AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 2003.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEWCASTLE INVESTMENT CORP.
(Exact name of registrant as specified in its charter)
<Table>
MARYLAND 81-0559116
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</Table>
1251 AVENUE OF THE AMERICAS
16TH FLOOR
NEW YORK, NEW YORK 10020
(212) 789-6100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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RANDAL A. NARDONE
SECRETARY
1251 AVENUE OF THE AMERICAS
16TH FLOOR
NEW YORK, NEW YORK 10020
(212) 789-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPY TO:
DAVID J. GOLDSCHMIDT
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
FOUR TIMES SQUARE
NEW YORK, NEW YORK 10036-6522
(212) 735-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement as determined by
the Registrant
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box. [
]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1)(2) UNIT(2)(3) PRICE(3) REGISTRATION FEE
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Debt Securities,
Preferred Stock,
Depositary Shares,
Warrants, Common Stock... $750,000,000 100% $750,000,000 $60,675
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</Table>
(1) Such indeterminate number or amount of debt securities, preferred stock,
depositary shares, warrants or common stock of Newcastle Investment Corp. as
may from time to time be issued at indeterminate prices.
(2) Such indeterminate number of shares of common stock, preferred stock,
depositary shares and warrants with respect thereto and such indeterminate
principal amount of senior notes and subordinated notes as may from time to
time be issued at indeterminate prices.
(3) Estimated solely for the purpose of calculating the registration fee under
the Securities Act of 1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 9, 2003
PROSPECTUS
[NEWCASTLE LOGO]
NEWCASTLE INVESTMENT CORP.
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
DEBT SECURITIES
AND
WARRANTS
We may offer, issue and sell from time to time, together or separately, our
debt securities, which may be senior debt securities or subordinated debt
securities; shares of our preferred stock, which we may issue in one or more
series; depositary shares representing shares of our preferred stock; shares of
our common stock; or warrants to purchase debt or equity securities, at an
aggregate initial offering price which will not exceed $750,000,000.
We will provide the specific terms of these securities in supplements to
this prospectus. We may describe the terms of these securities in a term sheet
which will precede the prospectus supplement. You should read this prospectus
and the accompanying prospectus supplement carefully before you make your
investment decision.
THIS PROSPECTUS MAY NOT BE USED TO SELL SECURITIES UNLESS ACCOMPANIED BY A
PROSPECTUS SUPPLEMENT.
We may offer securities through underwriting syndicates managed or
co-managed by one or more underwriters, through agents or directly to
purchasers. The prospectus supplement for each offering of securities will
describe in detail the plan of distribution for that offering. For general
information about the distribution of securities offered, please see "Plan of
Distribution" in this prospectus.
An investment in these securities entails certain material risks and
uncertainties that should be considered. See "Risk Factors" beginning on page 4
of this prospectus.
Our common stock is listed on the New York Stock Exchange under the trading
symbol "NCT." Each prospectus supplement will indicate if the securities offered
thereby will be listed on any securities exchange.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 2003
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
ABOUT THIS PROSPECTUS....................................... 1
WHERE YOU CAN FIND MORE INFORMATION......................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 2
NEWCASTLE INVESTMENT CORP................................... 3
RISK FACTORS................................................ 4
USE OF PROCEEDS............................................. 16
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS AND EARNINGS TO FIXED CHARGES............. 17
DESCRIPTION OF DEBT SECURITIES.............................. 18
DESCRIPTION OF CAPITAL STOCK................................ 26
DESCRIPTION OF DEPOSITARY SHARES............................ 35
DESCRIPTION OF WARRANTS..................................... 37
IMPORTANT PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND
BYLAWS.................................................... 38
FEDERAL INCOME TAX CONSIDERATIONS........................... 41
ERISA CONSIDERATIONS........................................ 57
PLAN OF DISTRIBUTION........................................ 59
VALIDITY OF SECURITIES...................................... 61
EXPERTS..................................................... 61
</Table>
Unless otherwise stated or the context otherwise requires, references in
this prospectus to "NCT," "Newcastle," "we," "our," and "us" refer to Newcastle
Investment Corp. and its direct and indirect subsidiaries.
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (the "SEC") using a "shelf" registration
process. Under this shelf process, we may, from time to time, sell any
combination of the securities described in this prospectus, in one or more
offerings up to a total dollar amount of $750,000,000. This prospectus provides
you with a general description of the securities we may offer. Each time we
offer to sell securities under this prospectus, we will provide a prospectus
supplement containing specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read both this prospectus and any prospectus
supplement together with additional information described under the heading
"Where You Can Find More Information."
You should rely on the information contained or incorporated by reference
in this prospectus. We have not authorized anyone to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
You should assume that the information in this prospectus is accurate as of
the date of the prospectus. Our business, financial condition, results of
operations and prospects may have changed since that date.
This prospectus contains summary descriptions of the debt securities,
common stock, preferred stock and warrants that we may sell from time to time.
These summary descriptions are not meant to be complete descriptions of each
security. The particular terms of any security will be described in the related
prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our SEC filings can be read and copied at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. Our SEC filings are also available over the
Internet at the SEC's website at http://www.sec.gov. Our common stock is listed
and traded on the New York Stock Exchange under the trading symbol "NCT." Our
reports, proxy statements and other information can also be read at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
The SEC allows "incorporation by reference" into this prospectus of
information that we file with the SEC. This permits us to disclose important
information to you by referencing these filed documents. Any information
referenced this way is considered to be a part of this prospectus and any
information filed by us with the SEC subsequent to the date of this prospectus
will automatically be deemed to update and supersede this information. We
incorporate by reference the following documents which we have already filed
with the SEC:
- Annual Report on Form 10-K for the year ended December 31, 2002;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003 and
June 30, 2003; and
- Proxy Statement for the Annual Meeting of Shareholders held on May 29,
2003.
Whenever after the date of this prospectus we file reports or documents
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended, those reports and documents will be deemed to be a part of this
prospectus from the time they are filed. Any statement made in this prospectus
or in a document incorporated or deemed to be incorporated by reference in this
prospectus will be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
other subsequently filed document that is also incorporated or deemed to be
incorporated by reference in this prospectus modifies or supersedes that
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this prospectus.
We will provide without charge, upon written or oral request, a copy of any
or all of the documents which are incorporated by reference into this
prospectus, excluding any exhibits to those documents unless the exhibit is
1
specifically incorporated by reference as an exhibit to the registration
statement of which this prospectus forms a part. Requests should be directed to
Newcastle Investment Corp., 1251 Avenue of the Americas, 16th Floor, New York,
New York, 10020 (telephone number (212) 798-6100), Attention: Investor
Relations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements relate to, among other things, the operating
performance of our investments and financing needs. Forward-looking statements
are generally identifiable by use of forward-looking terminology such as "may,"
"will," "should," "potential," "intend," "expect," "endeavor," "seek,"
"anticipate," "estimate," "overestimate," "underestimate," "believe," "could,"
"project," "predict," "continue" or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future
expectations, describe future plans and strategies, contain projections of
results of operations or of financial condition or state other forward-looking
information. Our ability to predict results or the actual effect of future plans
or strategies is inherently uncertain. Although we believe that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ materially from
those set forth in the forward-looking statements. These forward-looking
statements involve risks, uncertainties and other factors that may cause our
actual results in future periods to differ materially from forecasted results.
Factors which could have a material adverse effect on our operations and future
prospects include, but are not limited to, changes in economic conditions
generally and the real estate and bond markets specifically; adverse changes in
the financing markets we access affecting our ability to finance our real estate
securities portfolios in general, or in a manner that maintains our historic net
spreads; changes in interest rates and/or credit spreads, as well as the success
of our hedging strategy in relation to such changes; the quality and size of the
investment pipeline and the rate at which we can invest our cash, including cash
obtained in connection with CBO financings; impairments in the value of the
collateral underlying our real estate securities; changes in the markets;
legislative/regulatory changes; completion of pending investments; the
availability and cost of capital for future investments; competition within the
finance and real estate industries; and other risks detailed from time to time
in our SEC reports. Readers are cautioned not to place undue reliance on any of
these forward-looking statements, which reflect our management's views as of the
date of this prospectus. The factors noted above could cause our actual results
to differ significantly from those contained in any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform these
statements to actual results.
2
NEWCASTLE INVESTMENT CORP.
GENERAL
We own a diversified portfolio of moderately credit sensitive real estate
securities, including commercial mortgage backed securities, senior unsecured
debt issued by property REITs and asset backed securities. Mortgage backed
securities are interests in or obligations secured by pools of mortgage loans.
We generally target investments rated A through BB. We also own credit leased
operating real estate in Canada and Belgium, which we refer to in this
prospectus as the "Bell Canada portfolio" and the "LIV portfolio," respectively.
We consider credit leased operating real estate to be real estate that is leased
primarily to tenants with, or whose major tenant has, investment grade credit
ratings. We also own, directly and indirectly, interests in pools of mortgage
loans, including residential mortgage loans. We are organized and conduct our
operations to qualify as a real estate investment trust (REIT) for federal
income tax purposes.
We seek to match-fund our investments with respect to interest rates and
maturities in order to minimize the impact of interest rate fluctuations on
earnings and reduce the risk of refinancing our liabilities prior to the
maturity of the investments. Our objective is to maximize the difference between
the yield on our investments and the cost of financing these investments while
hedging our positions.
We focus on investing in moderately credit sensitive real estate
securities, including commercial mortgage backed securities, senior unsecured
debt issued by property REITs and asset backed securities. We seek to finance
our real estate securities through the issuance of debt securities in the form
of collateralized bond obligations, known as CBOs, which are obligations issued
in multiple classes secured by an underlying portfolio of securities. Our CBO
financings offer us structural flexibility to buy and sell certain investments
to manage risk and, subject to certain limitations, to optimize returns.
We are incorporated in Maryland and the address of our principal executive
office is 1251 Avenue of the Americas, 16th Floor, New York, New York, 10020.
Our telephone number is (212) 798-6100. Our Internet address is
www.newcastleinv.com. newcastleinv.com is an interactive textual reference only,
meaning that the information contained on the website is not part of this
prospectus and is not incorporated in this prospectus by reference.
OUR MANAGER
We are externally managed and advised by Fortress Investment Group LLC. As
of September 30, 2003, Fortress Investment Group, through its affiliate, owned
2,750,189 shares of our common stock and had options to purchase an additional
1,160,000 shares of our common stock, which were issued in connection with our
prior equity offerings, representing approximately 13.4% of our common stock on
a fully diluted basis. In addition, we may grant options to purchase shares of
our common stock to our manager, or to an affiliate of our manager, in
connection with future equity offerings or otherwise, as we have done
previously.
We have no ownership interest in our manager. Fortress Investment Holdings
LLC is the sole member of our manager. The beneficial owners of Fortress
Investment Holdings LLC include Messrs. Wesley R. Edens, Peter L. Briger, Jr.,
Robert I. Kauffman, Randal A. Nardone and Michael E. Novogratz.
Our chairman and chief executive officer and each of our executive officers
also serve as officers of our manager. Our manager is entitled to receive a base
management fee from us and may receive incentive compensation based on certain
performance criteria.
As required by our management agreement, our manager provides a dedicated
management team to us, including a president, chief financial officer and chief
operating officer, whose primary responsibility is to manage us.
Our manager also manages and invests in other real estate-related
investment vehicles and intends to engage in additional management and
investment opportunities and investment vehicles in the future. However, our
manager has agreed not to raise or sponsor any new investment vehicle that
targets, as its primary investment category, investment in United States
dollar-denominated credit sensitive real estate securities reflecting primarily
United States loans or assets, although these entities, and other entities
managed by our manager, are not prohibited from investing in these securities.
3
RISK FACTORS
An investment in our Company involves a high degree of risk. You should
carefully consider the following information, together with the other
information contained in this prospectus and any prospectus supplement, before
buying any of the securities offered hereby. In connection with the
forward-looking statements that appear in this prospectus, you should also
carefully review the cautionary statement referred to under "Cautionary
Statement Regarding Forward-Looking Statements."
RISKS RELATING TO OUR MANAGEMENT
WE ARE DEPENDENT ON OUR MANAGER AND MAY NOT FIND A SUITABLE REPLACEMENT IF OUR
MANAGER TERMINATES THE MANAGEMENT AGREEMENT.
We have no employees. Our officers are employees of our manager. We have no
separate facilities and are completely reliant on our manager, which has
significant discretion as to the implementation of our operating policies and
strategies. We are subject to the risk that our manager will terminate the
management agreement and that no suitable replacement will be found to manage
us. We believe that our success depends to a significant extent upon the
experience of the manager's executive officers, whose continued service is not
guaranteed.
THERE ARE CONFLICTS OF INTEREST IN OUR RELATIONSHIP WITH OUR MANAGER.
Our chairman and chief executive officer and each of our executive officers
also serve as officers of our manager. As a result, our management agreement
with our manager was not negotiated at arm's-length and its terms, including
fees payable, may not be as favorable to us as if it had been negotiated with an
unaffiliated third party.
Our manager also manages and invests in other real estate-related
investment vehicles and our chairman and chief executive officer and some of our
other officers also serve as officers and/or directors of these other entities.
Certain investments appropriate for us may also be appropriate for one or more
of these other investment vehicles; our manager may make a particular investment
through another investment vehicle rather than through us or may, subject to the
approval of the independent members of our board of directors, make a
co-investment with one or more of these other investment vehicles.
Our manager also intends to engage in additional real estate-related
management and investment opportunities in the future which may also compete
with us for investments.
Our management agreement with our manager generally does not limit or
restrict our manager from engaging in any business or managing any other vehicle
that invests generally in real estate securities, except that neither the
manager nor any entity controlled by or under common control with the manager
shall raise or sponsor any new investment fund, company or vehicle whose
investment policies, guidelines or plan targets as its primary investment
category investment in United States dollar-denominated credit sensitive real
estate-related securities reflecting primarily United States loans or assets.
The ability of our manager and its officers and employees to engage in other
business activities may reduce the time our manager spends managing us. The
manager is required to seek the approval of the independent members of our board
of directors before we engage in a material transaction, including certain
co-investments, with another entity managed by our manager.
The management compensation structure that we have agreed to with our
manager may cause our manager to invest in high risk investments. In addition to
its management fee, our manager is entitled to receive incentive compensation
based in part upon our achievement of targeted levels of funds from operations.
In evaluating investments and other management strategies, the opportunity to
earn incentive compensation based on funds from operations may lead our manager
to place undue emphasis on the maximization of funds from operations at the
expense of other criteria, such as preservation of capital, in order to achieve
higher incentive compensation. Investments with higher yield potential are
generally riskier or more speculative. This could result in increased risk to
the value of our invested portfolio.
4
Termination of the management agreement with our manager is difficult and
costly. The management agreement may only be terminated annually upon the
affirmative vote of at least two-thirds of our independent directors, or by a
vote of the holders of a majority of the outstanding shares of our common stock,
based upon (1) unsatisfactory performance by our manager that is materially
detrimental to us or (2) a determination that the management fee payable to our
manager is not fair, subject to our manager's right to prevent such a
compensation termination by accepting a mutually acceptable reduction of fees.
Our manager will be provided 60 days' prior notice of any termination and will
be paid a termination fee equal to the amount of the management fee earned by
the manager during the twelve-month period preceding such termination. In
addition, following any termination of the management agreement, the manager may
require us to purchase its right to receive incentive compensation at a price
determined as if our assets were sold for their fair market value (as determined
by an appraisal, taking into account, among other things, the expected future
value of the underlying investments) or otherwise we may continue to pay the
incentive compensation to our manager. These provisions may increase the
effective cost to us of terminating the management agreement, thereby adversely
affecting our ability to terminate our manager without cause.
OUR DIRECTORS HAVE APPROVED VERY BROAD INVESTMENT GUIDELINES FOR OUR MANAGER AND
DO NOT APPROVE EACH INVESTMENT DECISION MADE BY OUR MANAGER.
Our manager is authorized to follow very broad investment guidelines. Our
directors periodically review our investment guidelines and our investment
portfolio. However, our board does not review each proposed investment. In
addition, in conducting periodic reviews, the directors rely primarily on
information provided to them by our manager. Furthermore, transactions entered
into by our manager may be difficult or impossible to unwind by the time they
are reviewed by the directors. Our manager has great latitude within the broad
investment guidelines in determining the types of assets it may decide are
proper investments for us.
WE MAY CHANGE OUR INVESTMENT STRATEGY WITHOUT STOCKHOLDER CONSENT WHICH MAY
RESULT IN RISKIER INVESTMENTS THAN OUR CURRENT INVESTMENTS.
We may change our investment strategy at any time without the consent of
our stockholders, which could result in our making investments that are
different from, and possibly riskier than, the investments described in this
prospectus. A change in our investment strategy may increase our exposure to
interest rate and real estate market fluctuations.
RISKS RELATING TO OUR BUSINESS
WE ARE SUBJECT TO SIGNIFICANT COMPETITION AND WE MAY NOT COMPETE SUCCESSFULLY.
We are subject to significant competition in seeking investments. We
compete with several other companies, including other REITs, insurance companies
and other investors, including funds and companies affiliated with our manager.
Some of our competitors have greater resources than us and we may not be able to
compete successfully for investments.
WE LEVERAGE OUR PORTFOLIO, WHICH MAY ADVERSELY AFFECT OUR RETURN ON OUR
INVESTMENTS AND MAY REDUCE CASH AVAILABLE FOR DISTRIBUTION.
We leverage our portfolio through borrowings, generally through the use of
bank credit facilities, repurchase agreements, mortgage loans on real estate,
securitizations, including the issuance of CBOs, loans to entities in which we
hold, directly or indirectly, interests in pools of properties or loans, and
other borrowings. The percentage of leverage varies depending on our ability to
obtain credit facilities and the lender's estimate of the stability of the
portfolio's cash flow. We currently have a policy limiting the use of leverage
up to 90% of the value of our assets on an aggregate basis. Our return on our
investments and cash available for distribution to our stockholders may be
reduced to the extent that changes in market conditions cause the cost of our
financing to increase relative to the income that can be derived from the assets
acquired.
5
Our debt service payments reduce cash flow available for distributions to
stockholders. We may not be able to meet our debt service obligations and, to
the extent that we cannot, we risk the loss of some or all of our assets to
foreclosure or sale to satisfy our debt obligations.
We may leverage certain of our investments through repurchase agreements. A
decrease in the value of the assets may lead to margin calls which we will have
to satisfy. We may not have the funds available to satisfy any such margin
calls.
THE MORTGAGE LOANS WE INVEST IN AND THE MORTGAGE LOANS UNDERLYING THE MORTGAGE
AND ASSET BACKED SECURITIES WE INVEST IN ARE SUBJECT TO DELINQUENCY, FORECLOSURE
AND LOSS, WHICH COULD RESULT IN LOSSES TO US.
Commercial mortgage loans are secured by multifamily or commercial property
and are subject to risks of delinquency and foreclosure, and risks of loss that
are greater than similar risks associated with loans made on the security of
single-family residential property. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower. If the net operating income of the
property is reduced, the borrower's ability to repay the loan may be impaired.
Net operating income of an income-producing property can be affected by, among
other things: tenant mix, success of tenant businesses, property management
decisions, property location and condition, competition from comparable types of
properties, changes in laws that increase operating expense or limit rents that
may be charged, any need to address environmental contamination at the property,
the occurrence of any uninsured casualty at the property, changes in national,
regional or local economic conditions and/or specific industry segments,
declines in regional or local real estate values, declines in regional or local
rental or occupancy rates, increases in interest rates, real estate tax rates
and other operating expenses, changes in governmental rules, regulations and
fiscal policies, including environmental legislation, acts of God, terrorism,
social unrest and civil disturbances.
Residential mortgage loans are secured by single-family residential
property and are subject to risks of delinquency and foreclosure, and risks of
loss. The ability of a borrower to repay a loan secured by a residential
property is dependent upon the income or assets of the borrower. A number of
factors, including a general economic downturn, acts of God, terrorism, social
unrest and civil disturbances, may impair borrowers' abilities to repay their
loans.
Asset backed securities are bonds or notes backed by loans and/or other
financial assets. The ability of a borrower to repay these loans or other
financial assets is dependant upon the income or assets of these borrowers. We
intend to focus on real estate related asset backed securities, but there can be
no assurance that we will not invest in other types of asset backed securities.
In the event of any default under a mortgage loan held directly by us, we
will bear a risk of loss of principal to the extent of any deficiency between
the value of the collateral and the principal and accrued interest of the
mortgage loan, which could have a material adverse effect on our cash flow from
operations. In the event of the bankruptcy of a mortgage loan borrower, the
mortgage loan to such borrower will be deemed to be secured only to the extent
of the value of the underlying collateral at the time of bankruptcy (as
determined by the bankruptcy court), and the lien securing the mortgage loan
will be subject to the avoidance powers of the bankruptcy trustee or
debtor-in-possession to the extent the lien is unenforceable under state law.
Foreclosure of a mortgage loan can be an expensive and lengthy process which
could have a substantial negative effect on our anticipated return on the
foreclosed mortgage loan.
Residential mortgage backed securities evidence interests in or are secured
by pools of residential mortgage loans and commercial mortgage backed securities
evidence interests in or are secured by a single commercial mortgage loan or a
pool of commercial mortgage loans. Accordingly, the mortgage backed securities
we invest in are subject to all of the risks of the underlying mortgage loans.
6
ALTHOUGH WE SEEK TO MATCH-FUND OUR INVESTMENTS TO LIMIT REFINANCE RISK, IN
PARTICULAR WITH RESPECT TO OUR INVESTMENTS IN REAL ESTATE SECURITIES, WE DO NOT
EMPLOY THIS STRATEGY WITH RESPECT TO OUR INVESTMENTS IN MORTGAGE LOANS, WHICH
INCREASES REFINANCE RISKS FOR OUR MORTGAGE LOANS.
A key to our investment strategy is to finance our investments using
match-funded financing structures, which match assets and liabilities with
respect to maturities and interest rates. This limits our refinance risk,
including the risk of being able to refinance an investment or refinance on
favorable terms. We use match-funded financing structures, such as CBOs, to
finance our investments in real estate securities. However, we do not employ
this strategy with respect to the mortgage loans we invest in, which exposes us
to additional refinance risks that may not apply to our other investments.
WE MAY NOT BE ABLE TO MATCH-FUND OUR FUTURE INVESTMENTS WITH RESPECT TO
MATURITIES AND INTEREST RATES, WHICH EXPOSES US TO THE RISK THAT WE MAY NOT BE
ABLE TO FINANCE OUR INVESTMENTS ON ECONOMICALLY FAVORABLE TERMS.
We focus on investing in credit sensitive real estate securities, including
commercial mortgage backed securities, senior unsecured debt issued by property
REITs and asset backed securities. We seek to match-fund our investments with
respect to interest rates and maturities in order to minimize the impact of
interest rate fluctuations on earnings and reduce the risk of refinancing our
liabilities prior to the maturity of the investments. If we are unable to
match-fund our future investments with respect to maturities and interest rates,
we are subject to the risk that we may not be able to finance our investments on
economically favorable terms. In addition, when financing our investments
through CBOs, we accumulate securities through an arrangement in which a third
party provides short-term financing pending the issuance of the CBO securities
and we make a cash deposit with such third party. Under such arrangement, if
such CBO financing were not consummated we would be required to either purchase
the securities and obtain other more expensive financing for such purchase, or
pay the third party the lesser of the difference between the price it paid for
the securities and the price at which it sold such securities, or our deposit.
WE MAY NOT BE ABLE TO ACQUIRE ELIGIBLE SECURITIES FOR A CBO FINANCING, OR MAY
NOT BE ABLE TO ISSUE CBO SECURITIES ON ATTRACTIVE TERMS, WHICH MAY REQUIRE US TO
SEEK MORE COSTLY FINANCING FOR OUR INVESTMENTS OR TO LIQUIDATE ASSETS. IN
ADDITION, FOLLOWING THE CLOSING OF A CBO FINANCING, THE RATE AT WHICH WE ARE
ABLE TO ACQUIRE ELIGIBLE SECURITIES MAY ADVERSELY IMPACT OUR ANTICIPATED
RETURNS.
We acquire real estate securities and finance them on a long-term basis,
such as through the issuance of collateralized bond obligations. During the
period that we are acquiring these assets, we finance our purchases through
relatively short-term credit facilities. We use these warehouse lines of credit
to finance the acquisition of real estate securities until a sufficient quantity
of securities is accumulated at which time we may refinance these lines through
a securitization, such as a CBO financing, or other long-term financing. As a
result, we are subject to the risk that we will not be able to acquire, during
the period that our warehouse facility is available, a sufficient amount of
eligible securities to maximize the efficiency of a collateralized bond
obligation financing. In addition, conditions in the capital markets may make
the issuance of a collateralized bond obligation less attractive to us when we
do have a sufficient pool of collateral. If we are unable to issue a
collateralized bond obligation to finance these assets, we may be required to
seek such other forms of potentially less attractive financing or otherwise to
liquidate the assets.
In addition, we must invest the net cash raised during the period following
each CBO financing. Until we are able to acquire sufficient securities, our
returns will reflect income earned on uninvested cash.
In general, our ability to acquire appropriate investments depends upon the
supply in the market of investments we deem suitable, and changes in various
economic factors which may affect our determination of what constitutes a
suitable investment.
OUR INVESTMENTS IN SUBORDINATED COMMERCIAL MORTGAGE BACKED SECURITIES ARE
SUBJECT TO LOSSES.
In general, losses on an asset securing a mortgage loan included in a
securitization will be borne first by the equity holder of the property, then by
a cash reserve fund or letter of credit, if any, and then by the "first loss"
subordinated security holder. In the event of default and the exhaustion of any
equity support, reserve fund, letter
7
of credit and any classes of securities junior to those in which we invest, we
will not be able to recover all of our investment in the securities we purchase.
In addition, if the underlying mortgage portfolio has been overvalued by the
originator, or if the values subsequently decline and, as a result, less
collateral is available to satisfy interest and principal payments due on the
related mortgage backed securities, the securities in which we invest may
effectively become the "first loss" position behind the more senior securities,
which may result in significant losses to us.
The prices of lower credit quality securities are generally less sensitive
to interest rate changes than more highly rated investments, but more sensitive
to adverse economic downturns or individual issuer developments. A projection of
an economic downturn, for example, could cause a decline in the price of lower
credit quality securities because the ability of obligors of mortgages
underlying mortgage backed securities to make principal and interest payments
may be impaired. In such event, existing credit support in the securitization
structure may be insufficient to protect us against loss of our principal on
these securities.
OUR INVESTMENTS IN SENIOR UNSECURED REIT SECURITIES ARE SUBJECT TO SPECIFIC
RISKS RELATING TO THE PARTICULAR REIT ISSUER OF THE SECURITIES AND TO THE
GENERAL RISKS OF INVESTING IN SUBORDINATED REAL ESTATE SECURITIES, WHICH MAY
RESULT IN LOSSES TO US.
Our investments in REIT securities involve special risks relating to the
particular REIT issuer of the securities, including the financial condition and
business outlook of the issuer. REITs generally are required to substantially
invest in operating real estate or real estate-related assets and are subject to
the inherent risks associated with real estate-related investments discussed in
this prospectus.
Our investments in REIT securities are also subject to the risks described
above with respect to mortgage loans and mortgage backed securities and similar
risks, including (i) risks of delinquency and foreclosure, and risks of loss in
the event thereof, (ii) the dependence upon the successful operation of and net
income from real property, (iii) risks generally incident to interests in real
property, and (iv) risks that may be presented by the type and use of a
particular commercial property.
REIT securities are generally unsecured and may also be subordinated to
other obligations of the issuer. We may also invest in REIT securities that are
rated below investment grade. As a result, investments in REIT securities are
also subject to risks of: (i) limited liquidity in the secondary trading market,
(ii) substantial market price volatility resulting from changes in prevailing
interest rates, (iii) subordination to the prior claims of banks and other
senior lenders to the issuer, (iv) the operation of mandatory sinking fund or
call/redemption provisions during periods of declining interest rates that could
cause the issuer to reinvest premature redemption proceeds in lower yielding
assets, (v) the possibility that earnings of the REIT issuer may be insufficient
to meet its debt service and dividend obligations and (vi) the declining
creditworthiness and potential for insolvency of the issuer of such REIT
securities during periods of rising interest rates and economic downturn. These
risks may adversely affect the value of outstanding REIT securities and the
ability of the issuers thereof to repay principal and interest or make dividend
payments.
THE B NOTES AND OTHER DIRECT AND INDIRECT INTERESTS IN POOLS OF REAL ESTATE
PROPERTIES OR LOANS THAT WE INVEST IN MAY BE SUBJECT TO ADDITIONAL RISKS
RELATING TO THE PRIVATELY NEGOTIATED STRUCTURE AND TERMS OF THE TRANSACTION,
WHICH MAY RESULT IN LOSSES TO US.
We invest in "B Notes" and other direct and indirect interests in pools of
real estate properties or loans. A "B Note" is a mortgage loan typically (a)
secured by a first mortgage on a single large commercial property or group of
related properties and (b) subordinated to an "A Note" secured by the same first
mortgage on the same collateral. As a result, if an issuer defaults, there may
not be sufficient funds remaining for B Note holders. B Notes reflect similar
credit risks to comparably rated commercial mortgage backed securities. We also
invest, directly or indirectly, in pools of real estate properties or loans.
However, since each transaction is privately negotiated, these investments can
vary in their structural characteristics and risks. For example, the rights of
holders of B Notes to control the process following a borrower default may vary
from transaction to transaction, while investments in pools of real estate
properties or loans may be subject to varying contractual arrangements with
third party co-investors in such pools. Further, B Notes typically are secured
by a single property, and so
8
reflect the risks associated with significant concentration. These investments
also are less liquid than commercial mortgage backed securities.
OUR INSURANCE ON OUR REAL ESTATE IN WHICH WE HAVE INTERESTS AND INSURANCE ON OUR
MORTGAGE LOANS AND REAL ESTATE SECURITIES COLLATERAL MAY NOT COVER ALL LOSSES.
There are certain types of losses, generally of a catastrophic nature, such
as earthquakes, floods, hurricanes, terrorism or acts of war, that may be
uninsurable or not economically insurable. Inflation, changes in building codes
and ordinances, environmental considerations, and other factors, including
terrorism or acts of war, also might make the insurance proceeds insufficient to
repair or replace a property if it is damaged or destroyed. Under such
circumstances, the insurance proceeds received might not be adequate to restore
our economic position with respect to the affected real property.
As a result of the events of September 11, 2001, insurance companies are
limiting and/or excluding coverage for acts of terrorism in insurance policies.
As a result, we may suffer losses from acts of terrorism that are not covered by
insurance. In addition, the mortgage loans which are secured by certain of our
properties contain customary covenants, including covenants that require us to
maintain property insurance in an amount equal to the replacement cost of the
properties. There can be no assurance that the lenders under our mortgage loans
will not take the position that exclusions from our coverage for losses due to
terrorist acts is a breach of a covenant which, if uncured, could allow the
lenders to declare an event of default and accelerate repayment of the mortgage
loans.
ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES WITH RESPECT TO OUR REAL ESTATE
IN WHICH WE HAVE INTERESTS MAY AFFECT OUR RESULTS OF OPERATIONS.
Our operating costs may be affected by our obligation to pay for the cost
of complying with existing environmental laws, ordinances and regulations, as
well as the cost of complying with future legislation with respect to the
assets, or loans secured by assets, with environmental problems that materially
impair the value of the assets. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under, or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate properly, may adversely affect the owner's ability to borrow by using
such real property as collateral. Certain environmental laws and common law
principles could be used to impose liability for releases of hazardous
materials, including asbestos-containing materials into the environment, and
third parties may seek recovery from owners or operators of real properties for
personal injury associated with exposure to released asbestos-containing
materials or other hazardous materials. Environmental laws may also impose
restrictions on the manner in which a property may be used or transferred or in
which businesses may be operated, and these restrictions may require
expenditures. In connection with the direct or indirect ownership and operation
of properties, we may be potentially liable for any such costs. The cost of
defending against claims of liability or remediating contaminated property and
the cost of complying with environmental laws could materially adversely affect
our results of operations and financial condition.
MANY OF OUR INVESTMENTS ARE ILLIQUID AND WE MAY NOT BE ABLE TO VARY OUR
PORTFOLIO IN RESPONSE TO CHANGES IN ECONOMIC AND OTHER CONDITIONS.
Operating real estate and other direct and indirect investments in real
estate and real estate-related assets are generally illiquid. In addition, the
real estate securities that we purchase in connection with privately negotiated
transactions are not registered under the relevant securities laws, resulting in
a prohibition against their transfer, sale, pledge or other disposition except
in a transaction that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. A majority of the mortgage backed
securities, REIT securities and asset backed securities, and all of the B Notes
and other directly or indirectly held interests in pools of properties or loans
that we purchase are purchased in private, unregistered transactions and are
therefore subject to restrictions on resale or otherwise have no established
trading market. As a result, our ability to vary our portfolio in response to
changes in economic and other conditions may be relatively limited.
9
INTEREST RATE FLUCTUATIONS MAY CAUSE LOSSES.
Our primary interest rate exposures relate to our mortgage loans, real
estate securities and floating-rate debt obligations, as well as our interest
rate swaps and caps. Changes in the general level of interest rates can affect
our net interest income, which is the difference between the interest income
earned on our interest-earning assets and the interest expense incurred on our
interest-bearing liabilities. Changes in the level of interest rates also can
affect, among other things, our ability to acquire mortgage loans and
securities, the value of our mortgage loans and real estate securities and our
ability to realize gains from the settlement of such assets.
Currently, U.S. interest rates are historically low. In the event of a
significant rising interest rate environment and/or economic downturn, mortgage
and loan defaults may increase and result in credit losses that would adversely
affect our liquidity and operating results. Interest rates are highly sensitive
to many factors, including governmental monetary and tax policies, domestic and
international economic and political conditions, and other factors beyond our
control.
Our ability to execute our business strategy, particularly the growth of
our investment portfolio, depends to a significant degree on our ability to
obtain additional capital. Our CBO financing strategy is dependent on our
ability to place the match-funded debt we use to finance our real estate
securities at spreads that provide a positive arbitrage. If spreads for CBO
liabilities widen or if demand for such liabilities ceases to exist, then our
ability to execute future CBO financings will be severely restricted.
Interest rate changes may also impact our net book value as our securities
and related hedge derivatives are marked-to-market each quarter. Generally, as
interest rates increase, the value of our fixed rate real estate securities,
such as commercial mortgage backed securities, decreases, which will decrease
the book value of our equity.
Our operating results will depend in large part on differences between the
income from our assets, net of credit losses, and our financing costs. We
anticipate that, in most cases, for any period during which our assets are not
match-funded, the income from such assets will respond more slowly to interest
rate fluctuations than the cost of our borrowings. Consequently, changes in
interest rates, particularly short-term interest rates, may significantly
influence our net income. Increases in these rates will tend to decrease our net
income and market value of our assets. Interest rate fluctuations resulting in
our interest expense exceeding interest income would result in operating losses
for us.
OUR INVESTMENTS IN REAL ESTATE SECURITIES AND MORTGAGE LOANS ARE SUBJECT TO
CHANGES IN CREDIT SPREADS.
Our investments in real estate securities are subject to changes in credit
spreads. The majority of the real estate securities we invest in are fixed rate
securities, which are valued based on a market credit spread over the rate
payable on fixed rate U.S. Treasuries of like maturity. The value of these
securities is dependent on the yield demanded on these securities by the market
based on their credit relative to U.S. Treasuries. Excessive supply of these
securities combined with reduced demand will generally cause the market to
require a higher yield on these real estate securities, resulting in the use of
a higher, or "wider," spread over the benchmark rate (usually the applicable
U.S. Treasury security yield) to value such securities. Under such conditions,
the value of our securities portfolio would tend to decline. Conversely, if the
spread used to value such securities were to decrease, or "tighten", the value
of our securities portfolio would tend to increase. Such changes in the market
value of our portfolio may effect our net equity, net income or cash flow
directly through their impact on unrealized gains or losses on
available-for-sale securities, and therefore our ability to realize gains on
such securities, or indirectly through their impact on our ability to borrow and
access capital.
Furthermore, shifts in the U.S. Treasury yield curve, which represents the
market's expectations of future interest rates, would also affect the yield
required on our securities and therefore their value. This would have similar
effects on our portfolio and our financial position and operations to a change
in spreads.
Our investments in mortgage loans are also subject to changes in credit
spreads. The majority of mortgage loans we invest in are floating rate loans
valued based on a market credit spread to LIBOR. The value of the loans is
dependent upon the yield demanded by the market based on their credit. The value
of our portfolio would tend to decline should the market require a higher yield
on such loans, resulting in the use of a higher spread over the
10
benchmark rate (usually the applicable LIBOR yield). If the value of our
mortgage loan portfolio were to decline, it could affect our ability to
refinance such portfolio upon the maturity of the related repurchase agreement.
Any credit or spread losses incurred with respect to our mortgage loan portfolio
would affect us in the same way as similar losses on our real estate securities
portfolio as described above.
OUR HEDGING TRANSACTIONS MAY LIMIT OUR GAINS OR RESULT IN LOSSES.
We use derivatives to hedge our liabilities and this has certain risks,
including the risk that losses on a hedge position will reduce the cash
available for distribution to stockholders and that such losses may exceed the
amount invested in such instruments. Our board of directors has adopted a
general policy with respect to the use of derivatives, which generally allows us
to use derivatives where appropriate, but does not set forth specific policies
and procedures. We use derivative instruments, including forwards, futures,
swaps and options, in our risk management strategy to limit the effects of
changes in interest rates on our operations. A hedge may not be effective in
eliminating all of the risks inherent in any particular position. Our
profitability may be adversely affected during any period as a result of the use
of derivatives.
PREPAYMENT RATES CAN INCREASE, ADVERSELY AFFECTING YIELDS ON OUR RESIDENTIAL
MORTGAGE LOANS.
The value of our assets may be affected by prepayment rates on our
residential mortgage loans. Prepayment rates on mortgage loans are influenced by
changes in current interest rates and a variety of economic, geographic and
other factors beyond our control, and consequently, such prepayment rates cannot
be predicted with certainty. In periods of declining mortgage interest rates,
prepayments on mortgage loans generally increase. If general interest rates
decline as well, the proceeds of such prepayments received during such periods
are likely to be reinvested by us in assets yielding less than the yields on the
assets that were prepaid. In addition, the market value of the mortgage assets
may, because of the risk of prepayment, benefit less than other fixed-income
securities from declining interest rates. Conversely, in periods of rising
interest rates, prepayments on mortgage loans generally decrease, in which case
we would not have the prepayment proceeds available to invest in assets with
higher yields. Under certain interest rate and prepayment scenarios we may fail
to recoup fully our cost of acquisition of certain investments.
OUR INTERNATIONAL INVESTMENTS ARE SUBJECT TO CURRENCY RATE EXPOSURE AND THE
UNCERTAINTY OF FOREIGN LAWS AND MARKETS.
We own real estate located in Canada and in Belgium, which in addition to
all the risks inherent in the investment in real estate generally discussed in
this prospectus are also subject to fluctuations in foreign currency exchange
rates, unexpected changes in regulatory requirements, political and economic
instability in certain geographic locations, difficulties in managing
international operations, potentially adverse tax consequences, enhanced
accounting and control expenses and the burden of complying with a wide variety
of foreign laws. A change in foreign currency exchange rates may adversely
impact returns on our non-dollar denominated investments. Our principal direct
currency exposures are to the Euro and the Canadian Dollar. Changes in the
currency rates can adversely impact the fair values and earnings streams of our
international holdings. We generally do not directly hedge our foreign currency
risk through the use of derivatives, due to, among other things, REIT income
qualification issues.
WE ARE EXPOSED TO RISKS FROM OUR BELL CANADA PORTFOLIO.
As of June 30, 2003, approximately 2.7% of our total assets consisted of
properties leased to Bell Canada and for the quarter ended June 30, 2003,
approximately 11.3% of our revenue was derived from Bell Canada. If the credit
quality of this tenant is downgraded, or if it is unable or unwilling to timely
pay rent, or if it elects not to renew any significant lease, the value of and
revenue from our Bell Canada portfolio would decline.
11
RISKS RELATING TO OUR COMPANY
OUR FAILURE TO QUALIFY AS A REIT WOULD RESULT IN HIGHER TAXES AND REDUCED CASH
AVAILABLE FOR STOCKHOLDERS.
We operate in a manner so as to qualify as a REIT for federal income tax
purposes. Although we do not intend to request a ruling from the Internal
Revenue Service (the IRS) as to our REIT status, we expect to receive the
opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to our
qualification as a REIT. This opinion will be issued in connection with the
registration statement of which this prospectus forms a part. Investors should
be aware, however, that opinions of counsel are not binding on the IRS or any
court. The opinion of Skadden, Arps, Slate, Meagher & Flom LLP represents only
the view of our counsel based on our counsel's review and analysis of existing
law and on certain representations as to factual matters and covenants made by
us and our manager, including representations relating to the values of our
assets and the sources of our income. The opinion of Skadden, Arps, Slate,
Meagher & Flom LLP also relies on various legal opinions issued by other counsel
for Newcastle and its predecessors with respect to certain issues and
transactions. The opinions, copies of which are filed along with the opinion of
Skadden, Arps, Slate, Meagher & Flom LLP as an exhibit to the registration
statement of which this prospectus is a part, are expressed as of the date
issued, and do not cover subsequent periods. Counsel has no obligation to advise
us or the holders of our common stock of any subsequent change in the matters
stated, represented or assumed, or of any subsequent change in applicable law.
Furthermore, both the validity of the opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, and our continued qualification as a REIT will depend on our
satisfaction of certain asset, income, organizational, distribution, stockholder
ownership and other requirements on a continuing basis, the results of which
will not be monitored by Skadden, Arps, Slate, Meagher & Flom LLP. Our ability
to satisfy the asset tests depends upon our analysis of the fair market values
of our assets, some of which are not susceptible to a precise determination, and
for which we will not obtain independent appraisals. Our compliance with the
REIT income and quarterly asset requirements also depends upon our ability to
successfully manage the composition of our income and assets on an ongoing
basis. Moreover, the proper classification of an instrument as debt or equity
for federal income tax purposes may be uncertain in some circumstances, which
could affect the application of the REIT qualification requirements as described
below. Accordingly, there can be no assurance that the IRS will not contend that
our interests in subsidiaries or other issuers will not cause a violation of the
REIT requirements. If we were to fail to qualify as a REIT in any taxable year,
we would be subject to federal income tax, including any applicable alternative
minimum tax, on our taxable income at regular corporate rates, and distributions
to stockholders would not be deductible by us in computing our taxable income.
Any such corporate tax liability could be substantial and would reduce the
amount of cash available for distribution to our stockholders, which in turn
could have an adverse impact on the value of, and trading prices for, our stock.
Unless entitled to relief under certain Internal Revenue Code provisions, we
also would be disqualified from taxation as a REIT for the four taxable years
following the year during which we ceased to qualify as a REIT. The rule against
re-electing REIT status following a loss of such status could also apply to us
if Newcastle Investment Holdings failed to qualify as a REIT, and we are treated
as a successor to Newcastle Investment Holdings for federal income tax purposes.
See "Federal Income Tax Considerations" for a discussion of material federal
income tax consequences relating to us and our stock.
REIT DISTRIBUTION REQUIREMENTS COULD ADVERSELY AFFECT OUR LIQUIDITY.
We generally must distribute annually at least 90% of our net taxable
income, excluding any net capital gain, in order for corporate income tax not to
apply to earnings that we distribute. We intend to make distributions to our
stockholders to comply with the requirements of the Internal Revenue Code.
However, differences in timing between the recognition of taxable income and the
actual receipt of cash could require us to sell assets or borrow funds on a
short-term or long-term basis to meet the 90% distribution requirement of the
Internal Revenue Code. Certain of our assets generate substantial mismatches
between taxable income and available cash. As a result, the requirement to
distribute a substantial portion of our net taxable income could cause us to:
(a) sell assets in adverse market conditions, (b) borrow on unfavorable terms,
or (c) distribute amounts that would otherwise be invested in future
acquisitions, capital expenditures or repayment of debt, in order to comply with
REIT requirements.
12
Further, amounts distributed will not be available to fund investment
activities. If we fail to obtain debt or equity capital in the future, it could
limit our ability to grow, which could have a material adverse effect on the
value of our common stock.
DIVIDENDS PAYABLE BY REITS DO NOT QUALIFY FOR THE REDUCED TAX RATES UNDER
RECENTLY ENACTED TAX LEGISLATION.
Recently enacted tax legislation reduces the maximum tax rate for dividends
payable to individuals from 38.6% to 15% (through 2008). Dividends payable by
REITs, however, are generally not eligible for the reduced rates. Although this
legislation does not adversely affect the taxation of REITs or dividends paid by
REITs, the more favorable rates applicable to regular corporate dividends could
cause investors who are individuals to perceive investments in REITs to be
relatively less attractive than investments in the stocks of non-REIT
corporations that pay dividends, which could adversely affect the value of the
stock of REITs, including our common stock.
In addition, the relative attractiveness of real estate in general may be
adversely affected by the newly favorable tax treatment given to corporate
dividends, which could affect the value of our real estate assets negatively.
MAINTENANCE OF OUR INVESTMENT COMPANY ACT EXEMPTION IMPOSES LIMITS ON OUR
OPERATIONS.
We conduct our operations so as not to become regulated as an investment
company under the Investment Company Act of 1940, as amended. We believe that
there are a number of exemptions under the Investment Company Act that may be
applicable to us. The assets that we may acquire, therefore, are limited by the
provisions of the Investment Company Act and the rules and regulations
promulgated under the Investment Company Act. In addition, we could, among other
things, be required either (a) to change the manner in which we conduct our
operations to avoid being required to register as an investment company or (b)
to register as an investment company, either of which could have an adverse
effect on us and the market price for our stock.
ERISA MAY RESTRICT INVESTMENTS BY PLANS IN OUR COMMON STOCK.
A plan fiduciary considering an investment in our common stock should
consider, among other things, whether such an investment is consistent with the
fiduciary obligations under ERISA, including whether such investment might
constitute or give rise to a prohibited transaction under ERISA, the Internal
Revenue Code or any substantially similar federal, state or local law and, if
so, whether an exemption from such prohibited transaction rules is available.
THE STOCK OWNERSHIP LIMITS IMPOSED BY THE INTERNAL REVENUE CODE FOR REITS AND
OUR CHARTER MAY INHIBIT MARKET ACTIVITY IN OUR STOCK AND MAY RESTRICT OUR
BUSINESS COMBINATION OPPORTUNITIES.
In order for us to maintain our qualification as a REIT under the Internal
Revenue Code, not more than 50% in value of our outstanding stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities) at any time during the last half of
each taxable year after our first year. Our charter, with certain exceptions,
authorizes our directors to take such actions as are necessary and desirable to
preserve our qualification as a REIT. Unless exempted by our board of directors,
no person may own more than 8% of the aggregate value of all outstanding shares
of our capital stock, treating classes and series of our stock in the aggregate,
or more than 25% of the outstanding shares of our Series B Preferred Stock. Our
board may grant such an exemption, subject to such conditions, representations
and undertakings as it may determine in its sole discretion. These ownership
limits could delay or prevent a transaction or a change in our control that
might involve a premium price for our common stock or otherwise be in the best
interest of our stockholders. Our board of directors has granted limited
exemptions to Newcastle Investment Holdings Corp., Fortress Principal Investment
Holdings LLC, our manager, a third party group of funds managed by Wallace R.
Weitz & Company, and certain affiliates of these entities.
13
MARYLAND TAKEOVER STATUTES MAY PREVENT A CHANGE OF OUR CONTROL. THIS COULD
DEPRESS OUR STOCK PRICE.
Under Maryland law, "business combinations" between a Maryland corporation
and an interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations
include certain mergers, consolidations, share exchanges, or, in circumstances
specified in the statute, an asset transfer or issuance or reclassification of
equity securities or a liquidation or dissolution. An interested stockholder is
defined as:
- any person who beneficially owns 10% or more of the voting power of the
corporation's outstanding shares; or
- an affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner
of 10% or more of the voting power of the then outstanding stock of the
corporation.
A person is not an interested stockholder under the statute if the board of
directors approved in advance the transaction by which he or she otherwise would
have become an interested stockholder.
After the five-year prohibition, any business combination between the
Maryland corporation and an interested stockholder generally must be recommended
by the board of directors of the corporation and approved by the affirmative
vote of at least:
- 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation voting together as a single group; and
- two-thirds of the votes entitled to be cast by holders of voting stock of
the corporation other than shares held by the interested stockholder with
whom or with whose affiliate the business combination is to be effected
or held by an affiliate or associate of the interested stockholder voting
together as a single voting group.
The business combination statute may discourage others from trying to
acquire control of us and increase the difficulty of consummating any offer,
including potential acquisitions that might involve a premium price for our
common stock or otherwise be in the best interest of our stockholders.
OUR AUTHORIZED BUT UNISSUED COMMON AND PREFERRED STOCK MAY PREVENT A CHANGE IN
OUR CONTROL.
Our charter authorizes us to issue additional authorized but unissued
shares of our common stock or preferred stock. In addition, our board of
directors may classify or reclassify any unissued shares of common stock or
preferred stock and may set the preferences, rights and other terms of the
classified or reclassified shares. As a result, our board may establish a series
of preferred stock that could delay or prevent a transaction or a change in
control that might involve a premium price for our common stock or otherwise be
in the best interest of our stockholders.
OUR STOCKHOLDER RIGHTS PLAN COULD INHIBIT A CHANGE IN OUR CONTROL.
We have adopted a stockholder rights agreement. Under the terms of the
rights agreement, in general, if a person or group acquires more than 15% of the
outstanding shares of our common stock, all of our other common stockholders
will have the right to purchase securities from us at a discount to such
securities' fair market value, thus causing substantial dilution to the
acquiring person. The rights agreement may have the effect of inhibiting or
impeding a change in control not approved by our board of directors and,
therefore, could adversely affect our stockholders' ability to realize a premium
over the then-prevailing market price for our common stock in connection with
such a transaction. In addition, since our board of directors can prevent the
rights agreement from operating, in the event our board approves of an acquiring
person, the rights agreement gives our board of directors significant discretion
over whether a potential acquiror's efforts to acquire a large interest in us
will be successful. Because the rights agreement contains provisions that are
designed to assure that the executive officers, our manager and its affiliates
will never, alone, be considered a group that is an acquiring person, the
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rights agreement provides the executive officers, our manager and its affiliates
with certain advantages under the rights agreement that are not available to
other stockholders.
OUR STAGGERED BOARD AND OTHER PROVISIONS OF OUR CHARTER AND BYLAWS MAY PREVENT A
CHANGE IN OUR CONTROL.
Our board of directors is divided into three classes of directors.
Directors of each class are chosen for three-year terms upon the expiration of
their current terms, and each year one class of directors is elected by the
stockholders. The staggered terms of our directors may reduce the possibility of
a tender offer or an attempt at a change in control, even though a tender offer
or change in control might be in the best interest of our stockholders. In
addition, our charter and bylaws also contain other provisions that may delay or
prevent a transaction or a change in control that might involve a premium price
for our common stock or otherwise be in the best interest of our stockholders.
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USE OF PROCEEDS
Unless otherwise set forth in a prospectus supplement, we intend to use the
net proceeds of any offering of securities to invest in real estate-related
assets and for general corporate purposes. We will have significant discretion
in the use of any net proceeds. The net proceeds may be invested temporarily in
interest-bearing accounts and short-term interest-bearing securities that are
consistent with our qualification as a REIT until they are used for their stated
purpose. We may provide additional information on the use of the net proceeds
from the sale of the offered securities in an applicable prospectus supplement
relating to the offered securities.
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RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS AND RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to combined fixed
charges and preferred share dividends and our ratio of earnings to fixed charges
for each of the periods indicated:
<Table>
<Caption>
SIX MONTHS YEAR ENDED DECEMBER 31, PERIOD FROM
ENDED ---------------------------- MAY 11, 1998 TO
JUNE 30, 2003 2002 2001 2000 1999 DECEMBER 31, 1998
------------- ---- ---- ---- ---- -----------------
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends................ 1.62 1.62 1.90 1.82 1.39 N/A
Ratio of Earnings to
Fixed Charges............ 1.70 1.65 2.04 1.92 1.39 N/A
</Table>
For purposes of calculating the above ratios, (i) earnings represent
"Income (loss) before equity in earnings of unconsolidated subsidiaries" from
our consolidated statements of income, as adjusted for fixed charges and
distributions from unconsolidated subsidiaries, and (ii) fixed charges represent
"Interest expense" from our consolidated statements of income. The ratios are
based solely on historical financial information.
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DESCRIPTION OF DEBT SECURITIES
As used in this prospectus, debt securities means the debentures, notes,
bonds and other evidences of indebtedness that we may issue from time to time.
The debt securities will either be senior debt securities or subordinated debt
securities. Senior debt securities will be issued under a "Senior Indenture" and
subordinated debt securities will be issued under a "Subordinated Indenture."
This prospectus sometimes refers to the Senior Indenture and the Subordinated
Indenture collectively as the "Indentures." The trustee under the Indentures
will be named in the applicable prospectus supplement.
The forms of Indentures are filed as exhibits to the registration statement
of which this prospectus forms a part. The statements and descriptions in this
prospectus or in any prospectus supplement regarding provisions of the
Indentures and debt securities are summaries thereof, do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indentures (and any amendments or supplements
we may enter into from time to time which are permitted under each Indenture)
and the debt securities, including the definitions therein of certain terms.
GENERAL
Unless otherwise specified in a prospectus supplement, the debt securities
will be direct unsecured obligations of Newcastle Investment Corp. The senior
debt securities will rank equally with any of our other senior and
unsubordinated debt. The subordinated debt securities will be subordinate and
junior in right of payment to any senior indebtedness.
The Indentures do not limit the aggregate principal amount of debt
securities that we may issue and provide that we may issue debt securities from
time to time in one or more series, in each case with the same or various
maturities, at par or at a discount. Unless indicated in a prospectus
supplement, we may issue additional debt securities of a particular series
without the consent of the holders of the debt securities of such series
outstanding at the time of the issuance. Any such additional debt securities,
together with all other outstanding debt securities of that series, will
constitute a single series of debt securities under the applicable Indenture.
Each prospectus supplement will describe the terms relating to the specific
series of debt securities being offered. These terms will include some or all of
the following:
- the title of debt securities and whether they are subordinated debt
securities or senior debt securities;
- any limit on the aggregate principal amount of the debt securities;
- the ability to issue additional debt securities of the same series;
- the price or prices at which we will sell the debt securities;
- the maturity date or dates of the debt securities;
- the rate or rates of interest, if any, which may be fixed or variable, at
which the debt securities will bear interest, or the method of
determining such rate or rates, if any;
- the date or dates from which any interest will accrue or the method by
which such date or dates will be determined;
- the right, if any, to extend the interest payment periods and the
duration of any such deferral period, including the maximum consecutive
period during which interest payment periods may be extended;
- whether the amount of payments of principal of (and premium, if any) or
interest on the debt securities may be determined with reference to any
index, formula or other method, such as one or more currencies,
commodities, equity indices or other indices, and the manner of
determining the amount of such payments;
- the dates on which we will pay interest on the debt securities and the
regular record date for determining who is entitled to the interest
payable on any interest payment date;
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- the place or places where the principal of (and premium, if any) and
interest on the debt securities will be payable, where any securities may
be surrendered for registration of transfer, exchange or conversion, as
applicable, and notices and demands may be delivered to or upon us
pursuant to the Indenture;
- if we possess the option to do so, the periods within which and the
prices at which we may redeem the debt securities, in whole or in part,
pursuant to optional redemption provisions, and the other terms and
conditions of any such provisions;
- our obligation, if any, to redeem, repay or purchase debt securities by
making periodic payments to a sinking fund or through an analogous
provision or at the option of holders of the debt securities, and the
period or periods within which and the price or prices at which we will
redeem, repay or purchase the debt securities, in whole or in part,
pursuant to such obligation, and the other terms and conditions of such
obligation;
- the denominations in which the debt securities will be issued, if other
than denominations of $1,000 and integral multiples of $1,000;
- the portion, or methods of determining the portion, of the principal
amount of the debt securities which we must pay upon the acceleration of
the maturity of the debt securities in connection with an Event of
Default (as described below), if other than the full principal amount;
- the currency, currencies or currency unit in which we will pay the
principal of (and premium, if any) or interest, if any, on the debt
securities, if not United States dollars;
- provisions, if any, granting special rights to holders of the debt
securities upon the occurrence of specified events;
- any deletions from, modifications of or additions to the Events of
Default or our covenants with respect to the applicable series of debt
securities, and whether or not such Events of Default or covenants are
consistent with those contained in the applicable Indenture;
- any limitation on our ability to incur debt, redeem stock, sell our
assets or other restrictions;
- the application, if any, of the terms of the Indenture relating to
defeasance and covenant defeasance (which terms are described below) to
the debt securities;
- whether the subordination provisions summarized below or different
subordination provisions will apply to the debt securities;
- the terms, if any, upon which the holders may convert or exchange the
debt securities into or for our common stock, preferred stock or other
securities or property;
- whether any of the debt securities will be issued in global form and, if
so, the terms and conditions upon which global debt securities may be
exchanged for certificated debt securities;
- any change in the right of the trustee or the requisite holders of debt
securities to declare the principal amount thereof due and payable
because of an Event of Default;
- the depositary for global or certificated debt securities;
- any special tax implications of the debt securities;
- any trustees, authenticating or paying agents, transfer agents or
registrars or other agents with respect to the debt securities;
- any other terms of the debt securities not inconsistent with the
provisions of the Indentures, as amended or supplemented;
- to whom any interest on any debt security shall be payable, if other than
the person in whose name the security is registered, on the record date
for such interest, the extent to which, or the manner in which, any
interest payable on a temporary global debt security will be paid if
other than in the manner provided in the applicable Indenture;
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- if the principal of or any premium or interest on any debt securities of
the series is to be payable in one or more currencies or currency units
other than as stated, the currency, currencies or currency units in which
it shall be paid and the periods within and terms and conditions upon
which such election is to be made and the amounts payable (or the manner
in which such amount shall be determined);
- the portion of the principal amount of any securities of the series which
shall be payable upon declaration of acceleration of the maturity of the
debt securities pursuant to the applicable Indenture if other than the
entire principal amount; and
- if the principal amount payable at the stated maturity of any debt
security of the series will not be determinable as of any one or more
dates prior to the stated maturity, the amount which shall be deemed to
be the principal amount of such securities as of any such date for any
purpose, including the principal amount thereof which shall be due and
payable upon any maturity other than the stated maturity or which shall
be deemed to be outstanding as of any date prior to the stated maturity
(or, in any such case, the manner in which such amount deemed to be the
principal amount shall be determined).
Unless otherwise specified in the applicable prospectus supplement, the
debt securities will not be listed on any securities exchange.
Unless otherwise specified in the applicable prospectus supplement, debt
securities will be issued in fully-registered form without coupons.
Debt securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time of
issuance is below market rates. The applicable prospectus supplement will
describe the federal income tax consequences and special considerations
applicable to any such debt securities. The debt securities may also be issued
as indexed securities or securities denominated in foreign currencies, currency
units or composite currencies, as described in more detail in the prospectus
supplement relating to any of the particular debt securities. The prospectus
supplement relating to specific debt securities will also describe any special
considerations and certain additional tax considerations applicable to such debt
securities.
SUBORDINATION
The prospectus supplement relating to any offering of subordinated debt
securities will describe the specific subordination provisions. However, unless
otherwise noted in the prospectus supplement, subordinated debt securities will
be subordinate and junior in right of payment to any existing Senior
Indebtedness.
Under the Subordinated Indenture, "Senior Indebtedness" means all amounts
due on obligations in connection with any of the following, whether outstanding
at the date of execution of the Subordinated Indenture or thereafter incurred or
created:
- the principal of (and premium, if any) and interest due on our
indebtedness for borrowed money and indebtedness evidenced by securities,
debentures, bonds or other similar instruments issued by us;
- all of our capital lease obligations;
- any of our obligations as lessee under leases required to be capitalized
on the balance sheet of the lessee under generally accepted accounting
principles;
- all of our obligations for the reimbursement on any letter of credit,
banker's acceptance, security purchase facility or similar credit
transaction;
- all of our obligations in respect of interest rate swap, cap or other
agreements, interest rate future or options contracts, currency swap
agreements, currency future or option contracts and other similar
agreements;
- all obligations of the types referred to above of other persons for the
payment of which we are responsible or liable as obligor, guarantor or
otherwise; and
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- all obligations of the types referred to above of other persons secured
by any lien on any property or asset of ours (whether or not such
obligation is assumed by us).
However, Senior Indebtedness does not include:
- any indebtedness which expressly provides that such indebtedness shall
not be senior in right of payment to the subordinated debt securities, or
that such indebtedness shall be subordinated to any other of our
indebtedness, unless such indebtedness expressly provides that such
indebtedness shall be senior in right of payment to the subordinated debt
securities;
- any of our indebtedness in respect of the subordinated debt securities;
- any indebtedness or liability for compensation to employees, for goods or
materials purchased in the ordinary course of business or for services;
- any of our indebtedness to any subsidiary; and
- any liability for federal, state, local or other taxes owed or owing by
us.
Senior Indebtedness shall continue to be Senior Indebtedness and be
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any term of such Senior Indebtedness.
Unless otherwise noted in the accompanying prospectus supplement, if we
default in the payment of any principal of (or premium, if any) or interest on
any Senior Indebtedness when it becomes due and payable, whether at maturity or
at a date fixed for prepayment or by declaration or otherwise, then, unless and
until such default is cured or waived or ceases to exist, we will make no direct
or indirect payment (in cash, property, securities, by set-off or otherwise) in
respect of the principal of or interest on the subordinated debt securities or
in respect of any redemption, retirement, purchase or other requisition of any
of the subordinated debt securities.
In the event of the acceleration of the maturity of any subordinated debt
securities, the holders of all senior debt securities outstanding at the time of
such acceleration, subject to any security interest, will first be entitled to
receive payment in full of all amounts due on the senior debt securities before
the holders of the subordinated debt securities will be entitled to receive any
payment of principal (and premium, if any) or interest on the subordinated debt
securities.
If any of the following events occurs, we will pay in full all Senior
Indebtedness before we make any payment or distribution under the subordinated
debt securities, whether in cash, securities or other property, to any holder of
subordinated debt securities:
- any dissolution or winding-up or liquidation or reorganization of
Newcastle, whether voluntary or involuntary or in bankruptcy, insolvency
or receivership;
- any general assignment by us for the benefit of creditors; or
- any other marshaling of our assets or liabilities.
In such event, any payment or distribution under the subordinated debt
securities, whether in cash, securities or other property, which would otherwise
(but for the subordination provisions) be payable or deliverable in respect of
the subordinated debt securities, will be paid or delivered directly to the
holders of Senior Indebtedness in accordance with the priorities then existing
among such holders until all Senior Indebtedness has been paid in full. If any
payment or distribution under the subordinated debt securities is received by
the trustee of any subordinated debt securities in contravention of any of the
terms of the Subordinated Indenture and before all the Senior Indebtedness has
been paid in full, such payment or distribution or security will be received in
trust for the benefit of, and paid over or delivered and transferred to, the
holders of the Senior Indebtedness at the time outstanding in accordance with
the priorities then existing among such holders for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
such Senior Indebtedness in full.
The Subordinated Indenture does not limit the issuance of additional Senior
Indebtedness.
21
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
We may not (i) merge with or into or consolidate with another corporation
or sell, assign, transfer, lease or convey all or substantially all of our
properties and assets to, any other corporation other than a direct or indirect
wholly-owned subsidiary of ours, and (ii) no corporation may merge with or into
or consolidate with us or, except for any direct or indirect wholly-owned
subsidiary of ours, sell, assign, transfer, lease or convey all or substantially
all of its properties and assets to us, unless:
- we are the surviving corporation or the corporation formed by or
surviving such merger or consolidation or to which such sale, assignment,
transfer, lease or conveyance has been made, if other than us, has
expressly assumed by supplemental indenture all of our obligations under
the Indentures;
- immediately after giving effect to such transaction, no default or Event
of Default has occurred and is continuing; and
- we deliver to the trustee an officers' certificate and an opinion of
counsel, each stating that the supplemental indenture complies with the
applicable Indenture.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless an accompanying prospectus supplement states otherwise, the
following shall constitute "Events of Default" under the Indentures with respect
to each series of debt securities:
- our failure to pay any interest on any debt security of such series when
due and payable, continued for 30 days;
- our failure to pay principal (or premium, if any) on any debt security of
such series when due, regardless of whether such payment became due
because of maturity, redemption, acceleration or otherwise, or is
required by any sinking fund established with respect to such series;
- our failure to observe or perform any other of its covenants or
agreements with respect to such debt securities for 60 days after we
receive notice of such failure;
- certain events of bankruptcy, insolvency or reorganization of Newcastle;
and
- any other Event of Default provided with respect to Securities of that
series.
If an Event of Default with respect to any debt securities of any series
outstanding under either of the Indentures shall occur and be continuing, the
trustee under such Indenture or the holders of at least 25% in aggregate
principal amount of the debt securities of that series outstanding may declare,
by notice as provided in the applicable Indenture, the principal amount (or such
lesser amount as may be provided for in the debt securities of that series) of
all the debt securities of that series outstanding to be due and payable
immediately; provided that, in the case of an Event of Default involving certain
events in bankruptcy, insolvency or reorganization, acceleration is automatic;
and, provided further, that after such acceleration, but before a judgment or
decree based on acceleration, the holders of a majority in aggregate principal
amount of the outstanding debt securities of that series may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived.
Upon the acceleration of the maturity of original issue discount securities, an
amount less than the principal amount thereof will become due and payable.
Reference is made to the prospectus supplement relating to any original issue
discount securities for the particular provisions relating to acceleration of
maturity thereof.
Any past default under either Indenture with respect to debt securities of
any series, and any Event of Default arising therefrom, may be waived by the
holders of a majority in principal amount of all debt securities of such series
outstanding under such Indenture, except in the case of (i) default in the
payment of the principal of (or premium, if any) or interest on any debt
securities of such series or (ii) default in respect of a covenant or provision
which may not be amended or modified without the consent of the holder of each
outstanding debt security of such series affected.
22
The trustee is required within 90 days after the occurrence of a default
(which is known to the trustee and is continuing), with respect to the debt
securities of any series (without regard to any grace period or notice
requirements), to give to the holders of the debt securities of such series
notice of such default.
The trustee, subject to its duties during default to act with the required
standard of care, may require indemnification by the holders of the debt
securities of any series with respect to which a default has occurred before
proceeding to exercise any right or power under the Indentures at the request of
the holders of the debt securities of such series. Subject to such right of
indemnification and to certain other limitations, the holders of a majority in
principal amount of the outstanding debt securities of any series under either
Indenture may direct the time, method and place of conducting any proceeding for
any remedy available to the trustee, or exercising any trust or power conferred
on the trustee with respect to the debt securities of such series, provided that
such direction shall not be in conflict with any rule of law or with the
applicable Indenture and the Trustee may take any other action deemed proper by
the Trustee which is not inconsistent with such direction.
No holder of a debt security of any series may institute any action against
us under either of the Indentures (except actions for payment of overdue
principal of (and premium, if any) or interest on such debt security or for the
conversion or exchange of such debt security in accordance with its terms)
unless (i) the holder has given to the trustee written notice of an Event of
Default and of the continuance thereof with respect to the debt securities of
such series specifying an Event of Default, as required under the applicable
Indenture, (ii) the holders of at least 25% in aggregate principal amount of the
debt securities of that series then outstanding under such Indenture shall have
requested the trustee to institute such action and offered to the trustee
indemnity reasonably satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request; (iii) the trustee
shall not have instituted such action within 60 days of such request and (iv) no
direction inconsistent with such written request has been given to the Trustee
during such 60-day period by the holders of a majority in principal amount of
the debt securities of that series.
We are required to furnish annually to the trustee statements as to our
compliance with all conditions and covenants under each Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
We may discharge or defease our obligations under the Indenture as set
forth below, unless otherwise indicated in the applicable prospectus supplement.
We may discharge certain obligations to holders of any series of debt
securities issued under either the Senior Indenture or the Subordinated
Indenture which have not already been delivered to the trustee for cancellation
and which have either become due and payable or are by their terms due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the trustee money in an amount sufficient to pay and
discharge the entire indebtedness on such debt securities not previously
delivered to the Trustee for cancellation, for principal and any premium and
interest to the date of such deposit (in the case of debt securities which have
become due and payable) or to the stated maturity or redemption date, as the
case may be and we have paid all other sums payable under the applicable
indenture.
If indicated in the applicable prospectus supplement, we may elect either
(i) to defease and be discharged from any and all obligations with respect to
the debt securities of or within any series (except as otherwise provided in the
relevant Indenture) ("defeasance") or (ii) to be released from our obligations
with respect to certain covenants applicable to the debt securities of or within
any series ("covenant defeasance"), upon the deposit with the relevant Indenture
trustee, in trust for such purpose, of money and/or government obligations which
through the payment of principal and interest in accordance with their terms
will provide money in an amount sufficient to pay the principal of (and premium,
if any) or interest on such debt securities to maturity or redemption, as the
case may be, and any mandatory sinking fund or analogous payments thereon. As a
condition to defeasance or covenant defeasance, we must deliver to the trustee
an opinion of counsel to the effect that the holders of such debt securities
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance or covenant defeasance and will be subject to federal
income tax on the same amounts and in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred. Such opinion of counsel, in the case of defeasance under clause (i)
above, must refer to and be
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based upon a ruling of the Internal Revenue Service or a change in applicable
federal income tax law occurring after the date of the relevant Indenture. In
addition, in the case of either defeasance or covenant defeasance, we shall have
delivered to the trustee (i) an officers' certificate to the effect that the
relevant debt securities exchange(s) have informed us that neither such debt
securities nor any other debt securities of the same series, if then listed on
any securities exchange, will be delisted as a result of such deposit and (ii)
an officers' certificate and an opinion of counsel, each stating that all
conditions precedent with respect to such defeasance or covenant defeasance have
been complied with.
We may exercise our defeasance option with respect to such debt securities
notwithstanding our prior exercise of our covenant defeasance option.
MODIFICATION AND WAIVER
Under the Indentures, we and the applicable trustee may supplement the
Indentures for certain purposes which would not materially adversely affect the
interests or rights of the holders of debt securities of a series without the
consent of those holders. We and the applicable trustee may also modify the
Indentures or any supplemental indenture in a manner that affects the interests
or rights of the holders of debt securities with the consent of the holders of
at least a majority in aggregate principal amount of the outstanding debt
securities of each affected series issued under the Indenture. However, the
Indentures require the consent of each holder of debt securities that would be
affected by any modification which would:
- change the fixed maturity of any debt securities of any series, or reduce
the principal amount thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce any premium payable upon the
redemption thereof;
- reduce the amount of principal of an original issue discount debt
security or any other debt security payable upon acceleration of the
maturity thereof;
- change the currency in which any debt security or any premium or interest
is payable;
- impair the right to enforce any payment on or with respect to any debt
security;
- reduce the percentage in principal amount of outstanding debt securities
of any series, the consent of whose holders is required for modification
or amendment of the Indentures or for waiver of compliance with certain
provisions of the Indentures or for waiver of certain defaults; or
- modify any of the above provisions.
The Indentures permit the holders of at least a majority in aggregate
principal amount of the outstanding debt securities of any series issued under
the Indenture which is affected by the modification or amendment to waive our
compliance with certain covenants contained in the Indentures.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable prospectus supplement, payment
of interest on a debt security on any interest payment date will be made to the
person in whose name a debt security is registered at the close of business on
the record date for the interest.
Unless otherwise indicated in the applicable prospectus supplement,
principal, interest and premium on the debt securities of a particular series
will be payable at the office of such paying agent or paying agents as we may
designate for such purpose from time to time. Notwithstanding the foregoing, at
our option, payment of any interest may be made by check mailed to the address
of the person entitled thereto as such address appears in the security register.
Unless otherwise indicated in the applicable prospectus supplement, a
paying agent designated by us will act as paying agent for payments with respect
to debt securities of each series. All paying agents initially designated by us
for the debt securities of a particular series will be named in the applicable
prospectus supplement. We may at any time designate additional paying agents or
rescind the designation of any paying agent or approve a change
24
in the office through which any paying agent acts, except that we will be
required to maintain a paying agent in each place of payment for the debt
securities of a particular series.
All moneys paid by us to a paying agent for the payment of the principal,
interest or premium on any debt security which remain unclaimed at the end of
two years after such principal, interest or premium has become due and payable
will be repaid to us upon request, and the holder of such debt security
thereafter may look only to us for payment thereof.
DENOMINATIONS, REGISTRATIONS AND TRANSFER
Unless an accompanying prospectus supplement states otherwise, debt
securities will be represented by one or more global certificates registered in
the name of a nominee for The Depository Trust Company, or DTC. In such case,
each holder's beneficial interest in the global securities will be shown on the
records of DTC and transfers of beneficial interests will only be effected
through DTC's records.
A holder of debt securities may only exchange a beneficial interest in a
global security for certificated securities registered in the holder's name if:
- DTC notifies us that it is unwilling or unable to continue serving as the
depositary for the relevant global securities or DTC ceases to maintain
certain qualifications under the Securities Exchange Act of 1934 and no
successor depositary has been appointed for 90 days; or
- we determine, in our sole discretion, that the global security shall be
exchangeable.
If debt securities are issued in certificated form, they will only be
issued in the minimum denomination specified in the accompanying prospectus
supplement and integral multiples of such denomination. Transfers and exchanges
of such debt securities will only be permitted in such minimum denomination.
Transfers of debt securities in certificated form may be registered at the
trustee's corporate office or at the offices of any paying agent or trustee
appointed by us under the Indentures. Exchanges of debt securities for an equal
aggregate principal amount of debt securities in different denominations may
also be made at such locations.
GOVERNING LAW
The Indentures and debt securities will be governed by, and construed in
accordance with, the internal laws of the State of New York, without regard to
its principles of conflicts of laws.
TRUSTEE
The trustee under the Indentures will be named in any applicable prospectus
supplement.
CONVERSION OR EXCHANGE RIGHTS
The prospectus supplement will describe the terms, if any, on which a
series of debt securities may be convertible into or exchangeable for our common
stock, preferred stock or other debt securities. These terms will include
provisions as to whether conversion or exchange is mandatory, at the option of
the holder or at our option. These provisions may allow or require the number of
shares of our common stock or other securities to be received by the holders of
such series of debt securities to be adjusted.
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DESCRIPTION OF CAPITAL STOCK
The following description of the terms of our stock is only a summary. For
a complete description, we refer you to the Maryland General Corporation Law,
our Articles of Amendment and Restatement, as supplemented through the date
hereof (referred to herein as our charter), and our bylaws. We have incorporated
by reference our charter and bylaws as exhibits to the registration statement of
which this prospectus is a part. The following description discusses the general
terms of the common stock and preferred stock that we may issue.
The prospectus supplement relating to a particular series of preferred
stock will describe certain other terms of such series of preferred stock. If so
indicated in the prospectus supplement relating to a particular series of
preferred stock, the terms of any such series of preferred stock may differ from
the terms set forth below. The description of preferred stock set forth below
and the description of the terms of a particular series of preferred stock set
forth in the applicable prospectus supplement are not complete and are qualified
in their entirety by reference to our charter, particularly to the articles
supplementary relating to that series of preferred stock.
GENERAL
Under our charter we are authorized to issue up to 500,000,000 shares of
common stock, $.01 par value per share, and up to 100,000,000 shares of
preferred stock, $.01 par value per share. As of the date of this prospectus,
28,090,057 shares of common stock were issued and outstanding, and 2,875,000
shares have been classified and designated as 9.75% Series B Cumulative
Redeemable Preferred Stock, of which 2,500,000 shares were outstanding. As of
the date of this prospectus, there are currently no other classes or series of
preferred stock authorized, except the Series A Junior Participating Preferred
Stock. See "Description of Capital Stock -- Stockholder Rights Plan." Under
Maryland law, our stockholders generally are not liable for our debts or
obligations.
COMMON STOCK
All outstanding shares of our common stock are duly authorized, fully paid
and nonassessable. Holders of our common stock are entitled to receive dividends
when authorized by our board of directors out of assets legally available for
the payment of dividends. They are also entitled to share ratably in our assets
legally available for distribution to our stockholders in the event of our
liquidation, dissolution or winding up, after payment of or adequate provision
for all of our known debts and liabilities. These rights are subject to the
preferential rights of any other class or series of our stock and to the
provisions of our charter regarding restrictions on transfer of our stock.
Subject to our charter restrictions on transfer of our stock, each
outstanding share of common stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors. Except
as provided with respect to any other class or series of stock, the holders of
our common stock will possess the exclusive voting power. There is no cumulative
voting in the election of directors, and directors are elected by a plurality of
votes cast.
Holders of our common stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any of our securities. Subject to our charter restrictions on
transfer of stock, all shares of common stock will have equal dividend,
liquidation and other rights.
Under Maryland law, a Maryland corporation generally cannot dissolve, amend
its charter, merge, sell all or substantially all of its assets, engage in a
share exchange or engage in similar transactions outside the ordinary course of
business, unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter. However, a
Maryland corporation may provide in its charter for approval of these matters by
a lesser percentage, but not less than a majority of all of the votes entitled
to be cast on the matter. Our charter provides that these matters may be
approved by a majority of all of the votes entitled to be cast on the matter.
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PREFERRED STOCK
Our board of directors may authorize the issuance of preferred stock in one
or more series and may determine, with respect to any such series, the powers,
preferences and rights of such series, and its qualifications, limitations and
restrictions, including, without limitation:
- the number of shares to constitute such series and the designations
thereof;
- the voting power, if any, of holders of shares of such series and, if
voting power is limited, the circumstances under which such holders may
be entitled to vote; provided, however, that the board of directors shall
not create any series of preferred stock with more than one vote per
share;
- the rate of dividends, if any, and the extent of further participation in
dividend distributions, if any, and whether dividends shall be cumulative
or non-cumulative;
- whether or not such series shall be redeemable, and, if so, the terms and
conditions upon which shares of such series shall be redeemable;
- the extent, if any, to which such series shall have the benefit of any
sinking fund provision for the redemption or purchase of shares;
- the rights, if any, of such series, in the event of the dissolution of
the corporation, or upon any distribution of the assets of the
corporation; and
- whether or not the shares of such series shall be convertible, and, if
so, the terms and conditions upon which shares of such series shall be
convertible.
You should refer to the prospectus supplement relating to the series of
preferred stock being offered for the specific terms of that series, including:
- the title of the series and the number of shares in the series;
- the price at which the preferred stock will be offered;
- the dividend rate or rates or method of calculating the rates, the dates
on which the dividends will be payable, whether or not dividends will be
cumulative or noncumulative and, if cumulative, the dates from which
dividends on the preferred stock being offered will cumulate;
- the voting rights, if any, of the holders of shares of the preferred
stock being offered;
- the provisions for a sinking fund, if any, and the provisions for
redemption, if applicable, of the preferred stock being offered;
- the liquidation preference per share;
- the terms and conditions, if applicable, upon which the preferred stock
being offered will be convertible into our common stock, including the
conversion price, or the manner of calculating the conversion price, and
the conversion period;
- the terms and conditions, if applicable, upon which the preferred stock
being offered will be exchangeable for debt securities, including the
exchange price, or the manner of calculating the exchange price, and the
exchange period;
- any listing of the preferred stock being offered on any securities
exchange;
- whether interests in the shares of the series will be represented by
depositary shares;
- a discussion of any material U.S. federal income tax considerations
applicable to the preferred stock being offered;
- the relative ranking and preferences of the preferred stock being offered
as to dividend rights and rights upon liquidation, dissolution or the
winding up of our affairs;
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- any limitations on the issuance of any class or series of preferred stock
ranking senior or equal to the series of preferred stock being offered as
to dividend rights and rights upon liquidation, dissolution or the
winding up of our affairs; and
- any additional rights, preferences, qualifications, limitations and
restrictions of the series.
Upon issuance, the shares of preferred stock will be fully paid and
nonassessable, which means that its holders will have paid their purchase price
in full and we may not require them to pay additional funds. Holders of
preferred stock will not have any preemptive rights.
PREFERRED STOCK DIVIDEND RIGHTS
Holders of preferred stock will be entitled to receive, when, as and if
declared by the board of directors, dividends in additional shares of preferred
stock or cash dividends at the rates and on the dates set forth in the related
articles supplementary and prospectus supplement. Dividend rates may be fixed or
variable or both. Different series of preferred stock may be entitled to
dividends at different dividend rates or based upon different methods of
determination. Each dividend will be payable to the holders of record as they
appear on our stock books on record dates determined by the board of directors.
Dividends on preferred stock may be cumulative or noncumulative, as specified in
the related articles supplementary and prospectus supplement. If the board of
directors fails to declare a dividend on any preferred stock for which dividends
are noncumulative, then the right to receive that dividend will be lost, and we
will have no obligation to pay the dividend for that dividend period, whether or
not dividends are declared for any future dividend period.
No full dividends will be declared or paid on any preferred stock unless
full dividends for the dividend period commencing after the immediately
preceding dividend payment date and any cumulative dividends still owing have
been or contemporaneously are declared and paid on all other series of preferred
stock which have the same rank as, or rank senior to, that series of preferred
stock. When those dividends are not paid in full, dividends will be declared pro
rata, so that the amount of dividends declared per share on that series of
preferred stock and on each other series of preferred stock having the same rank
as that series of preferred stock will bear the same ratio to each other that
accrued dividends per share on that series of preferred stock and the other
series of preferred stock bear to each other. In addition, generally, unless
full dividends including any cumulative dividends still owing on all outstanding
shares of any series of preferred stock have been paid, no dividends will be
declared or paid on the common stock and generally we may not redeem or purchase
any common stock. No interest will be paid in connection with any dividend
payment or payments which may be in arrears.
Unless otherwise set forth in the related prospectus supplement, the
dividends payable for each dividend period will be computed by annualizing the
applicable dividend rate and dividing by the number of dividend periods in a
year, except that the amount of dividends payable for the initial dividend
period or any period shorter than a full dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months and, for any period
less than a full month, the actual number of days elapsed in the period.
PREFERRED STOCK RIGHTS UPON LIQUIDATION
If we liquidate, dissolve or wind up our affairs, either voluntarily or
involuntarily, the holders of each series of preferred stock will be entitled to
receive liquidating distributions in the amount set forth in the articles
supplementary and prospectus supplement relating to the series of preferred
stock. If the amounts payable with respect to preferred stock of any series and
any stock having the same rank as that series of preferred stock are not paid in
full, the holders of the preferred stock will share ratably in any such
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled. After the holders of each series of preferred stock
having the same rank are paid in full, they will have no right or claim to any
of our remaining assets. Neither the sale of all or substantially all of our
property or business nor a merger or consolidation by us with any other
corporation will be considered a dissolution, liquidation or winding up by us of
our business or affairs.
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PREFERRED STOCK REDEMPTION
Any series of preferred stock may be redeemable in whole or in part at our
option. In addition, any series of preferred stock may be subject to mandatory
redemption pursuant to a sinking fund. The redemption provisions that may apply
to a series of preferred stock, including the redemption dates and the
redemption prices for that series, will be set forth in the related prospectus
supplement.
If a series of preferred stock is subject to mandatory redemption, the
related prospectus supplement will specify the year we can begin to redeem
shares of the preferred stock, the number of shares of the preferred stock we
can redeem each year, and the redemption price per share. We may pay the
redemption price in cash, stock or other securities of our or of third parties,
as specified in the related prospectus supplement. If the redemption price is to
be paid only from the proceeds of the sale of our capital stock, the terms of
the series of preferred stock may also provide that if no capital stock is sold
or if the amount of cash received is insufficient to pay in full the redemption
price then due, the series of preferred stock will automatically be converted
into shares of the applicable capital stock pursuant to conversion provisions
specified in the related prospectus supplement.
If fewer than all the outstanding shares of any series of preferred stock
are to be redeemed, whether by mandatory or optional redemption, the board of
directors will determine the method for selecting the shares to be redeemed,
which may be by lot or pro rata by any other method determined to be equitable.
From and after the redemption date, dividends will cease to accrue on the shares
of preferred stock called for redemption and all rights of the holders of those
shares other than the right to receive the redemption price will cease.
PREFERRED STOCK CONVERSION RIGHTS
The related articles supplementary and prospectus supplement will state any
conversion rights under which shares of preferred stock are convertible into
shares of common stock or another series of preferred stock or other property.
As described under "Redemption" above, under some circumstances preferred stock
may be mandatorily converted into common stock or another series of preferred
stock.
PREFERRED STOCK VOTING RIGHTS
The related articles supplementary and prospectus supplement will state any
voting rights of that series of preferred stock. Unless otherwise indicated in
the related prospectus supplement, if we issue full shares of any series of
preferred stock, each share will be entitled to one vote on matters on which
holders of that series of preferred stock are entitled to vote. Because each
full share of any series of preferred stock will be entitled to one vote, the
voting power of that series will depend on the number of shares in that series,
and not on the aggregate liquidation preference or initial offering price of the
shares of that series of preferred stock.
PERMANENT GLOBAL PREFERRED SECURITIES
A series of preferred stock may be issued in whole or in part in the form
of one or more global securities that will be deposited with a depositary or its
nominee identified in the related prospectus supplement. For most series of
preferred stock, the depositary will be DTC. A global security may not be
transferred except as a whole to the depositary, a nominee of the depositary or
their successors unless it is exchanged in whole or in part for preferred stock
in individually certificated form. Any additional terms of the depositary
arrangement with respect to any series of preferred stock and the rights of and
limitations on owners of beneficial interests in a global security representing
a series of preferred stock may be described in the related prospectus
supplement.
DESCRIPTION OF SERIES B PREFERRED STOCK
Our Board of Directors has adopted articles supplementary to our charter
establishing the number and fixing the terms, designations, powers, preferences,
rights, limitations and restrictions of a series of preferred stock designated
the 9.75% Series B Cumulative Redeemable Preferred Stock. The Series B Preferred
Stock is listed on the New York Stock Exchange.
Ranking. The Series B Preferred Stock, with respect to distribution rights
and the distribution of assets upon our liquidation, dissolution or winding up,
ranks (i) senior to all classes or series of our common stock and
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to all equity securities the terms of which specifically provide that such
equity securities rank junior to the Series B Preferred Stock; (ii) on a parity
with all equity securities issued by us other than those referred to in clauses
(i) and (iii); and (iii) junior to all equity securities issued by us the terms
of which specifically provide that such equity securities rank senior to such
Series B Preferred Stock. The term "equity securities" shall not include
convertible debt securities.
Distributions. Holders of Series B Preferred Stock are entitled to
receive, when and as authorized by our board of directors, out of legally
available funds, cumulative preferential cash distributions at the rate of 9.75%
of the liquidation preference per annum, which is equivalent to $2.4375 per
share of Series B Preferred Stock per year. Distributions on the Series B
Preferred Stock cumulate from the date of original issuance (March 18, 2003) and
are payable quarterly in arrears on the last calendar day of each January,
April, July and October of each year, or, if not a business day, the next
succeeding business day.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of us, holders of Series B Preferred Stock are
entitled to receive out of our assets available for distribution to shareholders
(after payment or provision for all of our debts and other liabilities) a
liquidating distribution in the amount of a liquidation preference of $25.00 per
share, plus any accumulated and unpaid distributions to the date of payment,
whether or not authorized, before any distribution of assets is made to holders
of our common stock and any other shares of our equity securities ranking junior
to the Series B Preferred Stock as to liquidation rights.
Redemption. Except in certain circumstances relating to the preservation
of our status as a REIT for federal income tax purposes, the Series B Preferred
Stock will not be redeemable prior to March 18, 2008. On or after March 18,
2008, we, at our option, upon giving of notice, may redeem the Series B
Preferred Stock, in whole or from time to time in part (unless we are in arrears
on the distributions on the Series B Preferred Stock, in which case we can only
redeem in whole), for cash, at a redemption price of $25.00 per share, plus all
accumulated and unpaid distributions to the date of redemption, whether or not
authorized.
Maturity. The Series B Preferred Stock does not have a stated maturity and
is not subject to any sinking fund or mandatory redemption provisions.
Voting Rights. Holders of Series B Preferred Stock do not have any voting
rights, except that if distributions on the Series B Preferred Stock are in
arrears for six or more quarterly periods, then holders of Series B Preferred
Stock shall be entitled to elect two additional directors. In addition, so long
as any Series B Preferred Stock remains outstanding, subject to limited
exceptions, we will be required to obtain approval of at least two-thirds of the
then-outstanding Series B Preferred Stock in order to (a) authorize, create or
increase the authorized or issued amount of any class or series of equity
securities ranking senior to the Series B Preferred Stock with respect to
certain rights, or create, authorize or issue any obligation or security
convertible into any such senior securities; or (b) amend, alter or repeal our
charter in a way that materially and adversely affects the Series B Preferred
Stock.
Conversion. The Series B Preferred Stock is not convertible into or
exchangeable for our property or securities.
POWER TO RECLASSIFY UNISSUED SHARES OF COMMON AND PREFERRED STOCK
Our charter authorizes our board of directors to classify and reclassify
any unissued shares of our common stock or preferred stock into other classes or
series of stock. Prior to issuance of shares of each class or series, our board
is required by Maryland law and by our charter to set, subject to our charter
restrictions on transfer of stock, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
class or series. Therefore, our board could authorize the issuance of shares of
another class or series of stock with terms and conditions more favorable than
current terms, or which also could have the effect of delaying, deferring or
preventing a transaction or a change in control that might involve a premium
price for holders of our common stock or otherwise be in their best interest.
Our board also could authorize the issuance of additional shares of our 9.75%
Series B Cumulative Redeemable Preferred Stock.
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POWER TO ISSUE ADDITIONAL SHARES OF COMMON AND PREFERRED STOCK
We believe that the power to issue additional shares of common stock or
preferred stock and to classify or reclassify unissued shares of common stock or
preferred stock and thereafter to issue the classified or reclassified shares
provides us with increased flexibility in structuring possible future financings
and acquisitions and in meeting other needs which might arise. These actions can
be taken without stockholder approval, unless stockholder approval is required
by applicable law or the rules of any stock exchange or automated quotation
system on which our securities may be listed or traded. Although we have no
present intention of doing so, we could issue a class or series of stock that
could delay, defer or prevent a transaction or a change in control of us that
might involve a premium price for holders of common stock or otherwise be in
their best interest.
STOCKHOLDER RIGHTS PLAN
Our board of directors has adopted a stockholder rights agreement. The
adoption of the stockholder rights agreement could make it more difficult for a
third party to acquire, or could discourage a third party from acquiring, us or
a large block of our common stock.
Pursuant to the terms of the stockholder rights agreement, our board of
directors declared a dividend distribution of one preferred stock purchase right
for each outstanding share of common stock to stockholders of record at the
close of business on October 16, 2002. In addition, one preferred stock purchase
right will automatically attach to each share of common stock issued between
October 16, 2002 and the distribution date described below. Each preferred stock
purchase right initially entitles the registered holder to purchase from us a
unit consisting of one one-hundredth of a share, each a rights unit, of Series A
Junior Participating Preferred Stock, $0.01 par value per share, the Series A
Preferred Stock, at a purchase price of $70 per rights unit, the purchase price,
subject to adjustment.
Initially, the preferred stock purchase rights are not exercisable and are
attached to and transfer and trade with, the outstanding shares of common stock.
The preferred stock purchase rights will separate from the common stock and will
become exercisable upon the earliest of (i) the close of business on the tenth
business day following the first public announcement that an acquiring person
has acquired beneficial ownership of 15% or more of the aggregate outstanding
shares of common stock, subject to certain exceptions, the date of said
announcement being referred to as the stock acquisition date, or (ii) the close
of business on the tenth business day (or such later date as our board of
directors may determine) following the commencement of a tender offer or
exchange offer that would result upon its consummation in a person or group
becoming an acquiring person, the earlier of such dates being the distribution
date. For these purposes, a person will not be deemed to beneficially own shares
of common stock which may be issued in exchange for rights units. The
stockholder rights agreement contains provisions that are designed to ensure
that the manager and its affiliates will never, alone, be considered a group
that is an acquiring person.
Until the distribution date (or earlier redemption, exchange or expiration
of rights), (a) the rights will be evidenced by the common stock certificates
and will be transferred with and only with such common stock certificates, (b)
new common stock certificates issued after the record date will contain a
notation incorporating the stockholder rights agreement by reference, and (c)
the surrender for transfer of any certificates for common stock outstanding will
also constitute the transfer of the rights associated with common stock
represented by such certificate.
The rights are not exercisable until the distribution date and will expire
ten years after the issuance thereof, on October 16, 2012, unless such date is
extended or the rights are earlier redeemed or exchanged by us as described
below.
As soon as practicable after the distribution date, rights certificates
will be mailed to holders of record of common stock as of the close of business
on the distribution date and, thereafter, the separate rights certificates alone
will represent the rights. Except as otherwise determined by our board of
directors, only shares of common stock issued prior to the distribution date
will be issued with rights.
In the event that a person becomes an acquiring person, except pursuant to
an offer for all outstanding shares of common stock which the independent
directors determine to be fair to, not inadequate and otherwise in our
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best interests and the best interest of our stockholders, after receiving advice
from one or more investment banking firms, a qualified offer, each holder of a
right will thereafter have the right to receive, upon exercise, common stock
(or, in certain circumstances, cash, property or other securities of ours)
having a value equal to two times the exercise price of the right. The exercise
price is the purchase price times the number of rights units associated with
each right.
Notwithstanding any of the foregoing, following the occurrence of the event
set forth in this paragraph, all rights that are, or (under certain
circumstances specified in the rights agreement) were, beneficially owned by any
acquiring person will be null and void. However, rights are not exercisable
following the occurrence of the event set forth above until such time as the
rights are no longer redeemable by us as set forth below.
In the event that, at any time following the stock acquisition date, (i) we
engage in a merger or other business combination transaction in which we are not
the surviving corporation (other than with an entity which acquired the shares
pursuant to a qualified offer), (ii) we engage in a merger or other business
combination transaction in which we are the surviving corporation and our common
stock changed or exchanged, or (iii) 50% or more of our assets, cash flow or
earning power is sold or transferred, each holder of a right (except rights
which have previously been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the right. The events set forth
in this paragraph and in the preceding paragraph are referred to as the
"triggering events."
At any time after a person becomes an acquiring person and prior to the
acquisition by such person or group of fifty percent (50%) or more of the
outstanding common stock, our board may exchange the rights (other than rights
owned by such person or group which have become void), in whole or in part, at
an exchange ratio of one share of common stock, or one one-hundredth of a share
of preferred stock (or of a share of a class or series of our preferred stock
having equivalent rights, preferences and privileges), per right (subject to
adjustment).
We may redeem the rights in whole, but not in part, at a price of $0.01 per
right (payable in cash, common stock or other consideration deemed appropriate
by our board of directors) at any time until the earlier of (i) the close of
business on the tenth business day after the stock acquisition date, or (ii) the
expiration date of the rights agreement. Immediately upon the action of our
board of directors ordering redemption of the rights, the rights will terminate
and thereafter the only right of the holders of rights will be to receive the
redemption price.
The rights agreement may be amended by our board of directors in its sole
discretion at any time prior to the distribution date. After the distribution
date, subject to certain limitations set forth in the rights agreement, our
board of directors may amend the rights agreement only to cure any ambiguity,
defect or inconsistency, to shorten or lengthen any time period, or to make
changes that do not adversely affect the interests of rights holders (excluding
the interests of an acquiring person or its associates or affiliates). The
foregoing notwithstanding, no amendment may be made at such time as the rights
are not redeemable.
Until a right is exercised, the holder thereof, as such, will have no
rights as our stockholder, including, without limitation, the right to vote or
to receive dividends. While the distribution of the rights will not be taxable
to stockholders or to us, stockholders may, depending upon the circumstances,
recognize taxable income in the event that the rights become exercisable for
common stock, other securities of ours, other consideration or for common stock
of an acquiring company or in the event of the redemption of the rights as set
forth above.
A copy of the rights agreement is available from us upon written request.
The foregoing description of the rights does not purport to be complete and is
qualified in its entirety by reference to the rights agreement, which is filed
as an exhibit to the registration statement of which this prospectus is a part.
DIVIDEND REINVESTMENT PLAN
We may implement a dividend reinvestment plan whereby stockholders may
automatically reinvest their dividends in our common stock. Details about any
such plan would be sent to our stockholders following adoption thereof by our
board of directors.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock and our Series B
Preferred Stock is American Stock Transfer & Trust Company, New York, New York.
We will appoint a transfer agent, registrar and dividend disbursement agent for
any new series of preferred stock. The registrar for the preferred stock will
send notices to the holders of the preferred stock of any meeting at which those
holders will have the right to elect directors or to vote on any other matter.
TRANSFER RESTRICTIONS
Our charter contains restrictions on the number of shares of our stock that
a person may own. No person or entity may acquire or hold, directly or
indirectly, (a) shares of our stock representing in excess of 8% of the
aggregate value of the outstanding shares of our stock, treating all classes and
series of our stock as one for this purpose, or (b) shares of our Series B
Preferred Stock representing in excess of 25% of the outstanding shares of our
Series B Preferred Stock, in each case unless they receive an exemption from our
board of directors.
Our charter further prohibits (a) any person or entity from owning shares
of our stock that would result in our being "closely held" under Section 856(h)
of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT
and (b) any person or entity from transferring shares of our stock if the
transfer would result in our stock being owned by fewer than 100 persons. Any
person who acquires or intends to acquire shares of our stock that may violate
any of these restrictions, or who is the intended transferee of shares of our
stock which are transferred to the Trust, as defined below, is required to give
us immediate written notice and provide us with such information as we may
request in order to determine the effect of the transfer on our status as a
REIT. The above restrictions will not apply if our board of directors determines
that it is no longer in our best interests to continue to qualify as a REIT.
Our board of directors may exempt a person from these limits, subject to
such terms, conditions, representations and undertakings as it may determine in
its sole discretion. Our board of directors has granted limited exemptions to
Newcastle Investment Holdings Corp., Fortress Principal Investment Holdings LLC,
our manager, a third party group of funds managed by Wallace R. Weitz & Company,
and certain affiliates of these entities.
Any attempted transfer or ownership of our stock which, if effective, would
result in violation of the above limitations, will cause the number of shares
causing the violation (rounded to the nearest whole share) to be automatically
transferred to a trust ("Trust") for the exclusive benefit of one or more
charitable beneficiaries ("Charitable Beneficiary"), and the proposed holder
will not acquire any rights in the shares. The automatic transfer will be deemed
to be effective as of the close of business on the Business Day (as defined in
our charter) prior to the date of such violation. The shares transferred to the
Trust will generally be selected so as to minimize the aggregate value of shares
transferred to the Trust. Shares of our stock held in the Trust will be issued
and outstanding shares. The proposed holder will not benefit economically from
ownership of any shares of stock held in the Trust, will have no rights to
dividends and no rights to vote or other rights attributable to the shares of
stock held in the Trust. The trustee of the Trust will have all voting rights
and rights to dividends or other distributions with respect to shares held in
the Trust. These rights will be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to our
discovery that shares of stock have been transferred to the Trust will be paid
by the recipient to the Trustee upon demand. Any dividend or other distribution
authorized but unpaid will be paid when due to the Trustee. Any dividend or
distribution paid to the Trustee will be held in trust for the Charitable
Beneficiary. Subject to Maryland law, the Trustee will have the authority (i) to
rescind as void any vote cast by the proposed holder prior to our discovery that
the shares have been transferred to the Trust and (ii) to recast the vote in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary. However, if we have already taken irreversible corporate
action, then the Trustee will not have the authority to rescind and recast the
vote. If necessary to protect our status as a REIT, we may establish additional
Trusts with distinct Trustees and Charitable Beneficiaries to which shares may
be transferred.
Within 20 days of receiving notice from us that shares of our stock have
been transferred to the Trust, the Trustee will sell the shares to a person
designated by the Trustee, whose ownership of the shares will not violate
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the above ownership limitations. Upon the sale, the interest of the Charitable
Beneficiary in the shares sold will terminate and the Trustee will distribute
the net proceeds of the sale to the proposed holder and to the Charitable
Beneficiary as follows. The proposed holder will receive the lesser of (i) the
price paid by the proposed holder for the shares or, if the proposed holder did
not give value for the shares in connection with the event causing the shares to
be held in the Trust (e.g., a gift, devise or other similar transaction), the
Market Price (as defined in our charter) of the shares on the day of the event
causing the shares to be held in the Trust and (ii) the price received by the
Trustee from the sale or other disposition of the shares. Any net sale proceeds
in excess of the amount payable to the proposed holder will be paid immediately
to the Charitable Beneficiary. If, prior to our discovery that shares of our
stock have been transferred to the Trust, the shares are sold by the proposed
holder, then (i) the shares shall be deemed to have been sold on behalf of the
Trust and (ii) to the extent that the proposed holder received an amount for the
shares that exceeds the amount he or she was entitled to receive, the excess
shall be paid to the Trustee upon demand.
In addition, shares of our stock held in the Trust will be deemed to have
been offered for sale to us, or our designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in the
transfer to the Trust (or, in the case of a devise or gift, the Market Price at
the time of the devise or gift) and (ii) the Market Price on the date we, or our
designee, accept the offer. We will have the right to accept the offer until the
Trustee has sold the shares. Upon a sale to us, the interest of the Charitable
Beneficiary in the shares sold will terminate and the Trustee will distribute
the net proceeds of the sale to the proposed holder.
If an investor acquires an amount of stock that exceeds 8% of the number of
shares of a particular class, but is less than 8% of the aggregate value of our
stock of all classes, subsequent fluctuations in the relative values of our
different classes of stock could cause the investor's ownership to exceed the 8%
ownership limitation, with the consequences described above.
Our charter further provides that, prior to the date shares of our common
and preferred stock qualify as a class of "publicly offered securities" (within
the meaning of Department of Labor Regulation Section 2510.3-101(a)(2)) or
another exception to the "look-through" rule under such regulation applies, (a)
no benefit plan investor may acquire shares of our stock without our prior
written consent; and (b) any transfers to plan investors that would increase the
aggregate plan investors' ownership of any class of shares of our stock to 25%
or more of the value of any such class will be void ab initio. If any transfer
of shares of our stock to plan investors occurs which, if effective, would
result in plan investors beneficially or constructively owning, in the
aggregate, shares of any class of our stock in excess or in violation of the
above transfer or ownership limitations, then that number of shares of our
stock, the beneficial or constructive ownership of which otherwise would cause
such plan investors to violate such limitations, shall be automatically
transferred to the Trust (as defined above) to be held, subject to certain
adjustments, in accordance with the provisions detailed above.
All certificates representing shares of our stock will bear a legend
referring to the restrictions described above.
Every record owner of more than a specified percentage of our stock as
required by the Internal Revenue Code or the regulations promulgated thereunder
(which may be as low as 0.5% depending upon the number of stockholders of record
of our stock), within 30 days after the end of each taxable year, is required to
give us written notice, stating his name and address, the number of shares of
each class and series of our stock which he or she beneficially owns and a
description of the manner in which the shares are held. Each such owner shall
provide us with such additional information as we may request in order to
determine the effect, if any, of his beneficial ownership on our status as a
REIT and to ensure compliance with the ownership limits. In addition, each
stockholder shall, upon demand, be required to provide us with such information
as we may request in good faith in order to determine our status as a REIT, and
to comply with the requirements of any taxing authority or governmental
authority, or to determine such compliance.
These ownership limits could delay, defer or prevent a transaction, or a
change in control, that might involve a premium price for our stock or otherwise
be in the best interest of the stockholders.
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DESCRIPTION OF DEPOSITARY SHARES
We may issue depositary receipts representing interests in shares of
particular series of preferred stock which are called depositary shares. We will
deposit the preferred stock of a series which is the subject of depositary
shares with a depositary, which will hold that preferred stock for the benefit
of the holders of the depositary shares, in accordance with a deposit agreement
between the depositary and us. The holders of depositary shares will be entitled
to all the rights and preferences of the preferred stock to which the depositary
shares relate, including dividend, voting, conversion, redemption and
liquidation rights, to the extent of their interests in that preferred stock.
While the deposit agreement relating to a particular series of preferred
stock may have provisions applicable solely to that series of preferred stock,
all deposit agreements relating to preferred stock we issue will include the
following provisions:
DIVIDENDS AND OTHER DISTRIBUTIONS
Each time we pay a cash dividend or make any other type of cash
distribution with regard to preferred stock of a series, the depositary will
distribute to the holder of record of each depositary share relating to that
series of preferred stock an amount equal to the dividend or other distribution
per depositary share the depositary receives. If there is a distribution of
property other than cash, the depositary either will distribute the property to
the holders of depositary shares in proportion to the depositary shares held by
each of them, or the depositary will, if we approve, sell the property and
distribute the net proceeds to the holders of the depositary shares in
proportion to the depositary shares held by them.
WITHDRAWAL OF PREFERRED STOCK
A holder of depositary shares will be entitled to receive, upon surrender
of depositary receipts representing depositary shares, the number of whole or
fractional shares of the applicable series of preferred stock, and any money or
other property, to which the depositary shares relate.
REDEMPTION OF DEPOSITARY SHARES
Whenever we redeem shares of preferred stock held by a depositary, the
depositary will be required to redeem, on the same redemption date, depositary
shares constituting, in total, the number of shares of preferred stock held by
the depositary which we redeem, subject to the depositary's receiving the
redemption price of those shares of preferred stock. If fewer than all the
depositary shares relating to a series are to be redeemed, the depositary shares
to be redeemed will be selected by lot or by another method we determine to be
equitable.
VOTING
Any time we send a notice of meeting or other materials relating to a
meeting to the holders of a series of preferred stock to which depositary shares
relate, we will provide the depositary with sufficient copies of those materials
so they can be sent to all holders of record of the applicable depositary
shares, and the depositary will send those materials to the holders of record of
the depositary shares on the record date for the meeting. The depositary will
solicit voting instructions from holders of depositary shares and will vote or
not vote the preferred stock to which the depositary shares relate in accordance
with those instructions.
LIQUIDATION PREFERENCE
Upon our liquidation, dissolution or winding up, the holder of each
depositary share will be entitled to what the holder of the depositary share
would have received if the holder had owned the number of shares (or fraction of
a share) of preferred stock which is represented by the depositary share.
CONVERSION
If shares of a series of preferred stock are convertible into common stock
or other of our securities or property, holders of depositary shares relating to
that series of preferred stock will, if they surrender depositary
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receipts representing depositary shares and appropriate instructions to convert
them, receive the shares of common stock or other securities or property into
which the number of shares (or fractions of shares) of preferred stock to which
the depositary shares relate could at the time be converted.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
We and the depositary may amend a deposit agreement, except that an
amendment which materially and adversely affects the rights of holders of
depositary shares, or would be materially and adversely inconsistent with the
rights granted to the holders of the preferred stock to which they relate, must
be approved by holders of at least two-thirds of the outstanding depositary
shares. No amendment will impair the right of a holder of depositary shares to
surrender the depositary receipts evidencing those depositary shares and receive
the preferred stock to which they relate, except as required to comply with law.
We may terminate a deposit agreement with the consent of holders of a majority
of the depositary shares to which it relates. Upon termination of a deposit
agreement, the depositary will make the whole or fractional shares of preferred
stock to which the depositary shares issued under the deposit agreement relate
available to the holders of those depositary shares. A deposit agreement will
automatically terminate if:
All outstanding depositary shares to which it relates have been redeemed or
converted.
The depositary has made a final distribution to the holders of the
depositary shares issued under the deposit agreement upon our liquidation,
dissolution or winding up.
MISCELLANEOUS
There will be provisions: (1) requiring the depositary to forward to
holders of record of depositary shares any reports or communications from us
which the depositary receives with respect to the preferred stock to which the
depositary shares relate; (2) regarding compensation of the depositary; (3)
regarding resignation of the depositary; (4) limiting our liability and the
liability of the depositary under the deposit agreement (usually to failure to
act in good faith, gross negligence or willful misconduct); and (5) indemnifying
the depositary against certain possible liabilities.
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DESCRIPTION OF WARRANTS
We may issue warrants to purchase debt or equity securities. We may issue
warrants independently or together with any offered securities. The warrants may
be attached to or separate from those offered securities. We will issue the
warrants under warrant agreements to be entered into between us and a bank or
trust company, as warrant agent, all as described in the applicable prospectus
supplement. The warrant agent will act solely as our agent in connection with
the warrants and will not assume any obligation or relationship of agency or
trust for or with any holders or beneficial owners of warrants.
The prospectus supplement relating to any warrants that we may offer will
contain the specific terms of the warrants. These terms may include the
following:
- the title of the warrants;
- the designation, amount and terms of the securities for which the
warrants are exercisable;
- the designation and terms of the other securities, if any, with which the
warrants are to be issued and the number of warrants issued with each
other security;
- the price or prices at which the warrants will be issued;
- the aggregate number of warrants;
- any provisions for adjustment of the number or amount of securities
receivable upon exercise of the warrants or the exercise price of the
warrants;
- the price or prices at which the securities purchasable upon exercise of
the warrants may be purchased;
- if applicable, the date on and after which the warrants and the
securities purchasable upon exercise of the warrants will be separately
transferable;
- if applicable, a discussion of the material U.S. federal income tax
considerations applicable to the exercise of the warrants;
- any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants;
- the date on which the right to exercise the warrants will commence, and
the date on which the right will expire;
- the maximum or minimum number of warrants that may be exercised at any
time; and
- information with respect to book-entry procedures, if any.
EXERCISE OF WARRANTS
Each warrant will entitle the holder of warrants to purchase for cash the
amount of debt or equity securities, at the exercise price stated or
determinable in the prospectus supplement for the warrants. Warrants may be
exercised at any time up to the close of business on the expiration date shown
in the applicable prospectus supplement, unless otherwise specified in such
prospectus supplement. After the close of business on the expiration date,
unexercised warrants will become void. Warrants may be exercised as described in
the applicable prospectus supplement. When the warrant holder makes the payment
and properly completes and signs the warrant certificate at the corporate trust
office of the warrant agent or any other office indicated in the prospectus
supplement, we will, as soon as possible, forward the debt or equity securities
that the warrant holder has purchased. If the warrant holder exercises the
warrant for less than all of the warrants represented by the warrant
certificate, we will issue a new warrant certificate for the remaining warrants.
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IMPORTANT PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The following description of the terms of our stock and of certain
provisions of Maryland law is only a summary. For a complete description, we
refer you to the Maryland General Corporation Law, our charter and our bylaws.
We have filed our charter and bylaws as exhibits to the registration statement
of which this prospectus is a part.
CLASSIFICATION OF OUR BOARD OF DIRECTORS
Our bylaws provide that the number of our directors may be established by
our board of directors but may not be fewer than the minimum required by the
MGCL (which is currently one) nor more than fifteen. Any vacancy will be filled,
at any regular meeting or at any special meeting called for that purpose, by a
majority of the remaining directors, except that a vacancy resulting from an
increase in the number of directors must be filled by a majority of the entire
board of directors.
Pursuant to our charter, the board of directors is divided into three
classes of directors. The current terms of the Class I, Class II and Class III
directors will expire in 2006, 2004 and 2005, respectively. Directors of each
class will be chosen for three-year terms upon the expiration of their current
terms and each year one class of directors will be elected by the stockholders.
We believe that classification of the board of directors will help to assure the
continuity and stability of our business strategies and policies as determined
by the board of directors. Holders of shares of our common stock will have no
right to cumulative voting in the election of directors. At each annual meeting
of stockholders at which a quorum is present, board nominees are elected by a
plurality of votes cast.
The classified board provision could have the effect of making the
replacement of incumbent directors more time-consuming and difficult. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of our board of directors. Thus, the classified
board provision could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may delay, defer or
prevent a tender offer or an attempt to change the control of us, even though
the tender offer or change in control might be in the best interest of our
stockholders.
REMOVAL OF DIRECTORS
Our charter provides that, subject to the rights of any preferred stock, a
director may be removed only for cause (as defined in the charter) and only by
the affirmative vote of at least two-thirds of the votes entitled to be cast in
the election of directors. This provision, when coupled with the provision in
our bylaws authorizing our board of directors to fill vacant directorships,
precludes stockholders from removing incumbent directors except for cause and by
a substantial affirmative vote and filling the vacancies created by the removal
with their own nominees.
BUSINESS COMBINATIONS
Under Maryland law, "business combinations" between a Maryland corporation
and an interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations
include certain mergers, consolidations, share exchanges, or, in circumstances
specified in the statute, an asset transfer or issuance or reclassification of
equity securities or a liquidation or dissolution. An interested stockholder is
defined as:
- any person who beneficially owns 10% or more of the voting power of the
corporation's outstanding shares; or
- an affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner
of 10% or more of the voting power of the then outstanding voting stock
of the corporation.
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A person is not an interested stockholder under the statute if the board of
directors approved in advance the transaction by which he or she otherwise would
have become an interested stockholder. However, in approving a transaction, the
board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
board.
After the five-year prohibition, any business combination between the
Maryland corporation and an interested stockholder generally must be recommended
by the board of directors of the corporation and approved by the affirmative
vote of at least:
- 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation voting together as a single group; and
- two-thirds of the votes entitled to be cast by holders of voting stock of
the corporation other than shares held by the interested stockholder with
whom or with whose affiliate the business combination is to be effected
or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation's
common stockholders receive a minimum price, as defined under Maryland law, for
their shares in the form of cash or other consideration in the same form as
previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including
business combinations that are exempted by the board of directors before the
time that the interested stockholder becomes an interested stockholder. Pursuant
to the statute, our board of directors has exempted any business combinations
(a) between us and Fortress Investment Group LLC or any of its affiliates, (b)
between us and Newcastle Investment Holdings or any of its affiliates and (c)
between us and any interested stockholder, provided that any such business
combination is first approved by our board of directors (including a majority of
our directors who are not affiliates or associates of such interested
stockholder). Consequently, the five-year prohibition and the super-majority
vote requirements will not apply to business combinations between us and any of
them. As a result, such parties may be able to enter into business combinations
with us that may not be in the best interest of our stockholders, without
compliance with the super-majority vote requirements and the other provisions of
the statute.
The business combination statute may discourage others from trying to
acquire control of us and increase the difficulty of consummating any offer.
CONTROL SHARE ACQUISITIONS
Maryland law provides that control shares of a Maryland corporation
acquired in a control share acquisition have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter. Shares owned by the acquiror, by officers of the corporation or by
directors who are employees of the corporation are excluded from shares entitled
to vote on the matter. Control shares are voting shares of stock which, if
aggregated with all other shares of stock owned by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power:
- one-tenth or more but less than one-third,
- one-third or more but less than a majority, or
- a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained stockholder approval. A
control share acquisition means the acquisition of control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share acquisition may
compel the board of directors of the corporation to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. The right to compel the calling of a special meeting is subject
to the satisfaction of certain conditions, including an undertaking to pay the
expenses of the meeting. If no request for a meeting is made, the corporation
may itself present the question at any stockholders meeting.
39
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then
the corporation may redeem for fair value any or all of the control shares,
except those for which voting rights have previously been approved. The right of
the corporation to redeem control shares is subject to certain conditions and
limitations. Fair value is determined, without regard to the absence of voting
rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of the shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of appraisal rights may not be less than the highest
price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
Our bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of shares of our stock. This
provision may be amended or eliminated at any time in the future.
AMENDMENT TO OUR CHARTER
Our charter, including its provisions on classification of our board of
directors and removal of directors, may be amended only by the affirmative vote
of the holders of not less than a majority of all of the votes entitled to be
cast on the matter, except that our board may change our name, or the
designation or par value of our capital stock, without stockholder action.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
Our bylaws provide that with respect to an annual meeting of stockholders,
nominations of persons for election to our board of directors and the proposal
of business to be considered by stockholders may be made only (i) pursuant to
our notice of the meeting, (ii) by our board of directors or (iii) by a
stockholder of record who is entitled to vote at the meeting and who has
complied with the advance notice procedures of our bylaws. With respect to
special meetings of stockholders, only the business specified in our notice of
the meeting may be brought before the meeting. Nominations of persons for
election to our board of directors at a special meeting may be made only (i)
pursuant to our notice of the meeting, (ii) by the board of directors, or (iii)
provided that the board of directors has determined that directors will be
elected at the meeting, by a stockholder of record who is entitled to vote at
the meeting and who has complied with the advance notice provisions of our
bylaws.
Special Stockholder Meetings. Pursuant to our bylaws, stockholders can
request a special meeting only upon written demand of at least a majority of all
votes entitled to be cast at such meeting. This could have the effect of making
it more difficult for stockholders to propose corporate actions to which our
management is opposed.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER
AND BYLAWS
The business combination provisions and, if the applicable provision in our
bylaws is rescinded, the control share acquisition provisions of Maryland law,
the provisions of our charter on classification of our board of directors and
removal of directors, the advance notice provisions of our bylaws and our
special meeting requirements could delay, defer or prevent a transaction or a
change in the control of us that might involve a premium price for holders of
our stock or otherwise be in their best interest.
40
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax consequences
of an investment in stock or other securities of Newcastle. For purposes of this
section under the heading "Federal Income Tax Considerations," references to
"Newcastle," "we," "our" and "us" mean only Newcastle Investment Corp. and not
its subsidiaries, except as otherwise indicated. This summary is based upon the
Internal Revenue Code, the regulations promulgated by the U.S. Treasury
Department, rulings and other administrative pronouncements issued by the IRS,
and judicial decisions, all as currently in effect, and all of which are subject
to differing interpretations or to change, possibly with retroactive effect. No
assurance can be given that the IRS would not assert, or that a court would not
sustain, a position contrary to any of the tax consequences described below. No
advance ruling has been or will be sought from the IRS regarding any matter
discussed in this prospectus. The summary is also based upon the assumption that
the operation of Newcastle and its subsidiaries and affiliated entities will be
in accordance with its applicable organizational documents or partnership
agreement. This summary is for general information only, and does not purport to
discuss all aspects of federal income taxation that may be important to a
particular investor in light of its investment or tax circumstances, or to
investors subject to special tax rules, such as:
- financial institutions;
- insurance companies;
- broker-dealers;
- regulated investment companies;
- holders who receive Newcastle stock through the exercise of employee
stock options or otherwise as compensation;
- persons holding Newcastle stock as part of a "straddle," "hedge,"
"conversion transaction," "synthetic security" or other integrated
investment;
and, except to the extent discussed below:
- tax-exempt organizations; and
- foreign investors.
This summary assumes that investors will hold our stock as capital assets, which
generally means as property held for investment.
THE FEDERAL INCOME TAX TREATMENT OF HOLDERS OF NEWCASTLE STOCK DEPENDS IN
SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX
PROVISIONS OF FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY
MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF HOLDING NEWCASTLE STOCK
TO ANY PARTICULAR STOCKHOLDER WILL DEPEND ON THE STOCKHOLDER'S PARTICULAR TAX
CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE FEDERAL,
STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU IN LIGHT OF
YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES OF ACQUIRING, HOLDING,
EXCHANGING, OR OTHERWISE DISPOSING OF NEWCASTLE STOCK.
TAXATION OF NEWCASTLE
Newcastle elected to be taxed as a REIT, commencing with its initial
taxable year ended December 31, 2002. We believe that we were organized and have
operated in such a manner as to qualify for taxation as a REIT, and intend to
continue to operate in such a manner.
The law firm of Skadden, Arps, Slate, Meagher & Flom LLP has acted as our
tax counsel in connection with our election to be taxed as a REIT. We have
received an opinion of Skadden, Arps, Slate, Meagher & Flom LLP to the effect
that Newcastle was organized in conformity with the requirements for
qualification as a REIT under the Internal Revenue Code, and that its actual
method of operation has enabled, and its proposed method of operation will
enable, it to meet the requirements for qualification and taxation as a REIT. It
must be emphasized that the opinion of Skadden, Arps, Slate, Meagher & Flom LLP
is based on various assumptions relating to the
41
organization and operation of Newcastle, and is conditioned upon representations
and covenants made by the management of Newcastle regarding its organization,
assets and the past, present and future conduct of its business operations.
While Newcastle intends to operate so that it will qualify as a REIT, given the
highly complex nature of the rules governing REITs, the ongoing importance of
factual determinations, and the possibility of future changes in the
circumstances of Newcastle, no assurance can be given by Skadden, Arps, Slate,
Meagher & Flom LLP or Newcastle that Newcastle will so qualify for any
particular year. The opinion of Skadden, Arps, Slate, Meagher & Flom LLP also
relies on various legal opinions issued by other counsel for Newcastle and its
predecessors, including Sidley Austin Brown & Wood LLP and Thacher Proffitt &
Wood, with respect to certain issues and transactions. The opinions, copies of
which are filed as an exhibit to the registration statement of which this
prospectus is a part, are expressed as of the date issued, and do not cover
subsequent periods. Counsel will have no obligation to advise Newcastle or the
holders of Newcastle stock of any subsequent change in the matters stated,
represented or assumed, or of any subsequent change in the applicable law. You
should be aware that opinions of counsel are not binding on the IRS, and no
assurance can be given that the IRS will not challenge the conclusions set forth
in such opinions.
Qualification and taxation as a REIT depends on the ability of Newcastle to
meet on a continuing basis, through actual operating results, distribution
levels, and diversity of stock ownership, various qualification requirements
imposed upon REITs by the Internal Revenue Code, the compliance with which will
not be reviewed by Skadden, Arps, Slate, Meagher & Flom LLP. In addition,
Newcastle's ability to qualify as a REIT depends in part upon the operating
results, organizational structure and entity classification for federal income
tax purposes of certain affiliated entities, the status of which may not have
been reviewed by Skadden, Arps, Slate, Meagher & Flom LLP. Newcastle's ability
to qualify as a REIT also requires that it satisfies certain asset tests, some
of which depend upon the fair market values of assets directly or indirectly
owned by Newcastle. Such values may not be susceptible to a precise
determination. Accordingly, no assurance can be given that the actual results of
Newcastle's operations for any taxable year satisfy such requirements for
qualification and taxation as a REIT.
TAXATION OF REITS IN GENERAL
As indicated above, qualification and taxation as a REIT depends upon the
ability of Newcastle to meet, on a continuing basis, various qualification
requirements imposed upon REITs by the Internal Revenue Code. The material
qualification requirements are summarized below under "-- Requirements for
Qualification -- General." While Newcastle intends to operate so that it
qualifies as a REIT, no assurance can be given that the IRS will not challenge
its qualification, or that it will be able to operate in accordance with the
REIT requirements in the future. See "-- Failure to Qualify."
Provided that Newcastle qualifies as a REIT, it will generally be entitled
to a deduction for dividends that it pays and therefore will not be subject to
federal corporate income tax on its net income that is currently distributed to
its stockholders. This treatment substantially eliminates the "double taxation"
at the corporate and stockholder levels that generally results from investment
in a corporation. Rather, income generated by a REIT generally is taxed only at
the stockholder level upon a distribution of dividends by the REIT.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Act"),
recently enacted by Congress and signed by President Bush, reduces the rate at
which individual stockholders are taxed on corporate dividends from a maximum of
38.6% (as ordinary income) to a maximum of 15% (the same as long-term capital
gains) for the 2003 through 2008 tax years. With limited exceptions, however,
dividends received by stockholders from Newcastle or from other entities that
are taxed as REITs are generally not eligible for the reduced rates, and will
continue to be taxed at rates applicable to ordinary income, which, pursuant to
the 2003 Act, will be as high as 35% through 2010. See "Taxation of
Stockholders -- Taxation of Taxable Domestic Stockholders -- Distributions."
Net operating losses, foreign tax credits and other tax attributes of a
REIT generally do not pass through to the stockholders of the REIT, subject to
special rules for certain items such as capital gains recognized by REITs. See
"Taxation of Stockholders."
42
If Newcastle qualifies as a REIT, it will nonetheless be subject to federal
tax in the following circumstances:
- Newcastle will be taxed at regular corporate rates on any undistributed
income, including undistributed net capital gains.
- Newcastle may be subject to the "alternative minimum tax" on its items of
tax preference, including any deductions of net operating losses.
- If Newcastle has net income from prohibited transactions, which are, in
general, sales or other dispositions of property held primarily for sale
to customers in the ordinary course of business, other than foreclosure
property, such income will be subject to a 100% tax. See "-- Prohibited
Transactions", and "-- Foreclosure Property", below.
- If Newcastle elects to treat property that it acquires in connection with
a foreclosure of a mortgage loan or certain leasehold terminations as
"foreclosure property", it may thereby avoid the 100% tax on gain from a
resale of that property (if the sale would otherwise constitute a
prohibited transaction), but the income from the sale or operation of the
property may be subject to corporate income tax at the highest applicable
rate (currently 35%).
- If Newcastle should fail to satisfy the 75% gross income test or the 95%
gross income test, as discussed below, but nonetheless maintains its
qualification as a REIT because other requirements are met, it will be
subject to a 100% tax on an amount based on the magnitude of the failure
adjusted to reflect the profit margin associated with Newcastle's gross
income.
- If Newcastle should fail to distribute during each calendar year at least
the sum of (a) 85% of its REIT ordinary income for such year, (b) 95% of
its REIT capital gain net income for such year, and (c) any undistributed
taxable income from prior periods, Newcastle would be subject to a 4%
excise tax on the excess of the required distribution over the sum of (i)
the amounts actually distributed, plus (ii) retained amounts on which
income tax is paid at the corporate level.
- Newcastle may be required to pay monetary penalties to the IRS in certain
circumstances, including if it fails to meet record keeping requirements
intended to monitor its compliance with rules relating to the composition
of a REIT's stockholders, as described below in "-- Requirements for
Qualification -- General."
- A 100% tax may be imposed on some items of income and expense that are
directly or constructively paid between a REIT and a taxable REIT
subsidiary (as described below) if and to the extent that the IRS
successfully adjusts the reported amounts of these items.
- If Newcastle acquires appreciated assets from a corporation that is not a
REIT (i.e., a corporation taxable under subchapter C of the Internal
Revenue Code) in a transaction in which the adjusted tax basis of the
assets in the hands of Newcastle is determined by reference to the
adjusted tax basis of the assets in the hands of the subchapter C
corporation, Newcastle may be subject to tax on such appreciation at the
highest corporate income tax rate then applicable if it subsequently
recognizes gain on a disposition of any such assets during the ten-year
period following their acquisition from the subchapter C corporation.
- The earnings of Newcastle's subsidiaries could be subject to federal
corporate income tax to the extent that such subsidiaries are subchapter
C corporations.
In addition, Newcastle and its subsidiaries may be subject to a variety of
taxes, including payroll taxes and state, local, and foreign income, property
and other taxes on their assets and operations. Newcastle could also be subject
to tax in situations and on transactions not presently contemplated.
43
REQUIREMENTS FOR QUALIFICATION -- GENERAL
The Internal Revenue Code defines a REIT as a corporation, trust or
association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares,
or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation but for the special
Internal Revenue Code provisions applicable to REITs;
(4) that is neither a financial institution nor an insurance company
subject to specific provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) in which, during the last half of each taxable year, not more than 50%
in value of the outstanding stock is owned, directly or indirectly, by
five or fewer "individuals" (as defined in the Internal Revenue Code to
include specified tax-exempt entities); and
(7) which meets other tests described below, including with respect to the
nature of its income and assets.
The Internal Revenue Code provides that conditions (1) through (4) must be
met during the entire taxable year, and that condition (5) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a shorter taxable year. Newcastle's charter provides restrictions regarding
transfers of its shares, which are intended to assist Newcastle in satisfying
the share ownership requirements described in conditions (5) and (6) above.
To monitor compliance with the share ownership requirements, Newcastle is
generally required to maintain records regarding the actual ownership of its
shares. To do so, Newcastle must demand written statements each year from the
record holders of significant percentages of its stock in which the record
holders are to disclose the actual owners of the shares, i.e., the persons
required to include in gross income the dividends paid by Newcastle. A list of
those persons failing or refusing to comply with this demand must be maintained
as part of the records of Newcastle. Failure by Newcastle to comply with these
record keeping requirements could subject it to monetary penalties. A
stockholder that fails or refuses to comply with the demand is required by
Treasury regulations to submit a statement with its tax return disclosing the
actual ownership of the shares and other information.
In addition, a corporation generally may not elect to become a REIT unless
its taxable year is the calendar year. Newcastle satisfies this requirement.
EFFECT OF SUBSIDIARY ENTITIES
Ownership of Partnership Interests. In the case of a REIT that is a
partner in a partnership, Treasury regulations provide that the REIT is deemed
to own its proportionate share of the partnership's assets, and to earn its
proportionate share of the partnership's income, for purposes of the asset and
gross income tests applicable to REITs as described below. In addition, the
assets and gross income of the partnership are deemed to retain the same
character in the hands of the REIT. Thus, Newcastle's proportionate share of the
assets and items of income of its subsidiary partnerships are treated as assets
and items of income of Newcastle for purposes of applying the REIT requirements
described below. A summary of certain rules governing the federal income
taxation of partnerships and their partners is provided below in "Tax Aspects of
Investments in Affiliated Entities -- Partnerships."
Disregarded Subsidiaries. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary", that subsidiary is disregarded for federal income
tax purposes, and all assets, liabilities and items of income, deduction and
credit of the subsidiary are treated as assets, liabilities and items of income,
deduction and credit of the REIT itself, including for purposes of the gross
income and asset tests applicable to REITs as summarized below. A qualified REIT
subsidiary is any corporation, other than a "taxable REIT subsidiary" as
described
44
below, that is wholly-owned by a REIT, or by other disregarded subsidiaries, or
by a combination of the two. Newcastle has several qualified REIT subsidiaries.
Other entities that are wholly-owned by a REIT, including single member limited
liability companies, are also generally disregarded as a separate entities for
federal income tax purposes, including for purposes of the REIT income and asset
tests. Disregarded subsidiaries, along with partnerships in which Newcastle
holds an equity interest, are sometimes referred to herein as "pass-through
subsidiaries."
In the event that a disregarded subsidiary of Newcastle ceases to be
wholly-owned -- for example, if any equity interest in the subsidiary is
acquired by a person other than Newcastle or another disregarded subsidiary of
Newcastle -- the subsidiary's separate existence would no longer be disregarded
for federal income tax purposes. Instead, it would have multiple owners and
would be treated as either a partnership or a taxable corporation. Such an event
could, depending on the circumstances, adversely affect Newcastle's ability to
satisfy the various asset and gross income requirements applicable to REITs,
including the requirement that REITs generally may not own, directly or
indirectly, more than 10% of the securities of another corporation. See "--
Asset Tests" and "-- Income Tests."
Taxable Subsidiaries. A REIT, in general, may jointly elect with
subsidiary corporations, whether or not wholly-owned, to treat the subsidiary
corporation as a taxable REIT subsidiary ("TRS"). The separate existence of a
TRS or other taxable corporation, unlike a disregarded subsidiary as discussed
above, is not ignored for federal income tax purposes. Accordingly, such an
entity would generally be subject to corporate income tax on its earnings, which
may reduce the cash flow generated by Newcastle and its subsidiaries in the
aggregate, and Newcastle's ability to make distributions to its stockholders.
A parent REIT is not treated as holding the assets of a taxable subsidiary
corporation or as receiving any income that the subsidiary earns. Rather, the
stock issued by the subsidiary is an asset in the hands of the parent REIT, and
the REIT recognizes as income, the dividends, if any, that it receives from the
subsidiary. This treatment can affect the income and asset test calculations
that apply to the REIT, as described below. Because a parent REIT does not
include the assets and income of such subsidiary corporations in determining the
parent's compliance with the REIT requirements, such entities may be used by the
parent REIT to indirectly undertake activities that the REIT rules might
otherwise preclude it from doing directly or through pass-through subsidiaries
(for example, activities that give rise to certain categories of income such as
management fees or foreign currency gains).
INCOME TESTS
In order to maintain qualification as a REIT, Newcastle annually must
satisfy two gross income requirements. First, at least 75% of Newcastle's gross
income for each taxable year, excluding gross income from sales of inventory or
dealer property in "prohibited transactions", must be derived from investments
relating to real property or mortgages on real property, including "rents from
real property," dividends received from other REITs, interest income derived
from mortgage loans secured by real property (including certain types of
mortgage backed securities), and gains from the sale of real estate assets, as
well as income from some kinds of temporary investments. Second, at least 95% of
Newcastle's gross income in each taxable year, excluding gross income from
prohibited transactions, must be derived from some combination of such income
from investments in real property (i.e., income that qualifies under the 75%
income test described above), as well as other dividends, interest, and gain
from the sale or disposition of stock or securities, which need not have any
relation to real property.
Rents received by Newcastle will qualify as "rents from real property" in
satisfying the gross income requirements described above, only if several
conditions are met, including the following. If rent is partly attributable to
personal property leased in connection with a lease of real property, the
portion of the total rent that is attributable to the personal property will not
qualify as "rents from real property" unless it constitutes 15% or less of the
total rent received under the lease. Moreover, for rents received to qualify as
"rents from real property," the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an "independent contractor" from which the REIT derives no revenue.
Newcastle and its affiliates are permitted, however, to perform services that
are "usually or customarily
45
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered rendered to the occupant of the property. In addition,
Newcastle and its affiliates may directly or indirectly provide non-customary
services to tenants of its properties without disqualifying all of the rent from
the property if the payment for such services does not exceed 1% of the total
gross income from the property. For purposes of this test, the income received
from such non-customary services is deemed to be at least 150% of the direct
cost of providing the services. Moreover, Newcastle is generally permitted to
provide services to tenants or others through a TRS without disqualifying the
rental income received from tenants for purposes of the REIT income
requirements. Also, rental income will qualify as rents from real property only
to the extent that Newcastle does not directly or constructively hold a 10% or
greater interest, as measured by vote or value, in the lessee's equity.
Interest income constitutes qualifying mortgage interest for purposes of
the 75% income test (as described above) to the extent that the obligation is
secured by a mortgage on real property. If Newcastle receives interest income
with respect to a mortgage loan that is secured by both real property and other
property, and the highest principal amount of the loan outstanding during a
taxable year exceeds the fair market value of the real property on the date that
Newcastle acquired or originated the mortgage loan, the interest income will be
apportioned between the real property and the other collateral, and Newcastle's
income from the arrangement will qualify for purposes of the 75% income test
only to the extent that the interest is allocable to the real property. Even if
a loan is not secured by real property, or is undersecured, the income that it
generates may nonetheless qualify for purposes of the 95% income test.
To the extent that the terms of a loan provide for contingent interest that
is based on the cash proceeds realized upon the sale of the property securing
the loan (a "shared appreciation provision"), income attributable to the
participation feature will be treated as gain from sale of the underlying
property, which generally will be qualifying income for purposes of both the 75%
and 95% gross income tests.
To the extent that a REIT derives interest income from a mortgage loan or
income from the rental of real property where all or a portion of the amount of
interest or rental income payable is contingent, such income generally will
qualify for purposes of the gross income tests only if it is based upon the
gross receipts or sales, and not the net income or profits, of the borrower or
lessee. This limitation does not apply, however, where the borrower or lessee
leases substantially all of its interest in the property to tenants or
subtenants, to the extent that the rental income derived by the borrower or
lessee, as the case may be, would qualify as rents from real property had it
been earned directly by a REIT.
Newcastle may indirectly receive distributions from TRSs or other
corporations that are not REITs or qualified REIT subsidiaries. These
distributions will be classified as dividend income to the extent of the
earnings and profits of the distributing corporation. Such distributions will
generally constitute qualifying income for purposes of the 95% gross income
test, but not under the 75% gross income test. Any dividends received by
Newcastle from a REIT will be qualifying income in Newcastle's hands for
purposes of both the 95% and 75% income tests.
If Newcastle fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for the year if it is
entitled to relief under applicable provisions of the Internal Revenue Code.
These relief provisions will be generally available if the failure of Newcastle
to meet these tests was due to reasonable cause and not due to willful neglect,
Newcastle attaches to its tax return a schedule of the sources of its income,
and any incorrect information on the schedule was not due to fraud with intent
to evade tax. It is not possible to state whether Newcastle would be entitled to
the benefit of these relief provisions in all circumstances. If these relief
provisions are inapplicable to a particular set of circumstances involving
Newcastle, Newcastle will not qualify as a REIT. As discussed above under "--
Taxation of REITs in General," even where these relief provisions apply, a tax
would be imposed based upon the amount by which Newcastle fails to satisfy the
particular gross income test.
ASSET TESTS
Newcastle, at the close of each calendar quarter, must also satisfy four
tests relating to the nature of its assets. First, at least 75% of the value of
the total assets of Newcastle must be represented by some combination of "real
estate assets", cash, cash items, U.S. government securities, and, under some
circumstances, stock or
46
debt instruments purchased with new capital. For this purpose, real estate
assets include interests in real property, such as land, buildings, leasehold
interests in real property, stock of other corporations that qualify as REITs,
and some kinds of mortgage backed securities and mortgage loans. Assets that do
not qualify for purposes of the 75% test are subject to the additional asset
tests described below.
The second asset test is that the value of any one issuer's securities
owned by Newcastle may not exceed 5% of the value of Newcastle's total assets.
Third, Newcastle may not own more than 10% of any one issuer's outstanding
securities, as measured by either voting power or value. The 5% and 10% asset
tests do not apply to securities of TRSs, and the 10% value test does not apply
to "straight debt" having specified characteristics. Fourth, the aggregate value
of all securities of TRSs held by a REIT may not exceed 20% of the value of the
REIT's total assets.
Notwithstanding the general rule, as noted above, that for purposes of the
REIT income and asset tests, a REIT is treated as owning its share of the
underlying assets of a subsidiary partnership, if a REIT holds indebtedness
issued by a partnership, the indebtedness will be subject to, and may cause a
violation of, the asset tests, unless it is a qualifying mortgage asset,
satisfies the rules for "straight debt," or is sufficiently small so as not to
otherwise cause an asset test violation. Similarly, although stock of another
REIT is a qualifying asset for purposes of the REIT asset tests, non-mortgage
debt held by Newcastle that is issued by another REIT may not so qualify.
Interests held by Newcastle in a real estate mortgage investment conduit,
or "REMIC," are generally treated as qualifying real estate assets, and income
derived by Newcastle from interests in REMICs is generally treated as qualifying
income for purposes of the REIT income tests described above. If less than 95%
of the assets of a REMIC are real estate assets, however, then only a
proportionate part of Newcastle's interest in the REMIC, and its income derived
from the interest, qualifies for purposes of the REIT asset and income tests.
Where a REIT holds a "residual interest" in a REMIC from which it derives
"excess inclusion income", the REIT will be required to either distribute the
excess inclusion income or pay tax on it (or a combination of the two), even
though the income may not be received in cash by the REIT. To the extent that
distributed excess inclusion income is allocable to a particular stockholder,
the income (i) would not be allowed to be offset by any net operating losses
otherwise available to the stockholder, (ii) would be subject to tax as
unrelated business taxable income in the hands of most types of stockholders
that are otherwise generally exempt from federal income tax, and (iii) would
result in the application of U.S. federal income tax withholding at the maximum
rate (30%), without reduction of any otherwise applicable income tax treaty, to
the extent allocable to most types of foreign stockholders. See "Taxation of
Stockholders."
Newcastle believes that its holdings of securities and other assets comply,
and will continue to comply, with the foregoing REIT asset requirements, and it
intends to monitor compliance on an ongoing basis. No independent appraisals
have been obtained, however, to support Newcastle's conclusions as to the value
of its total assets, or the value of any particular security or securities.
Moreover, values of some assets, including instruments issued in securitization
transactions, may not be susceptible to a precise determination, and values are
subject to change in the future. Furthermore, the proper classification of an
instrument as debt or equity for federal income tax purposes may be uncertain in
some circumstances, which could affect the application of the REIT asset
requirements. Accordingly, there can be no assurance that the IRS will not
contend that Newcastle's interests in its subsidiaries or in the securities of
other issuers will not cause a violation of the REIT asset requirements.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, Newcastle is required to distribute
dividends, other than capital gain dividends, to its stockholders in an amount
at least equal to:
(a) the sum of
(1) 90% of the "REIT taxable income" of Newcastle (computed without
regard to the deduction for dividends paid and net capital gains of
Newcastle), and
47
(2) 90% of the net income, if any, (after tax) from foreclosure
property (as described below), minus
(b) the sum of specified items of noncash income.
These distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before Newcastle timely files its
tax return for the year and if paid with or before the first regular dividend
payment after such declaration. In order for distributions to be counted for
this purpose, and to give rise to a tax deduction by Newcastle, they must not be
"preferential dividends." A dividend is not a preferential dividend if it is pro
rata among all outstanding shares of stock within a particular class, and is in
accordance with the preferences among different classes of stock as set forth in
Newcastle's organizational documents.
To the extent that Newcastle distributes at least 90%, but less than 100%,
of its "REIT taxable income," as adjusted, it will be subject to tax at ordinary
corporate tax rates on the retained portion. Newcastle may elect to retain,
rather than distribute, its net long-term capital gains and pay tax on such
gains. In this case, Newcastle could elect to have its stockholders include
their proportionate share of such undistributed long-term capital gains in
income, and to receive a corresponding credit for their share of the tax paid by
Newcastle. Stockholders of Newcastle would then increase the adjusted basis of
their Newcastle stock by the difference between the designated amounts included
in their long-term capital gains and the tax deemed paid with respect to their
shares.
To the extent that a REIT has available net operating losses carried
forward from prior tax years, such losses may reduce the amount of distributions
that it must make in order to comply with the REIT distribution requirements.
Such losses, however, will generally not affect the character, in the hands of
stockholders, of any distributions that are actually made by the REIT, which are
generally taxable to stockholders to the extent that the REIT has current or
accumulated earnings and profits. See "-- Taxation of Stockholders -- Taxation
of Taxable Domestic Stockholders -- Distributions."
If Newcastle should fail to distribute during each calendar year at least
the sum of (a) 85% of its REIT ordinary income for such year, (b) 95% of its
REIT capital gain net income for such year, and (c) any undistributed taxable
income from prior periods, Newcastle would be subject to a 4% excise tax on the
excess of such required distribution over the sum of (x) the amounts actually
distributed and (y) the amounts of income retained on which it has paid
corporate income tax. Newcastle intends to make timely distributions so that it
is not subject to the 4% excise tax.
It is possible that Newcastle, from time to time, may not have sufficient
cash to meet the distribution requirements due to timing differences between (a)
the actual receipt of cash, including receipt of distributions from its
subsidiaries, and (b) the inclusion of items in income by Newcastle for federal
income tax purposes. Other sources of non-cash taxable income include real
estate and securities that are financed through securitization structures, which
require some or all of available cash flows to be used to service borrowings,
loans or mortgage backed securities held by Newcastle as assets that are issued
at a discount and require the accrual of taxable economic interest in advance of
its receipt in cash, loans on which the borrower is permitted to defer cash
payments of interest, and distressed loans on which Newcastle may be required to
accrue taxable interest income even though the borrower is unable to make
current servicing payments in cash. In the event that such timing differences
occur, in order to meet the distribution requirements, it might be necessary to
arrange for short-term, or possibly long-term, borrowings, or to pay dividends
in the form of taxable in-kind distributions of property.
Newcastle may be able to rectify a failure to meet the distribution
requirements for a year by paying "deficiency dividends" to stockholders in a
later year, which may be included in Newcastle's deduction for dividends paid
for the earlier year. In this case, Newcastle may be able to avoid losing its
REIT status or being taxed on amounts distributed as deficiency dividends.
However, Newcastle will be required to pay interest and a penalty based on the
amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If Newcastle fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, Newcastle would be subject to tax,
including any applicable alternative minimum tax, on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
Newcastle is not a REIT
48
would not be deductible by Newcastle, nor would they be required to be made. In
this situation, to the extent of current and accumulated earnings and profits,
all distributions to stockholders that are individuals will generally be taxable
at capital gains rates (through 2008) pursuant to 2003 Act, and, subject to
limitations of the Internal Revenue Code, corporate distributees may be eligible
for the dividends received deduction. Unless Newcastle is entitled to relief
under specific statutory provisions, Newcastle would also be disqualified from
re-electing to be taxed as a REIT for the four taxable years following the year
during which qualification was lost. It is not possible to state whether, in all
circumstances, Newcastle would be entitled to this statutory relief. The rule
against re-electing REIT status following a loss of such status could also apply
to Newcastle if Newcastle Investment Holdings Corp. failed to qualify as a REIT,
and Newcastle is treated as a successor to Newcastle Investment Holdings for
federal income tax purposes.
PROHIBITED TRANSACTIONS
Net income derived by a REIT from a prohibited transaction is subject to a
100% tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. Newcastle
intends to conduct its operations so that no asset owned by Newcastle or its
pass-through subsidiaries will be held for sale to customers, and that a sale of
any such asset will not be in the ordinary course of Newcastle's business.
Whether property is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the particular facts and
circumstances. No assurance can be given that any property sold by Newcastle
will not be treated as property held for sale to customers, or that Newcastle
can comply with certain safe-harbor provisions of the Internal Revenue Code that
would prevent such treatment. The 100% tax does not apply to gains from the sale
of property that is held through a TRS or other taxable corporation, although
such income will be subject to tax in the hands of the corporation at regular
corporate rates.
FORECLOSURE PROPERTY
Foreclosure property is real property and any personal property incident to
such real property (i) that is acquired by a REIT as the result of the REIT
having bid in the property at foreclosure, or having otherwise reduced the
property to ownership or possession by agreement or process of law, after there
was a default (or default was imminent) on a lease of the property or a mortgage
loan held by the REIT and secured by the property, (ii) for which the related
loan or lease was acquired by the REIT at a time when default was not imminent
or anticipated, and (iii) for which such REIT makes a proper election to treat
the property as foreclosure property. REITs generally are subject to tax at the
maximum corporate rate (currently 35%) on any net income from foreclosure
property, including any gain from the disposition of the foreclosure property,
other than income that would otherwise be qualifying income for purposes of the
75% gross income test. Any gain from the sale of property for which a
foreclosure property election has been made will not be subject to the 100% tax
on gains from prohibited transactions described above, even if the property
would otherwise constitute inventory or dealer property in the hands of the
selling REIT. Newcastle does not anticipate that it will receive any income from
foreclosure property that is not qualifying income for purposes of the 75% gross
income test, but, if Newcastle does receive any such income, it intends to make
an election to treat the related property as foreclosure property.
FOREIGN INVESTMENTS
Newcastle and its subsidiaries currently hold and may acquire additional
investments and, accordingly, pay taxes, in foreign countries. Taxes paid by
Newcastle in foreign jurisdictions may not be passed through to, or used by, its
stockholders as a foreign tax credit or otherwise. Newcastle's foreign
investments may also generate foreign currency gains and losses. Foreign
currency gains are treated as income that does not qualify under the 95% or 75%
income tests, unless certain technical requirements are met. No assurance can be
given that these technical requirements will be met in the case of any foreign
currency gains recognized by Newcastle directly or through pass-through
subsidiaries, and will not adversely affect Newcastle's ability to satisfy the
REIT qualification requirements.
49
DERIVATIVES AND HEDGING TRANSACTIONS
Newcastle and its subsidiaries have, from time to time, and may in the
future enter into hedging transactions with respect to interest rate exposure on
one or more of their assets or liabilities. Any such hedging transactions could
take a variety of forms, including the use of derivative instruments such as
interest rate swap contracts, interest rate cap or floor contracts, futures or
forward contracts, and options. To the extent that Newcastle or a pass-through
subsidiary enters into such a contract to reduce interest rate risk on
indebtedness incurred to acquire or carry real estate assets, any periodic
income from the instrument, or gain from the disposition of it, would be
qualifying income for purposes of the REIT 95% gross income test, but not for
the 75% gross income test. To the extent that Newcastle hedges with other types
of financial instruments or in other situations (for example, hedges against
fluctuations in the value of foreign currencies), the resultant income will be
treated as income that does not qualify under the 95% or 75% income tests unless
certain technical requirements are met. Newcastle intends to structure any
hedging transactions in a manner that does not jeopardize its status as a REIT.
Newcastle may conduct some or all of its hedging activities (including hedging
activities relating to currency risk) through a TRS or other corporate entity,
the income from which may be subject to federal income tax, rather than
participating in the arrangements directly or through pass-through subsidiaries.
No assurance can be given, however, that Newcastle's hedging activities will not
give rise to income that does not qualify for purposes of either or both of the
REIT income tests, and will not adversely affect Newcastle's ability to satisfy
the REIT qualification requirements.
TAXABLE MORTGAGE POOLS
An entity, or a portion of an entity, may be classified as a taxable
mortgage pool ("TMP") under the Internal Revenue Code if (1) substantially all
of its assets consist of debt obligations or interests in debt obligations, (2)
more than 50% of those debt obligations are real estate mortgages or interests
in real estate mortgages as of specified testing dates, (3) the entity has
issued debt obligations (liabilities) that have two or more maturities, and (4)
the payments required to be made by the entity on its debt obligations
(liabilities) "bear a relationship" to the payments to be received by the entity
on the debt obligations that it holds as assets. Under regulations issued by the
U.S. Treasury Department, if less than 80% of the assets of an entity (or a
portion of an entity) consist of debt obligations, these debt obligations are
considered not to comprise "substantially all" of its assets, and therefore the
entity would not be treated as a TMP. Newcastle currently holds interests in
TMPs, and its future financing and securitization arrangements may give rise to
other TMPs, with the consequences as described below.
Where an entity, or a portion of an entity, is classified as a TMP, it is
generally treated as a taxable corporation for federal income tax purposes. In
the case of a REIT, or a portion of a REIT, or a disregarded subsidiary of a
REIT, that is a TMP, however, special rules apply. The TMP is not treated as a
corporation that is subject to corporate income tax, and the TMP classification
does not directly affect the tax status of the REIT. Rather, the consequences of
the TMP classification would, in general, except as described below, be limited
to the stockholders of the REIT. The Treasury Department has not yet issued
regulations to govern the treatment of stockholders as described below. A
portion of the REIT's income from the TMP arrangement, which might be non-cash
accrued income, could be treated as "excess inclusion income." The REIT's excess
inclusion income would be allocated among its stockholders. A stockholder's
share of excess inclusion income (i) would not be allowed to be offset by any
net operating losses otherwise available to the stockholder, (ii) would be
subject to tax as unrelated business taxable income in the hands of most types
of stockholders that are otherwise generally exempt from federal income tax, and
(iii) would result in the application of U.S. federal income tax withholding at
the maximum rate (30%), without reduction for any otherwise applicable income
tax treaty, to the extent allocable to most types of foreign stockholders. See
"Taxation of Stockholders." To the extent that excess inclusion income is
allocated to a tax-exempt stockholder of a REIT that is not subject to unrelated
business income tax (such as government entities), the REIT would be taxable on
this income at the highest applicable corporate tax rate (currently 35%). The
manner in which excess inclusion income would be allocated among shares of
different classes of stock is not clear under current law. Tax-exempt investors,
foreign investors and taxpayers with net operating losses should carefully
consider the tax consequences described above and are urged to consult their tax
advisors.
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If a subsidiary partnership of Newcastle, not wholly-owned by Newcastle
directly or through one or more disregarded entities, were a TMP, the foregoing
rules would not apply. Rather, the partnership that is a TMP would be treated as
a corporation for federal income tax purposes, and would potentially be subject
to corporate income tax. In addition, this characterization would alter
Newcastle's REIT income and asset test calculations, and could adversely affect
its compliance with those requirements. Newcastle believes that it has no
subsidiary partnerships that are or will become TMPs, and intends to monitor the
structure of any TMPs in which it has an interest to ensure that they will not
adversely affect its status as a REIT.
TAX ASPECTS OF INVESTMENTS IN AFFILIATED PARTNERSHIPS
GENERAL
Newcastle may hold investments through entities that are classified as
partnerships for federal income tax purposes. In general, partnerships are
"pass-through" entities that are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are potentially subject to tax
on these items, without regard to whether the partners receive a distribution
from the partnership. Newcastle will include in its income its proportionate
share of these partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, Newcastle will include its proportionate share of assets held
by subsidiary partnerships. See "Taxation of Newcastle -- Effect of Subsidiary
Entities -- Ownership of Partnership Interests."
ENTITY CLASSIFICATION
The investment by Newcastle in partnerships involves special tax
considerations, including the possibility of a challenge by the IRS of the
status of any of Newcastle's subsidiary partnerships as a partnership, as
opposed to an association taxable as a corporation, for federal income tax
purposes (for example, if the IRS were to assert that a subsidiary partnership
is a TMP). See "Taxation of Newcastle -- Taxable Mortgage Pools." If any of
these entities were treated as an association for federal income tax purposes,
it would be taxable as a corporation and therefore could be subject to an
entity-level tax on its income. In such a situation, the character of the assets
of Newcastle and items of gross income of Newcastle would change and could
preclude Newcastle from satisfying the REIT asset tests or the gross income
tests as discussed in "Taxation of Newcastle -- Asset Tests" and "-- Income
Tests," and in turn could prevent Newcastle from qualifying as a REIT. See
"Taxation of Newcastle -- Failure to Qualify," above, for a discussion of the
effect of the failure of Newcastle to meet these tests for a taxable year. In
addition, any change in the status of any of Newcastle's subsidiary partnerships
for tax purposes might be treated as a taxable event, in which case Newcastle
could have taxable income that is subject to the REIT distribution requirements
without receiving any cash.
TAX ALLOCATIONS WITH RESPECT TO PARTNERSHIP PROPERTIES
Under the Internal Revenue Code and the Treasury regulations, income, gain,
loss and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated for tax purposes in a manner such that the contributing partner is
charged with, or benefits from, the unrealized gain or unrealized loss
associated with the property at the time of the contribution. The amount of the
unrealized gain or unrealized loss is generally equal to the difference between
the fair market value of the contributed property at the time of contribution,
and the adjusted tax basis of such property at the time of contribution (a
"book-tax difference"). Such allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners.
To the extent that any subsidiary partnership of Newcastle acquires
appreciated (or depreciated) properties by way of capital contributions from its
partners, allocations would need to be made in a manner consistent with these
requirements. Where a partner contributes cash to a partnership at a time that
the partnership holds appreciated (or depreciated) property, the Treasury
regulations provide for a similar allocation of these items to the other (i.e.
non-contributing) partners. These rules may apply to the contribution by
Newcastle to any subsidiary partnerships of the cash proceeds received in
offerings of its stock. As a result, partners, including
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Newcastle, in subsidiary partnerships, could be allocated greater or lesser
amounts of depreciation and taxable income in respect of a partnership's
properties than would be the case if all of the partnership's assets (including
any contributed assets) had a tax basis equal to their fair market values at the
time of any contributions to that partnership. This could cause Newcastle to
recognize, over a period of time, taxable income in excess of cash flow from the
partnership, which might adversely affect Newcastle's ability to comply with the
REIT distribution requirements discussed above.
TAXATION OF STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
Distributions. Provided that Newcastle qualifies as a REIT, distributions
made to its taxable domestic stockholders out of current or accumulated earnings
and profits, and not designated as capital gain dividends, will generally be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. With limited exceptions,
dividends received from REITs are not eligible for taxation at the preferential
income tax rates (15% maximum federal rate through 2008) for qualified dividends
received by individuals from taxable C corporations pursuant to the 2003 Act.
Stockholders that are individuals, however, are taxed at the preferential rates
on dividends designated by and received from REITs to the extent that the
dividends are attributable to (i) income retained by the REIT in the prior
taxable year on which the REIT was subject to corporate level income tax (less
the amount of tax), (ii) dividends received by the REIT from TRSs or other
taxable C corporations, or (iii) income in the prior taxable year from the sales
of "built-in gain" property acquired by the REIT from C corporations in
carryover basis transactions (less the amount of corporate tax on such income).
Distributions from Newcastle that are designated as capital gain dividends
will generally be taxed to stockholders as long-term capital gains, to the
extent that they do not exceed the actual net capital gain of Newcastle for the
taxable year, without regard to the period for which the stockholder has held
its stock. A similar treatment will apply to long-term capital gains retained by
Newcastle, to the extent that Newcastle elects the application of provisions of
the Internal Revenue Code that treat stockholders of a REIT as having received,
for federal income tax purposes, undistributed capital gains of the REIT, while
passing through to stockholders a corresponding credit for taxes paid by the
REIT on such retained capital gains. Corporate stockholders may be required to
treat up to 20% of some capital gain dividends as ordinary income. Long-term
capital gains are generally taxable at maximum federal rates of 15% (through
2008) in the case of stockholders who are individuals, and 35% in the case of
stockholders that are corporations. Capital gains attributable to the sale of
depreciable real property held for more than 12 months are subject to a 25%
maximum federal income tax rate for taxpayers who are individuals, to the extent
of previously claimed depreciation deductions.
In determining the extent to which a distribution constitutes a dividend
for tax purposes, Newcastle's earnings and profits generally will be allocated
first to distributions with respect to preferred stock, including its Series B
Preferred Stock, prior to allocating any remaining earnings and profits to
distributions on Newcastle's common stock. If Newcastle has net capital gains
and designates some or all of its distributions as capital gain dividends to
that extent, the capital gain dividends will be allocated among different
classes of stock in proportion to the allocation of earnings and profits as
described above.
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 in respect of which the distributions
were made, but rather, will reduce the adjusted basis of these 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 capital gain, or short-term
capital gain if the shares have been held for one year or less. In addition, any
dividend declared by Newcastle in October, November or December of any year and
payable to a stockholder of record on a specified date in any such month will be
treated as both paid by Newcastle and received by the stockholder on December 31
of such year, provided that the dividend is actually paid by Newcastle before
the end of January of the following calendar year.
To the extent that a REIT has available net operating losses and capital
losses carried forward from prior tax years, such losses may reduce the amount
of distributions that must be made in order to comply with the REIT
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distribution requirements. See "Taxation of Newcastle -- Annual Distribution
Requirements." Such losses, however, are not passed through to stockholders and
do not offset income of stockholders from other sources, nor would they affect
the character of any distributions that are actually made by a REIT, which are
generally subject to tax in the hands of stockholders to the extent that the
REIT has current or accumulated earnings and profits.
If excess inclusion income from a taxable mortgage pool is allocated to any
Newcastle stockholder, that income will be taxable in the hands of the
stockholder and would not be offset by any net operating losses of the
stockholder that would otherwise be available. See "Taxation of Newcastle --
Taxable Mortgage Pools."
Dispositions of Newcastle Stock. In general, capital gains recognized by
individuals upon the sale or disposition of shares of Newcastle stock will,
pursuant to the 2003 Act, be subject to a maximum federal income tax rate of 15%
(from May 6, 2003 through 2008) if the Newcastle stock is held for more than 12
months, and will be taxed at ordinary income rates (of up to 35% through 2010)
if the Newcastle stock is held for 12 months or less. Gains recognized by
stockholders that are corporations are subject to federal income tax at a
maximum rate of 35%, whether or not classified as long-term capital gains.
Capital losses recognized by a stockholder upon the disposition of Newcastle
stock held for more than one year at the time of disposition will be considered
long-term capital losses, and are generally available only to offset capital
gain income of the stockholder but not ordinary income (except in the case of
individuals, who may offset up to $3,000 of ordinary income each year). In
addition, any loss upon a sale or exchange of shares of Newcastle stock by a
stockholder who has held the shares for six months or less, after applying
holding period rules, will be treated as a long-term capital loss to the extent
of distributions received from Newcastle that are required to be treated by the
stockholder as long-term capital gain.
If an investor recognizes a loss upon a subsequent disposition of stock or
other securities of Newcastle in an amount that exceeds a prescribed threshold,
it is possible that the provisions of recently adopted Treasury regulations
involving "reportable transactions" could apply, with a resulting requirement to
separately disclose the loss generating transaction to the IRS. While these
regulations are directed towards "tax shelters," they are written quite broadly,
and apply to transactions that would not typically be considered tax shelters.
In addition, legislative proposals have been introduced in Congress, that, if
enacted, would impose significant penalties for failure to comply with these
requirements. You should consult your tax advisors concerning any possible
disclosure obligation with respect to the receipt or disposition of stock or
securities of Newcastle, or transactions that might be undertaken directly or
indirectly by Newcastle. Moreover, you should be aware that Newcastle and other
participants in the transactions involving Newcastle (including their advisors)
might be subject to disclosure or other requirements pursuant to these
regulations.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of Newcastle stock
applicable to non-U.S. holders of Newcastle stock. A "non-U.S. holder" is any
person other than:
(a) a citizen or resident of the United States,
(b) a corporation or partnership created or organized in the United
States or under the laws of the United States, or of any state
thereof, or the District of Columbia,
(c) an estate, the income of which is includable in gross income for
U.S. federal income tax purposes regardless of its source, or
(d) a trust if a United States court is able to exercise primary
supervision over the administration of such trust and one or more
United States fiduciaries have the authority to control all
substantial decisions of the trust.
The discussion is based on current law and is for general information only.
The discussion addresses only selective and not all aspects of United States
federal income and estate taxation.
Ordinary Dividends. The portion of dividends received by non-U.S. holders
payable out of the earnings and profits of Newcastle which are not attributable
to capital gains of Newcastle and which are not effectively
53
connected with a U.S. trade or business of the non-U.S. holder will be subject
to U.S. withholding tax at the rate of 30%, unless reduced by treaty. Reduced
treaty rates are not available to the extent that income is excess inclusion
income allocated to the foreign stockholder. See "Taxation of Newcastle --
Taxable Mortgage Pools."
In general, non-U.S. holders will not be considered to be engaged in a U.S.
trade or business solely as a result of their ownership of Newcastle stock. In
cases where the dividend income from a non-U.S. holder's investment in Newcastle
stock is, or is treated as, effectively connected with the non-U.S. holder's
conduct of a U.S. trade or business, the non-U.S. holder generally will be
subject to U.S. tax at graduated rates, in the same manner as domestic
stockholders are taxed with respect to such dividends, and may also be subject
to the 30% branch profits tax in the case of a non-U.S. holder that is a
corporation.
Non-Dividend Distributions. Unless Newcastle stock constitutes a U.S. real
property interest (a "USRPI"), distributions by Newcastle which are not
dividends out of the earnings and profits of Newcastle will not be subject to
U.S. income tax. If it cannot be determined at the time at which a distribution
is made whether or not the distribution will exceed current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to dividends. However, the non-U.S. holder may seek a refund
from the IRS of any amounts withheld if it is subsequently determined that the
distribution was, in fact, in excess of Newcastle's current and accumulated
earnings and profits. If Newcastle stock constitutes a USRPI, as described
below, distributions by Newcastle in excess of the sum of its earnings and
profits plus the stockholder's basis in its Newcastle stock will be taxed under
the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") at the rate
of tax, including any applicable capital gains rates, that would apply to a
domestic stockholder of the same type (e.g., an individual or a corporation, as
the case may be), and the collection of the tax will be enforced by a refundable
withholding at a rate of 10% of the amount by which the distribution exceeds the
stockholder's share of Newcastle's earnings and profits.
Capital Gain Dividends. Under FIRPTA, a distribution made by Newcastle to
a non-U.S. holder, to the extent attributable to gains from dispositions of
USRPIs held by Newcastle directly or through pass-through subsidiaries ("USRPI
capital gains"), will be considered effectively connected with a U.S. trade or
business of the non-U.S. holder and will be subject to U.S. income tax at the
rates applicable to U.S. individuals or corporations, without regard to whether
the distribution is designated as a capital gain dividend. In addition,
Newcastle will be required to withhold tax equal to 35% of the amount of
dividends to the extent the dividends constitute USRPI capital gains. Recently
proposed legislation, if enacted, would modify the tax treatment of capital gain
dividends distributed by REITs to non-U.S. holders. See "Other Tax
Considerations - Legislative or Other Actions Affecting REITs." Distributions
subject to FIRPTA may also be subject to a 30% branch profits tax in the hands
of a non-U.S. holder that is a corporation. A distribution is not a USRPI
capital gain if Newcastle held the underlying asset solely as a creditor.
Capital gain dividends received by a non-U.S. holder from a REIT that are not
USRPI capital gains are generally not subject to U.S. income tax or withholding.
Dispositions of Newcastle Stock. Unless Newcastle stock constitutes a
USRPI, a sale of the stock by a non-U.S. holder generally will not be subject to
U.S. taxation under FIRPTA. The stock will not be treated as a USRPI if less
than 50% of Newcastle's assets throughout a prescribed testing period consist of
interests in real property located within the United States, excluding, for this
purpose, interests in real property solely in a capacity as a creditor.
Even if the foregoing test is not met, Newcastle stock nonetheless will not
constitute a USRPI if Newcastle is a "domestically-controlled REIT." A
domestically-controlled REIT is a REIT in which, at all times during a specified
testing period, less than 50% in value of its shares is held directly or
indirectly by non-U.S. holders. Newcastle believes that it is, and it expects to
continue to be, a domestically-controlled REIT and, therefore, the sale of
Newcastle stock should not be subject to taxation under FIRPTA. Because
Newcastle stock is publicly traded, however, no assurance can be given that
Newcastle will be a domestically-controlled REIT.
In the event that Newcastle does not constitute a domestically-controlled
REIT, a non-U.S. holder's sale of stock nonetheless will generally not be
subject to tax under FIRPTA as a sale of a USRPI, provided that (a) the stock
owned is of a class that is "regularly traded," as defined by applicable
Treasury Department regulations, on an established securities market, and (b)
the selling non-U.S. holder held 5% or less of Newcastle's outstanding stock of
that class at all times during a specified testing period.
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If gain on the sale of stock of Newcastle were subject to taxation under
FIRPTA, the non-U.S. holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain, subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of non-resident alien
individuals, and the purchaser of the stock could be required to withhold 10% of
the purchase price and remit such amount to the IRS.
Gain from the sale of Newcastle stock that would not otherwise be subject
to FIRPTA will nonetheless be taxable in the United States to a non-U.S. holder
in two cases: (a) if the non-U.S. holder's investment in the Newcastle stock is
effectively connected with a U.S. trade or business conducted by such non-U.S.
holder, the non-U.S. holder will be subject to the same treatment as a U.S.
stockholder with respect to such gain, or (b) if the non-U.S. holder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gain.
Estate Tax. Newcastle stock owned or treated as owned by an individual who
is not a citizen or resident (as specially defined for U.S. federal estate tax
purposes) of the United States at the time of death will be includable in the
individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise, and may therefore be subject to
U.S. federal estate tax.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts, generally are exempt from
federal income taxation. However, they are subject to taxation on their
unrelated business taxable income ("UBTI"). While some investments in real
estate may generate UBTI, the IRS has ruled that dividend distributions from a
REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and
provided that (1) a tax-exempt stockholder has not held its Newcastle stock as
"debt financed property" within the meaning of the Internal Revenue Code (i.e.
where the acquisition or holding of the property is financed through a borrowing
by the tax-exempt stockholder), and (2) the Newcastle stock is not otherwise
used in an unrelated trade or business, distributions from Newcastle and income
from the sale of the Newcastle stock should not give rise to UBTI to a
tax-exempt stockholder. To the extent, however, that Newcastle (or a part of
Newcastle, or a disregarded subsidiary of Newcastle) is a TMP, or if Newcastle
holds residual interests in a REMIC, a portion of the dividends paid to a
tax-exempt stockholder that is allocable to excess inclusion income may be
subject to tax as UBTI. See "Taxation of Newcastle -- Taxable Mortgage Pools."
Tax-exempt stockholders that are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans exempt from federal income taxation under sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, are subject to different UBTI rules, which generally will require
them to characterize distributions from Newcastle as UBTI.
In certain circumstances, a pension trust that owns more than 10% of
Newcastle's stock could be required to treat a percentage of the dividends from
Newcastle as UBTI, if Newcastle is a "pension-held REIT." Newcastle will not be
a pension-held REIT unless either (A) one pension trust owns more than 25% of
the value of Newcastle's stock, or (B) a group of pension trusts, each
individually holding more than 10% of the value of Newcastle's stock,
collectively owns more than 50% of such stock. Certain restrictions on ownership
and transfer of Newcastle's stock should generally prevent a tax-exempt entity
from owning more than 10% of the value of Newcastle's stock, or Newcastle from
becoming a pension-held REIT.
TAX-EXEMPT STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF OWNING NEWCASTLE
STOCK.
OTHER TAX CONSIDERATIONS
LEGISLATIVE OR OTHER ACTIONS AFFECTING REITS
The recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003
reduced the maximum tax rates at which individuals are taxed on capital gains
from 20% to 15% (from May 6, 2003 through 2008) and on dividends payable by
taxable C corporations from 38.6% to 15% (from January 1, 2003 through 2008).
While gains from the sale of the stock of REITs are eligible for the reduced tax
rates, dividends payable by REITs are
55
not eligible for the reduced tax rates except in limited circumstances. See
"Taxation of Stockholders -- Taxation of Taxable Domestic
Stockholders -- Distributions." As a result, dividends received from REITs
generally will continue to be taxed at ordinary income rates (now at a maximum
rate of 35% through 2010). The more favorable tax rates applicable to regular
corporate dividends could cause investors who are individuals to perceive
investments in REITs to be relatively less attractive than investments in the
stocks of non-REIT corporations that pay dividends, which could adversely affect
the value of the stock of REITs, including stock of Newcastle.
Recently proposed legislation would modify the tax treatment of capital
gain dividends distributed by REITs to foreign stockholders. See "Taxation of
Stockholders -- Taxation of Foreign Stockholders -- Capital Gain Dividends." The
proposed legislation would treat capital gain dividends received by a foreign
stockholder in the same manner as ordinary income dividends, provided that (1)
the capital gain dividends are received with respect to a class of stock that is
regularly traded on an established securities market located in the United
States, and (2) the foreign stockholder does not own more than 5% of that class
of stock at any time during the taxable year in which the capital gain dividends
are received. The proposed legislation would apply to taxable years beginning
after the date of enactment.
The rules dealing with federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. No assurance can be given as to whether, or in what form,
the proposal described above (or any other proposals affecting REITs or their
stockholders) will be enacted. Changes to the federal tax laws and
interpretations thereof could adversely affect an investment in our securities.
STATE, LOCAL AND FOREIGN TAXES
Newcastle and its subsidiaries and stockholders may be subject to state,
local or foreign taxation in various jurisdictions, including those in which it
or they transact business, own property or reside. Newcastle owns properties
located in a number of jurisdictions, and may be required to file tax returns in
some or all of those jurisdictions. The state, local or foreign tax treatment of
Newcastle and its stockholders may not conform to the federal income tax
treatment discussed above. Newcastle will pay foreign property taxes, and
dispositions of foreign property or operations involving, or investments in,
foreign property may give rise to foreign income or other tax liability in
amounts that could be substantial. Any foreign taxes incurred by Newcastle do
not pass through to stockholders as a credit against their United States federal
income tax liability. Prospective investors should consult their tax advisors
regarding the application and effect of state, local and foreign income and
other tax laws on an investment in stock or other securities of Newcastle.
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ERISA CONSIDERATIONS
A plan fiduciary considering an investment in the securities should
consider, among other things, whether such an investment might constitute or
give rise to a prohibited transaction under ERISA, the Internal Revenue Code or
any substantially similar federal, state or local law. ERISA and the Internal
Revenue Code impose restrictions on:
- employee benefit plans as defined in Section 3(3) of ERISA,
- plans described in Section 4975(e)(1) of the Internal Revenue Code,
including retirement accounts and Keogh Plans,
- entities whose underlying assets include plan assets by reason of a
plan's investment in such entities, and
- persons who have certain specified relationships to a plan described as
"parties in interest" under ERISA and "disqualified persons" under the
tax code.
REGULATION UNDER ERISA AND THE TAX CODE
ERISA imposes certain duties on persons who are fiduciaries of a plan.
Under ERISA, any person who exercises any authority or control over the
management or disposition of a plan's assets is considered to be a fiduciary of
that plan. Both ERISA and the tax code prohibit certain transactions involving
"plan assets" between a plan and parties in interest or disqualified persons.
Violations of these rules may result in the imposition of an excise tax or
penalty.
The term "plan assets" is not defined by ERISA or the tax code. However, a
plan's assets may be deemed to include an interest in the underlying assets of
an entity if the plan acquires an "equity interest" in such an entity. In that
event, the operations of such an entity could result in a prohibited transaction
under ERISA and the tax code.
REGULATION ISSUED BY THE DEPARTMENT OF LABOR
The Department of Labor issued a regulation that provides exceptions to
this rule (the "Plan Assets Regulation"). Under this regulation, if a plan
acquires a "publicly-offered security," the issuer of the security is not deemed
to hold plan assets. A publicly-offered security is a security that:
- is freely transferable,
- is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another, and
- is either:
(i) part of a class of securities registered under Section 12(b) or
12(g) of the Exchange Act, or
(ii) sold to the plan as part of an offering of securities to the
public pursuant to an effective registration statement under the Securities
Act and the class of securities of which such security is part is
registered under the Exchange Act within the requisite time.
THE SHARES OF OUR COMMON STOCK AND SERIES B PREFERRED STOCK AS "PUBLICLY-OFFERED
SECURITIES"
Our common stock and Series B Preferred Stock currently meet the above
criteria and it is anticipated that the shares of our common stock being offered
hereby will continue to meet the criteria of publicly-offered securities.
Applicability of other exceptions to the Plan Asset Regulation with respect
to other securities offered hereby will be discussed in the respective
prospectus supplement.
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GENERAL INVESTMENT CONSIDERATIONS
Prospective fiduciaries of a plan (including, without limitation, an entity
whose assets include plan assets, including, as applicable, an insurance company
general account) considering the purchase of securities should consult with
their legal advisors concerning the impact of ERISA and the tax code and the
potential consequences of making an investment in these securities with respect
to their specific circumstances. Each plan fiduciary should take into account,
among other considerations:
- whether the plan's investment could give rise to a non-exempt prohibited
transaction under Title I of ERISA or Section 4975 of the Internal
Revenue Code,
- whether the fiduciary has the authority to make the investment,
- the composition of the plan's portfolio with respect to diversification
by type of asset,
- the plan's funding objectives,
- the tax effects of the investment,
- whether our assets would be considered plan assets, and
- whether, under the general fiduciary standards of investment prudence and
diversification an investment in these shares is appropriate for the plan
taking into account the overall investment policy of the plan and the
composition of the plan's investment portfolio.
Certain employee benefit plans, such as governmental plans and certain
church plans are not subject to the provisions of Title I of ERISA and Section
4975 of the Internal Revenue Code. Accordingly, assets of such plans may be
invested in the securities without regard to the ERISA considerations described
here, subject to the provisions of any other applicable federal and state law.
It should be noted that any such plan that is qualified and exempt from taxation
under the tax code is subject to the prohibited transaction rules set forth in
the tax code.
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PLAN OF DISTRIBUTION
We may sell the common stock, preferred stock, depositary shares and any
series of debt securities and warrants being offered hereby in one or more of
the following ways from time to time:
- to underwriters or dealers for resale to the public or to institutional
investors;
- directly to institutional investors;
- directly to a limited number of purchasers or to a single purchaser;
- through agents to the public or to institutional investors; or
- through a combination of any of these methods of sale.
The prospectus supplement with respect to each series of securities will
state the terms of the offering of the securities, including:
- the offering terms, including the name or names of any underwriters,
dealers or agents;
- the purchase price of the securities and the net proceeds to be received
by us from the sale;
- any underwriting discounts or agency fees and other items constituting
underwriters' or agents' 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.
If we use underwriters or dealers in the sale, the securities will be
acquired by the underwriters or dealers 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 prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to prevailing market prices; or
- at negotiated prices.
Any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale of any securities, the securities may
be either offered to the public through underwriting syndicates represented by
managing underwriters, or directly by underwriters. Generally, the underwriters'
obligations to purchase the securities will be subject to certain conditions
precedent. The underwriters will be obligated to purchase all of the securities
if they purchase any of the securities.
If indicated in an applicable prospectus supplement, we may sell the
securities through agents from time to time. The applicable prospectus
supplement will name any agent involved in the offer or sale of the securities
and any commissions we pay to them. Generally, any agent will be acting on a
best efforts basis for the period of its appointment. We may authorize
underwriters, dealers or agents to solicit offers by certain purchasers to
purchase the securities from us at the public offering price set forth in the
applicable prospectus supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. The
delayed delivery contracts will be subject only to those conditions set forth in
the applicable prospectus supplement, and the applicable prospectus supplement
will set forth any commissions we pay for solicitation of these delayed delivery
contracts.
Offered securities may also be offered and sold, if so indicated in the
applicable prospectus supplement, in connection with a remarketing upon their
purchase, in accordance with a redemption or repayment pursuant to
59
their terms, or otherwise, by one or more remarketing firms, acting as
principals for their own accounts or as agents for us. Any remarketing firm will
be identified and the terms of its agreements, if any, with us and its
compensation will be described in the applicable prospectus supplement.
Agents, underwriters and other third parties described above may be
entitled to indemnification by us against certain civil liabilities under the
Securities Act, or to contribution with respect to payments which the agents or
underwriters may be required to make in respect thereof. Agents, underwriters
and such other third parties may be customers of, engage in transactions with,
or perform services for us in the ordinary course of business.
Each series of securities will be a new issue of securities and will have
no established trading market other than our common stock which is listed on the
New York Stock Exchange. Any common stock sold will be listed on the New York
Stock Exchange, upon official notice of issuance. The securities, other than the
common stock, may or may not be listed on a national securities exchange. Any
underwriters to whom securities are sold by us for public offering and sale may
make a market in the securities, but such underwriters will not be obligated to
do so and may discontinue any market making at any time without notice.
60
VALIDITY OF SECURITIES
Unless otherwise indicated in the applicable prospectus supplement, certain
legal matters will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom
LLP and Piper Rudnick LLP, Baltimore, Maryland. If the validity of any
securities is also passed upon by counsel for the underwriters of an offering of
those securities, that counsel will be named in the prospectus supplement
relating to that offering.
EXPERTS
The consolidated financial statements of Newcastle Investment Corp.,
appearing in Newcastle Investment Corp.'s Annual Report on Form 10-K for the
year ended December 31, 2002, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses relating to the registration of the securities will be borne
by the Registrant. The following expenses, with the exception of the Securities
and Exchange Commission Registration Fee, are estimates.
<Table>
Securities and Exchange Commission Registration Fee......... $ 60,675
Trustee Fees and Expenses................................... $ 20,000*
Printing and Engraving Fees and Expenses.................... $ 50,000*
Accounting Fees and Expenses................................ $ 60,000*
NASD Fees................................................... $ 30,500
Legal Fees.................................................. $150,000*
Miscellaneous............................................... $ 3,825*
---------
Total....................................................... $315,000*
=========
</Table>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment and which is material to the cause of action. The Company's
Charter contains such a provision which eliminates directors' and officers'
liability to the maximum extent permitted by Maryland law.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to indemnify any present or former director or officer or any
individual who, while a director of the Company and at the request of the
Company, serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as
a director, officer, partner or trustee, from and against any claim or liability
to which that person may become subject or which that person may incur by reason
of his or her status as a present or former director or officer of the Company
and to pay or reimburse their reasonable expenses in advance of final
disposition of a proceeding. The Bylaws obligate the Company, to the maximum
extent permitted by Maryland law, to indemnify any present or former director or
officer or any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise as a director, officer, partner or trustee and who is made a
party to the proceeding by reason of his or her service in that capacity from
and against any claim or liability to which that person may become subject or
which that person may incur by reason of his or her status as a present or
former director or officer of the Company and to pay or reimburse their
reasonable expenses in advance of final disposition of a proceeding. The Charter
and the Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and any employee or agent of the Company or a predecessor of the
Company.
Maryland law requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful in the defense of any proceeding to which he or she is made a
party by reason of his or her service in that capacity. Maryland law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an
II-1
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under Maryland law, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, Maryland law permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his or her good faith belief that he or she has met the standard of conduct
necessary for indemnification by the corporation and (b) a written undertaking
by him or her or on his or her behalf to repay the amount paid or reimbursed by
the corporation if it is ultimately determined that the standard of conduct was
not met.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 16. LIST OF EXHIBITS.
The Exhibits to this registration statement are listed in the Index to
Exhibits beginning on page II-5 and are incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; provided, however, that paragraphs 1(i) and 1(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to
Section 13 or section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be
II-2
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective.
The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on October 9, 2003.
NEWCASTLE INVESTMENT CORP.
By: /s/ WESLEY R. EDENS
------------------------------------
Name: Wesley R. Edens
Title: Chief Executive Officer
SIGNATURES AND POWERS OF ATTORNEY
Each person whose signature appears below authorizes Wesley R. Edens and
Debra A. Hess, or either of them, as his attorney in fact and agent, with full
power of substitution and resubstitution, to execute, in his name and on his
behalf, in any and all capacities, this Registration Statement on Form S-3 and
any amendments thereto (and any additional registration statement related
thereto permitted by Rule 462 (b) promulgated under the Securities Act of 1933
(and all further amendments including post-effective amendments thereto))
necessary or advisable to enable the registrant to comply with the Securities
Act of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in respect thereof, in connection with the registration of
the securities which are the subject of such registration statement, which
amendments may make such changes in such registration statement as such attorney
may deem appropriate, and with full power and authority to perform and do any
and all acts and things whatsoever which any such attorney or substitute may
deem necessary or advisable to be performed or done in connection with any or
all of the above-described matters, as fully as each of the undersigned could do
if personally present and acting, hereby ratifying and approving all acts of any
such attorney or substitute.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
/s/ WESLEY R. EDENS Chief Executive Officer and October 9, 2003
- ------------------------------------------------ Chairman of the Board
Wesley R. Edens
/s/ KENNETH M. RIIS President October 9, 2003
- ------------------------------------------------
Kenneth M. Riis
/s/ DEBRA A. HESS Chief Financial Officer (Principal October 9, 2003
- ------------------------------------------------ Financial and Accounting Officer)
Debra A. Hess
/s/ DAVID J. GRAIN Director October 9, 2003
- ------------------------------------------------
David J. Grain
/s/ STUART A. MCFARLAND Director October 9, 2003
- ------------------------------------------------
Stuart A. McFarland
/s/ DAVID K. MCKOWN Director October 9, 2003
- ------------------------------------------------
David K. McKown
/s/ PETER M. MILLER Director October 9, 2003
- ------------------------------------------------
Peter M. Miller
</Table>
II-4
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO. EXHIBIT
- ------- -------
1.1 Form of Underwriting Agreement for common stock, preferred
stock, warrants and debt securities to be filed as an
exhibit to a Current Report of the Company on Form 8-K and
incorporated by reference herein.
3.1 Articles of Amendment and Restatement of the Registrant
(incorporated by reference to the Registrant's Registration
Statement on Form S-11 (File No. 333-90578), Exhibit 3.1).
3.2 Articles Supplementary relating to the Series B Preferred
Stock (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31,
2003, filed with the SEC on May 13, 2003, Exhibit 3.3).
3.3 By-laws of the Registrant (incorporated by reference to the
Registrant's Registration Statement on Form S-11 (File No.
333-90578), Exhibit 3.2).
4.1 Form of Certificate for common stock (incorporated by
reference to the Registrant's Registration Statement on Form
S-11 (File No. 33-90578), Exhibit 4.1).
4.2 Form of Senior Indenture.*
4.3 Form of Subordinated Indenture.*
4.4 Form of any Senior Note with respect to each particular
series of Senior Notes issued hereunder (included in Exhibit
4.2).
4.5 Form of any Subordinated Note with respect to each
particular series of Subordinated Notes issued hereunder
(included in Exhibit 4.3).
4.6 Form of any certificate of designation, preferences and
rights with respect to any preferred stock issued hereunder
to be filed as an exhibit to a Current Report of the Company
on Form 8-K and incorporated by reference herein.
4.7 Form of any preferred stock certificate to be filed as an
exhibit to a Current Report of the Company on Form 8-K and
incorporated by reference herein.
4.8 Form of Debt Warrant Agreement.*
4.9 Form of Debt Warrant Certificate (included in Exhibit 4.8).
4.10 Form of Stock Warrant Agreement to be filed as an exhibit to
a Current Report of the Company on Form 8-K and incorporated
by reference herein.
4.11 Form of Stock Warrant Certificate (included in Exhibit
4.10).
4.12 Rights Agreement between the Registrant and American Stock
Transfer & Trust Company, as Rights Agent (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 2002, filed with the SEC
on November 22, 2002, Exhibit 4.1).
5.1 Opinion of Piper Rudnick LLP as to legality.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to
certain tax matters.*
10.1 Amended and Restated Management and Advisory Agreement by
and among the Registrant and Fortress Investment Group LLC,
dated June 23, 2003 (incorporated by reference to the
Registrant's Registration Statement on Form S-11 (File No.
106135), Exhibit 10.1).
10.2 Limited Liability Company Agreement of Fortress Investment
Group LLC, dated February 6, 1998 (incorporated by reference
to the Registrant's Registration Statement on Form S-11
(File No. 33-90578) Exhibit 10.2).
10.3 Investment Guidelines (incorporated by reference to the
Registrant's Registration Statement on Form S-11 (File No.
33-90578) Exhibit 10.3).
10.4 Newcastle Investment Corp. Nonqualified Stock Option and
Incentive Award Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-11 (File No.
106135) Exhibit 10.4).
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
21.1 Subsidiaries of the Registrant (incorporated by reference to
the Registrant's Registration Statement on Form S-11 (File
No. 106135) Exhibit 21.1).
</Table>
II-5
<Table>
<Caption>
EXHIBIT
NO. EXHIBIT
- ------- -------
23.1 Consent of Ernst & Young LLP, independent accountants.
23.2 Consent of Piper Rudnick LLP (included in Exhibit 5.1).
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 8.1)
24.1 Powers of Attorney (included on the signature pages hereto).
25.1 Statement of Eligibility on Form T-1 of the Trustee under
the Trust Indenture Act of 1939, as amended, of, as Trustee
under the Senior Indenture will be filed as an exhibit to a
Current Report of the Registrant on Form 8-K and
incorporated herein by reference.
25.2 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of, as Trustee under the
Subordinated Indenture will be filed as an exhibit to a
Current Report of the Registrant on Form 8-K and
incorporated herein by reference.
</Table>
- ---------------
* To be filed by amendment.
II-6