305 of the Code. If such a constructive distribution were
to occur, a holder of Preferred Stock could be required to recognize ordinary
income for tax purposes without receiving a corresponding distribution of cash.
S-21
Backup Withholding
Resource REIT will report to its domestic stockholders and the IRS the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless the holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder that does not provide Resource REIT
with his correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, Resource REIT may
be required to withhold a portion of the gross proceeds of a redemption of the
Preferred Stock with respect to any stockholders who fail to comply with the
backup withholding rules.
Taxation of Tax-Exempt Stockholders
In Revenue Ruling 66-106, 1966-I C.B. 151, the IRS ruled that an amount
distributed by a REIT to a tax-exempt employees pension trust did not constitute
"unrelated business taxable income" ("UBTI"). Revenue rulings are interpretive
in nature and subject to revocation or modification by the IRS. However, based
upon Revenue Ruling 66-106 and the analysis therein, distributions by Resource
REIT to a stockholder that is a tax-exempt entity will not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
shares with "acquisition indebtedness" within the meaning of the Code and the
shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
For taxable years beginning after December 31, 1993, qualified trusts which
are described in Section 401 of the Code and exempt from tax under Section
501(a) of the Code that hold more than 10% of the shares of certain REITs may be
required to treat a certain percentage of REIT dividends as UBTI. The
requirement only applies if (i) the qualification of the REIT were to depend
upon the application of a proposed "look-through" exception to the five or fewer
requirements applicable to shares held by qualified trust and (ii) the REIT were
"predominantly held" by qualified trusts. A REIT would be predominantly held if
either (i) a single qualified trust were to hold more than 25% by value of the
REIT s interests or (ii) one or more qualified trusts, each owning more than 10%
by value, were to hold more than 50% of the REIT's interests in the aggregate.
The percentage of any dividend treated as UBTI would be determined by the amount
of gross income (less direct expenses related thereto) of the REIT from
unrelated trades or businesses (treating the REIT as if it were a qualified
trust, and thereby subject to tax on UBTI) as a percentage of the gross income
(less direct expenses related thereto) of the REIT. A de minimis exception
would apply where the percentage was less than 5% for any year.
OTHER TAX CONSEQUENCES
Resource REIT's stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which they transact
business or reside. The state and local tax treatment of Resource REIT's
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
Resource REIT.
S-22
UNDERWRITING
The Underwriters named below have severally agreed to purchase from the
Company the following respective numbers of shares of Series B 9.55% Cumulative
Convertible Preferred Stock offered hereby:
Underwriter Number of Shares
Stifel, Nicolaus & Company, Incorporated . . . . . . . 417,500
Robert W. Baird & Co. Incorporated. . . . . . . . . . . 417,500
Scott & Stringfellow, Inc. . . . . . . . . . . . . . . 417,500
Stephens Inc. . . . . . . . . . . . . . . . . . . . . . 417,500
A. G. Edwards & Sons, Inc. . . . . . . . . . . . . . . 70,000
PaineWebber Incorporated . . . . . . . . . . . . . . . 70,000
Advest, Inc. . . . . . . . . . . . . . . . . . . . . . 30,000
J. C. Bradford & Co.. . . . . . . . . . . . . . . . . . 30,000
Dain Bosworth Incorporated . . . . . . . . . . . . . . 30,000
Friedman, Billings, Ramsey & Co., Inc. . . . . . . . . 30,000
Piper Jaffray Inc.. . . . . . . . . . . . . . . . . . . 30,000
Principal Financial Securities, Inc. . . . . . . . . . 30,000
Rauscher Pierce Refsnes, Inc. . . . . . . . . . . . . . 30,000
The Robinson-Humphrey Company, Inc. . . . . . . . . . . 30,000
Wedbush Morgan Securities . . . . . . . . . . . . . . . 30,000
Branch, Cabell & Co. . . . . . . . . . . . . . . . . . 10,000
Davenport & Co. of Virginia Inc. . . . . . . . . . . . 10,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000
The Company has granted to the Underwriters an option, expiring on the
thirtieth day after the date of the initial public offering of the Preferred
Stock offered hereby, to purchase up to 315,000 additional shares of Preferred
Stock at the public offering price less the underwriting discount, all as set
forth on the cover page of this Prospectus Supplement. The Underwriters may
exercise such option only to cover over-allotments in the sale of the shares of
Preferred Stock.
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. The Underwriters will be obligated
to purchase all of the shares of Preferred Stock offered hereby if any are
purchased.
The Company has been advised by the Underwriters that the several
Underwriters propose initially to offer the Preferred Stock to the public at the
public offering price set forth on the cover page of this Prospectus Supplement,
and to certain dealers at such price less a concession not in excess of $0.55
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to other dealers. After the initial
public offering, the public offering price and such concession may be changed.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1993, and to
contribute to payments that the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
Certain legal matters in connection with the offering of Preferred Stock 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 Thompson & Mitchell, St. Louis Missouri.
S-23
PROSPECTUS
RESOURCE MORTGAGE CAPITAL, INC.
[LOGO]
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, 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 $200,000,000 aggregate initial
public offering price, including the exercise price of any Common Stock
Warrants, Preferred Stock Warrants and Debt Warrants (collectively, "Securities
Warrants"). As of the date of this Prospectus, the Company has issued 1,552,500
shares of its Series A Cumulative Convertible Preferred Stock.
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 (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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
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 October 19, 1995
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, N.W., Judiciary Plaza, Washington, D.C. 20549, and at
the Commission's following regional offices: Chicago Regional Office, Room
3190, 230 South Dearborn Street, Chicago, Illinois 60604; and New York Regional
Office, Room 1400, 75 Park Place, New York, New York 10007. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., 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 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: Report on Form 8-K filed July 18,
1995 regarding a public offering and the settlement of the Commission's
investigation, Annual Report on Form 10-K for the year ended December 31, 1994;
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 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.
2
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., 4880 Cox Road,
Glen Allen, Virginia 23060, Attention: Investor Relations, Telephone: (804)
967-5800.
3
THE COMPANY
Resource Mortgage Capital, Inc. ("the Company"), incorporated in Virginia in
1987, originates, purchases, securitizes and services residential mortgage loans
(collectively "mortgage operations") and invests in a portfolio of residential
mortgage securities. The Company's primary strategy is to use its mortgage
operations to create investments for its portfolio. The Company's principal
sources of income are net interest income on its investment portfolio, gains on
the securitization and sale of mortgage loans and the interest spread realized
while the mortgage loans are being accumulated for sale or securitization. The
Company and its wholly-owned subsidiaries elect to be taxed as a real estate
investment trust.
MORTGAGE OPERATIONS
The mortgage loans funded through the Company's mortgage operations are
originated by the Company or by various sellers that meet the Company's
qualification criteria. These sellers include savings and loan associations,
banks, mortgage bankers and other mortgage lenders. The Company funds mortgage
loans secured by residential properties throughout the United States.
Substantially all of the mortgage loans funded through the mortgage
operations are "nonconforming" mortgage loans. Nonconforming mortgage loans will
not qualify for purchase by Federal Home Loan Mortgage Association ("FHLMC") or
Federal National Mortgage Association ("FNMA") or for inclusion in a loan
guarantee program sponsored by Government National Mortgage Association
("GNMA"). Nonconforming mortgage loans generally are originated based upon
different underwriting criteria than are required by the federal agencies'
programs (i.e. "non-conforming credit profile") or have outstanding principal
balances in excess of the program guidelines of these federal agencies. A
borrower with a non-conforming credit profile cannot easily qualify for a loan
from the federal agencies for reasons other than loan size. The maximum
principal balance of a conforming loan as of September 30, 1995 is $203,150 for
FHLMC and FNMA. Such non-conforming loans may have higher risks than conforming
mortgage loans due to their lower liquidity, different underwriting or
qualification criteria, and higher loan balances.
Mortgage loans funded by the Company in its mortgage operations are secured
by single (one-to-four) family residential properties and have either fixed or
adjustable interest rates. Fixed-rate mortgage loans generally have a constant
interest rate over the life of the loan, primarily 15 or 30 years. In addition,
fixed-rate mortgage loans funded by the Company may also have a fixed interest
rate for the first 3, 5, or 7 years and an interest rate which adjusts at six or
twelve month intervals thereafter, subject to periodic and lifetime interest
rate caps. Adjustable-rate mortgage ("ARM") loans provide for the periodic
adjustment to the rate of interest equal to the sum of a fixed margin and an
index, generally subject to certain periodic and lifetime interest rate caps.
The Company has two primary methods for sourcing mortgage loans funded
through its mortgage operations. Mortgage loans funded through the Company's
wholesale operations are originated through a network of mortgage loan brokers.
Mortgage loans funded through the Company's correspondent operations are
purchased from a network of approved sellers, including mortgage companies,
banks, thrifts and other lending institutions.
The Company established its mortgage loan wholesale origination capability
in 1994. Mortgage loans originated by the Company through its wholesale
operations are sourced by independent brokers and underwritten and closed by the
Company. This method allows the Company to be directly involved in the
origination process of the loan, but without the direct cost and overhead of a
retail branch operation. The Company's mortgage loan wholesale operation
targets borrowers with a non- conforming credit profile. As an approved
mortgage loan originator, the Company is subject to various federal and state
regulations. A violation of such regulations may result in the Company losing
its ability to originate mortgage loans in the respective jurisdiction.
The Company sets prices at least once every business day for loans either
originated through the wholesale operations or purchased through the
correspondent operations. The prices posted may be for immediate delivery of
the mortgage loans or for subsequent delivery (such as within 30, 60 or 90
days). Prices vary depending upon the loans' features and characteristics, such
as loan-to-value ratio and insurance coverage. The Company generally issues a
commitment to fund one or more mortgage loans for a specific period of time at
an established price and yield, in a specified principal amount.
During the mortgage loan accumulation period prior to sale or
securitization, which is typically 60 to 90 days, the Company is exposed to
risks of interest rate fluctuations and may enter into hedging transactions to
reduce the change in value of such mortgage loans caused by changes in interest
rates. Gains and losses on these hedging transactions are deferred as an
adjustment to the carrying value of the related mortgage loans until the
mortgage loans are sold. This strategy is designed to reduce the decline in
value of the commitments, as well as loans in inventory, when interest rates
increase, and
4
will reduce the increase in value of the commitments, as well as loans in
inventory, when interest rates decrease. The Company is also at risk for credit
losses on mortgage loans in inventory during the accumulation period.
When a sufficient volume of mortgage loans is accumulated, the Company may
elect to sell a pool of mortgage loans directly to an investment banking firm or
to securitize such pool of mortgage loans through the issuance of mortgage
securities. The mortgage-backed securities are structured so that substantially
all of the securities are rated in one of the two highest rating categories
(i.e. AA or AAA) by at least one of the nationally recognized rating agencies.
Mortgage-backed securities issued by the Company are not generally guaranteed by
the federal agencies. Each series of mortgage securities is expected to be
fully payable from the collateral pledged to secure the series. It is expected
that the recourse of investors in the series generally will be limited to the
collateral underlying the securities. Except in the case of a breach of the
standard representations and warranties made by the Company when loans are sold
or securitized, the securities are non-recourse to the Company.
The Company may securitize mortgage loans funded through its mortgage
operations by issuing collateralized mortgage obligations ("CMOs") or
pass-through securities. The Company recognizes a gain or loss on the issuance
and sale of a pass- through security, while no gain or loss is recognized on the
issuance of CMOs, as CMOs represent the issuance of a debt security. Credit
enhancement for these securities may take the form of over-collateralization,
subordination, reserve funds, pool insurance, bond insurance, 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.
Regardless of the form of credit enhancement, the Company may retain a
limited portion of the direct credit risk after securitization, including the
risk of loss related to hazards not covered under standard hazard insurance
policies. Such credit loss exposure is generally limited to an amount equal to
a fixed percentage of the principal balance of the pool of mortgage loans at the
time of securitization. Additionally, the Company may be contingently exposed
to losses due to fraud during the origination of a mortgage loan if the
originator of such mortgage loan defaults on its repurchase obligation. The
Company has established discounts and reserves for estimated expected losses
related to these various risks. The Company's results will be negatively
impacted in future periods to the extent actual losses exceed the amount of such
discounts and reserves.
Over-collateralization is generally used in conjunction with bond insurance
in the issuance of CMOs. Losses are first applied to the over-collateralization
amount, and any losses in addition to that amount would be borne by the bond
insurer or holders of the CMOs. The Company may retain over-collateralization
and generally receives an excess yield on the mortgage loans relative to the
yield on the CMOs to compensate the Company for retaining such loss exposure.
5
Subordination is generally used in conjunction with the issuance of
pass-through securities, and may also be used in conjunction with reserve funds,
pool insurance and bond insurance. The credit risk is concentrated in the
subordinated classes (which may partially be credit enhanced with reserve funds
or pool insurance) of the securities, thus allowing the senior classes of the
securities to receive the higher credit ratings. To the extent credit losses
are greater than expected (or exceed the protection provided by any reserve
funds or pool insurance), the holders of the subordinated securities will
experience a lower yield (which may be negative) than expected on their
investments. The Company may retain certain subordinated securities and records
discounts at the date of issuance on these securities representing the expected
exposure to credit losses.
As mentioned above, the Company may use mortgage pool insurance and reserve
funds for credit enhancement. Mortgage pool insurance is currently less
available as a form of credit enhancement than it had been in the past. Credit
losses covered by the pool insurance policies are borne by the pool insurers to
the limits of their policies and by the security holders if losses exceed those
limits. To the extent a loan is to be covered by mortgage pool insurance, the
Company may rely upon the credit review and analysis of each loan, which is
performed by the mortgage insurer, in deciding to fund the mortgage loan. After
these loans are securitized, the Company has only limited exposure to losses not
covered by pool insurance, resulting primarily from special hazard risks and
fraud during the origination of a mortgage loan. The Company has established
reserve funds to cover risks not covered by the pool insurance policies, or to
cover credit risks on loans not covered by pool insurance. The Company has
established discounts and reserves for these potential losses.
During 1994, the Company established, through an acquisition, the capability
to service mortgage loans funded through its mortgage operations. If the
Company retains a portion of the credit risk on a pool of mortgage loans after
securitization, it will generally directly service these loans in an effort to
better manage its credit exposure.
PORTFOLIO OF MORTGAGE INVESTMENTS
The Company's investment strategy is to create a diversified portfolio of
mortgage securities that in the aggregate generates stable income for the
Company in a variety of interest rate environments and preserves the capital
base of the Company. The Company creates the majority of the investments for
its portfolio by retaining a portion of the mortgage securities or other assets
that are generated from its mortgage operations. By pursuing these strategies,
the Company believes it can structure the portfolio to have more favorable
yields in a variety of interest rate environments than if it purchased mortgage
investments in the market, although there can be no assurance that the Company
will be successful in accomplishing this strategy. Included in the Company's
portfolio of mortgage investments are ARM securities, collateral for CMOs,
fixed-rate securities, other mortgage securities and mortgage warehouse lines of
credit. To the extent the Company retains a portion of the credit risk on
securities in the portfolio, the Company generally will service the underlying
mortgage loans to better manage this risk.
OTHER INFORMATION
The Company, and its qualified real estate investment trust ("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 4880 Cox Road,
Glen Allen, Virginia 23060, telephone number: (804) 967-5800.
6
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 mortgage loans and other
mortgage-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 Company's ratio of available earnings to fixed charges was 1:1 or
greater in each of the last five fiscal years and the six months ended June 30,
1995. The ratios were as follows:
(1) For purposes of computing the ratios, "available earnings" consist of net
earnings plus interest and debt expense and excludes fixed charges related to
CMOs issued by the Company which are nonrecourse to the Company. This sum is
divided by the total interest and debt expense to determine the ratio of
available earnings to fixed charges.
These ratios represent a measure of the ability to meet debt service
obligations from funds generated from operations.
7
DESCRIPTION OF SECURITIES
The following is a brief description of the material terms of the Company's
capital stock. 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, no par value, 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, no par amount. 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 September 30, 1995 there were 20,134,370 outstanding shares of Common
Stock held by 3,724 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
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. As of the date hereof, there were 1,552,500 shares of Series A 9.75%
Cumulative Convertible Preferred Stock issued and outstanding.
8
Any 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.
9
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.
10
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.
11
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.
12
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.
13
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
capital stock in excess of 9.8% of the outstanding shares. Shares of capital
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
capital 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.
14
For purposes of determining whether a person holds Excess Shares, a person
or group will be treated as owning not only shares of capital stock actually or
beneficially owned, but also any shares of capital 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 capital 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 capital 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. A Prospectus
Supplement will set forth the terms of the offering of the Securities offered
thereby, including the name or names of any underwriters, the purchase price of
the Securities, and the proceeds to the Company from the sale, any underwriting
discounts and other items constituting underwriters' compensation, any initial
public offering price, any discounts or concessions allowed or reallowed or paid
to dealers, and any securities exchange on which the Securities may be listed.
Only underwriters so named in the Prospectus Supplement are deemed to be
underwriters in connection with the Securities offered thereby.
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.
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 sets 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 agent involved in the offering and sale of
Securities in respect of which this
15
Prospectus is delivered is named, and any commissions payable by the Company to
such agent are 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 and underwriters 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 and underwriters may engage in transactions with, or
perform services for, the Company in the ordinary course of business.
16
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, a
nonqualified REIT subsidiary of the Company , which operates the MPP and is
included in the Company's consolidated GAAP financial statements, is not a
qualified REIT subsidiary. Consequently, all of the nonqualified REIT
subsidiary's 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 capital 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
17
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. 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 or certain gross proceeds paid to any
shareholder who (i) fails to furnish Resource REIT with a correct taxpayer
identification number, (ii) is the subject of a notification received by
Resource REIT that such 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.
18
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
Certain matters will be passed upon for the Company by Venable, Baetjer and
Howard, LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements and schedules of the Company
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1994, which is incorporated in this Prospectus and Registration Statement by
reference, have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. Such financial statements and schedules 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.
19
TABLE OF CONTENTS
Prospectus Supplement
Prospectus
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT TOGETHER WITH THE PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS SUPPLEMENT TOGETHER WITH THE PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS SUPPLEMENT
TOGETHER WITH THE PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
2,100,000 SHARES
[LOGO]
RESOURCE MORTGAGE
CAPITAL, INC.
SERIES B 9.55% CUMULATIVE
CONVERTIBLE PREFERRED STOCK
Prospectus Supplement
October 19, 1995
STIFEL, NICOLAUS & COMPANY
INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
STEPHENS INC.
SCOTT & STRINGFELLOW, INC.