AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2004
REGISTRATION NO. 333-114742
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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REDWOOD TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
ONE BELVEDERE PLACE, SUITE 300
MILL VALLEY, CA 94941
MARYLAND (415) 389-7373 68-0329422
(State or Other Jurisdiction of (Address, Including Zip Code, and (IRS Employer
Incorporation or Organization) Telephone Number, Including Area Code, Identification No.)
of Principal Executive Offices)
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GEORGE E. BULL III
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
REDWOOD TRUST, INC.
ONE BELVEDERE PLACE, SUITE 300
MILL VALLEY, CA 94941
(415) 389-7373
(Name and Address of Agent For Service)
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COPY TO:
PHILLIP R. POLLOCK, ESQ.
TOBIN & TOBIN
500 SANSOME STREET, 8TH FLOOR
SAN FRANCISCO, CA 94111-3214
(415) 433-1400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At any
time and from time to time after the effective date of this registration
statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please 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. [ ]
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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 REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
2,000,000 SHARES
RWT
REDWOOD TRUST, INC.
PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND
RETAIN IT FOR YOUR FUTURE REFERENCE.
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We are offering existing holders of our common stock and new investors the
opportunity to participate in our Direct Stock Purchase and Dividend
Reinvestment Plan. The Plan is designed to be an economical and convenient
method for existing stockholders to increase their holdings of our common stock
and for new investors to make an initial investment in our common stock.
If you are currently enrolled in our Plan you will automatically be
enrolled in this amended Plan. If you are not currently enrolled in our Plan but
you are an existing holder of our common stock, you may elect to have all or a
portion of your cash dividends automatically invested in additional shares of
common stock at a discount of 2% from the market price, without payment of any
brokerage or service charge.
If you are either an existing holder of our common stock, or a new
investor, you may also purchase shares of common stock with optional cash
payments of $100 to $10,000 per month at a discount, that may range from 0% to
3% as determined by us each month, and without payment of any brokerage
commission or service charge. Upon our approval of a request for waiver, you may
also invest optional cash payments in excess of the $10,000 monthly limit.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS
PROSPECTUS BEFORE ENROLLING IN THE PLAN. THE INFORMATION IN THIS PROSPECTUS IS
NOT COMPLETE AND MAY BE CHANGED. 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.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES ISSUED UNDER THE PLAN
OR HAVE DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Our principal executive offices are located at One Belvedere Place, Suite
300, Mill Valley, California 94941, telephone (415) 389-7373.
The date of this Prospectus is May , 2004.
TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 1
RISK FACTORS................................................ 4
REDWOOD TRUST, INC. ........................................ 15
THE PLAN.................................................... 15
PURPOSE..................................................... 16
AVAILABLE OPTIONS........................................... 16
BENEFITS AND DISADVANTAGES.................................. 17
Benefits.................................................. 17
Disadvantages............................................. 17
ADMINISTRATION.............................................. 18
PARTICIPATION............................................... 18
PURCHASES AND PRICES OF SHARES.............................. 22
ACCOUNT STATEMENTS.......................................... 27
DIVIDENDS ON FRACTIONS...................................... 27
CERTIFICATES FOR COMMON SHARES.............................. 27
WITHDRAWALS AND TERMINATION................................. 27
OTHER INFORMATION........................................... 29
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................... 30
FEDERAL INCOME TAX CONSIDERATIONS........................... 33
General................................................... 33
Stock Ownership Tests..................................... 34
Asset Tests............................................... 34
Gross Income Tests........................................ 35
Distribution Requirement.................................. 36
Qualified REIT Subsidiaries............................... 36
Taxable REIT Subsidiaries................................. 36
Taxation of Redwood Trust................................. 37
Taxation of Stockholders.................................. 38
Taxation of Tax-Exempt Entities........................... 39
State and Local Taxes..................................... 40
Certain United States Federal Income Tax Considerations 40
Applicable to Foreign Holders..........................
Information Reporting and Backup Withholding.............. 41
ERISA INVESTORS............................................. 42
DIVIDENDS................................................... 42
USE OF PROCEEDS............................................. 42
PLAN OF DISTRIBUTION........................................ 42
WHERE YOU CAN FIND MORE INFORMATION......................... 43
INCORPORATION OF IMPORTANT INFORMATION BY REFERENCE......... 43
LEGAL OPINIONS.............................................. 44
EXPERTS..................................................... 44
GLOSSARY.................................................... 45
SCHEDULE A.................................................. A-1
i
SUMMARY
The following summary description of our Direct Stock Purchase and Dividend
Reinvestment Plan is qualified by reference to the full text of the Plan which
appears in this prospectus. Capitalized terms have the meanings given to them in
the Plan.
OUR COMPANY................... Redwood Trust, Inc. is a Maryland corporation
operating as a real estate finance company. We
have elected to be taxed as a real estate
investment trust or REIT since our tax year
ending December 31, 1994. Our primary business
is owning, financing, and credit-enhancing
high-quality jumbo residential mortgage loans.
We distribute to our shareholders as dividends
the mortgage payments we receive from our real
estate loans and securities, less interest
expense and operating costs.
PURPOSE OF THE PLAN........... The purpose of the Plan is to provide our
existing stockholders and interested new
investors with a convenient and less costly
method of purchasing shares of our common stock
and investing all or a percentage of their cash
dividends in additional shares of our common
stock. The Plan can also provide us with a
means of raising additional capital through the
direct sale of our common stock.
SOURCE OF PURCHASE OF
SHARES........................ Shares of common stock purchased through the
Plan will be purchased either directly from us
as newly issued shares or on the open market or
through privately negotiated transactions, or
by a combination of such purchases, at our
option.
INVESTMENT OPTIONS............ You may choose from the following options:
Full Dividend Reinvestment: The Plan
Administrator will apply all cash dividends
relating to all shares of common stock
registered in your name and all cash dividends
on all shares held for you under the Plan
together with Optional Cash Payments, toward
the purchase of additional shares of our common
stock.
Partial Dividend Reinvestment: The Plan
Administrator will apply the cash dividends on
a percentage of common shares registered in
your name specified by you to purchase
additional shares of our common stock. The Plan
Administrator will pay the dividends relating
to the remaining shares of common stock to you
in cash.
All Dividends Paid in Cash: You will continue
to receive cash dividends on shares of common
stock registered in your name in the usual
manner. You may make Optional Cash Payments to
invest in additional shares of our common
stock, subject to monthly minimums and
maximums.
You may change your investment options at any
time by requesting a new enrollment form from
the Plan Administrator and returning it to the
Plan Administrator. Dividends paid on all
common shares acquired under and held in the
Plan will be automatically reinvested in
additional shares of our common stock, unless
otherwise requested.
OPTIONAL CASH PAYMENTS........ Each Optional Cash Payment is subject to a
minimum per month purchase of $100 and a
maximum per month purchase
1
limit of $10,000. Optional cash payments in
excess of $10,000 require our prior approval.
THRESHOLD PRICE............... When pre-approved Optional Cash Payments in
excess of $10,000 are being used to purchase
common stock from us, rather than in the open
market, we may establish a Threshold Price
which is the minimum price at which our common
stock must trade on a given day during the
Pricing Period to be included in the
determination of the Market Price (as described
below) for such investments. Your investment
will be reduced, and 1/10 of your Optional Cash
Payment will be returned to you without
interest, for each trading day that does not
meet the Threshold Price.
MAXIMUM PRICE................. As an investor in a pre-approved optional cash
purchase that exceeds $10,000, you may set a
Maximum Price for such purchases if the stock
is being acquired directly from us (and not
through open market purchases). If the Market
Price, less the applicable discount, exceeds
the Maximum Price specified by you, no purchase
shall be made and your Optional Cash Payment
will be returned to you.
CASH DISCOUNTS................ Each month, we may establish a discount between
0% and 3% from the Market Price applicable to
Optional Cash Payments. The discount may vary
each month but once established will apply
uniformly to all purchases made using Optional
Cash Payments during that month. With respect
to common stock purchased with reinvested
dividends, the discount is 2% off the Market
Price.
INVESTMENT DATE............... With respect to dividend reinvestment:
The Investment Date will be (i) if shares are
acquired directly from us, the dividend payment
date declared by our Board of Directors, or
(ii) in the case of open market purchases, the
date or dates of actual investment, but no
later than 10 business days following the
dividend payment date.
With respect to Optional Cash Payments:
The Investment Date is on or about the 21st day
of each month or, in the case of open market
purchases, such day or days between the 21st
and the next 10 business days thereafter, as
market conditions permit.
MARKET PRICE.................. Whether the shares are acquired directly from
us or on the open market, they will be
purchased for the Plan at the applicable
discount from the Market Price. In no event
shall the price paid be less than the Minimum
Price which is 95% of the sum of the fair
market value of our common stock on the date of
purchase plus brokerage commissions, if any,
paid by us.
The Market Price, in the case of shares
purchased directly from us, will be the average
of the daily high and low sales prices,
computed to 3 decimal places, of our common
stock on the NYSE or other applicable
securities exchange, as reported in the
2
Wall Street Journal, during the Pricing Period.
A Pricing Period is generally a period of 10
consecutive trading days.
In the case of shares purchased on the open
market, the Market Price will be the weighted
average of the actual prices paid, computed to
3 decimal places, for all of the common stock
purchased by the Plan Administrator with all
Participants' reinvested dividends and Optional
Cash Payments for the related month.
EXPENSES...................... With respect to shares of common stock
purchased directly from us from reinvested
dividends or Optional Cash Payments, we will
pay expenses incurred in connection with such
purchases. With respect to shares of common
stock purchased in the open market, we will
also pay brokerage commissions so long as the
combined discount and brokerage commissions do
not exceed 5% of the value of our common stock
on the date of purchase. We will pay all other
costs of administering the Plan. However, if
you request that the Plan Administrator sell
all or any portion of your shares, you must pay
a nominal fee per transaction to the
Administrator, any related brokerage
commissions, and applicable stock transfer
taxes.
NO INTEREST PENDING
INVESTMENT.................... No interest will be paid on cash dividends or
Optional Cash Payments pending investment or
reinvestment under the terms of the Plan.
WITHDRAWAL.................... You may withdraw from the Plan with respect to
all or a portion of the shares held in your
Plan account at any time by notifying the Plan
Administrator in writing.
AMOUNT OFFERED................ We have registered 2,000,000 shares of common
stock authorized to be issued under the Plan.
The amounts remaining under our prior plans
will not be aggregated into this limit. Because
we expect to continue the Plan indefinitely, we
expect to authorize for issuance and register
under the Securities Act additional shares from
time to time as necessary for purposes of the
Plan.
ADDITIONAL INFORMATION........ Additional information may be obtained at our
website at http://www.redwoodtrust.com.
3
RISK FACTORS
You should carefully consider the following factors and other information
contained or incorporated by reference in this prospectus before deciding to
purchase shares of our common stock.
The following is a summary of the risk factors that we currently believe
are important and that could cause our results to differ from expectations. This
is not an exhaustive list; other factors not listed here could be material to
our results.
We can provide no assurances with respect to projections or forward-looking
statements made by us or by others with respect to our future results. Any one
of the factors listed here, or other factors not so listed, could cause actual
results to differ materially from expectations. It is not possible to accurately
project future trends with respect to these factors, to project which factors
will be most important in determining our results, or to project what our future
results will be.
This prospectus includes forward-looking statements. All statements
regarding our and our subsidiaries' expected future financial position, results
of operations, cash flows, funds from operations, dividends and dividend plans,
financing plans, business strategy, budgets, projected costs, capital
expenditures, competitive positions, growth opportunities, expected interest
income, continued qualification as a real estate investment trust, plans and
objectives of our management for future operations and statements that include
words such as "if," "anticipate," "believe," "plan," "estimate," "expect,"
"intend," "may," "could," "should," "will," and other similar expressions are
forward-looking statements. Such forward-looking statements are inherently
uncertain, and you should recognize that actual results may differ from our
expectations. We do not undertake any duty to update such forward-looking
statements.
WE ASSUME DIRECT CREDIT RISK IN OUR RESIDENTIAL REAL ESTATE LOAN INVESTMENTS.
REAL ESTATE LOAN DELINQUENCIES, DEFAULTS, AND CREDIT LOSSES COULD REDUCE OUR
EARNINGS AND CREDIT LOSSES COULD REDUCE OUR CASH FLOWS AND ACCESS TO
LIQUIDITY.
As a core part of our business, we assume the credit risk of real estate
loans. We do this in each of our portfolios. We may add other product lines over
time that may have different types of credit risk than are described herein. We
are generally not limited in the types of credit risk or other types of risk
that we can undertake. As we acquire more credit-sensitive loans and securities,
we increase our credit risk exposure.
In our residential real estate loan portfolio, we assume the direct credit
risk of residential loans. Realized credit losses will reduce our earnings and
future cash flow. We have a credit reserve for these loans and we may continue
to add to this reserve in the future. There can be no assurance that our credit
reserve will be sufficient to cover future losses. We may need to reduce
earnings by increasing our credit reserve in the future.
Credit losses on residential real estate loans can occur for many reasons,
including: poor origination practices related to fraud, faulty appraisals,
documentation errors, poor underwriting, legal errors; poor servicing practices;
weak economic conditions; declines in the values of homes; special hazards;
earthquakes and other natural events; over-leveraging of the borrower; changes
in legal protections for lenders; reduction in personal incomes; job loss; and
personal events such as divorce or health problems.
If the U.S. economy or the housing market weakens or instances of borrower
fraud increase, our credit losses could be increased beyond levels that we have
anticipated. If we incur increased credit losses, our earnings might be reduced,
and our cash flows, asset market values and access to borrowings might be
adversely affected. The amount of capital and cash reserves that we hold to help
us manage credit and other risks may prove to be insufficient to protect us from
earnings volatility, dividend cuts, liquidity and solvency issues.
The manner in which we account for credit losses differs between Generally
Accepted Accounting Principles, or GAAP, and tax. While we may establish a
credit reserve for GAAP purposes, we are not permitted for tax purposes to
reduce our taxable REIT income to provide for a reserve for future credit
4
losses. Thus, if credit losses occur in the future, taxable REIT income may be
reduced relative to GAAP income. When taxable REIT income is reduced, our
minimum dividend distribution requirements under the REIT tax rules are reduced.
We could reduce our dividend rate in such a circumstance. Alternatively, credit
losses in some assets may be capital losses for tax. Unless we had offsetting
capital gains, our minimum dividend distribution requirement would not be
reduced by these credit losses, but eventually our cash flows would be. This
could reduce our free cash flow and liquidity.
Despite our efforts to manage our credit risk, there are many aspects of
credit that we cannot control, and there can be no assurance that our quality
control and loss mitigation operations will be successful in limiting future
delinquencies, defaults and losses. Our underwriting reviews may not be
effective. The representations and warranties that we receive from sellers may
not be enforceable. We may not receive funds that we believe are due to us from
mortgage insurance companies. Although we rely on our servicers, they may not
cooperate with our loss mitigation efforts, or such efforts may otherwise be
ineffective. Various service providers to securitizations, such as trustees,
bond insurance providers and custodians, may not perform in a manner that
promotes our interests. The value of the homes collateralizing our loans may
decline. The frequency of default, and the loss severity on our loans upon
default, may be greater than we anticipated. Interest-only loans, negative
amortization loans, adjustable rate loans, loans with balances over $1 million,
and loans that are partially collateralized by non-real estate assets may have
special risks. Our geographical diversification may be ineffective in reducing
losses. If loans become "real estate owned," or REO, we or our agents will have
to manage these properties and may not be able to sell them. Changes in consumer
behavior, bankruptcy laws and the like may exacerbate our losses. In some states
and circumstances, we have recourse against the borrower's other assets and
income, however, in most cases, we may only be able to look to the value of the
underlying property for any recoveries. Expanded loss mitigation efforts in the
event that defaults increase could be costly. The interest rate on the bulk of
our loans is adjustable. Accordingly, when short-term interest rates rise,
required monthly payments from homeowners will rise under the adjustable rate
mortgages and this may increase borrowers' delinquencies and defaults. We expect
to continue to increase the size of our residential loan portfolio, and will
likely increase our GAAP balance sheet leverage with respect to these loans,
thus exposing us to a greater degree to the potential risks of owning these
loans.
WE HAVE CREDIT RISKS IN OUR RESIDENTIAL LOAN CREDIT ENHANCEMENT SECURITIES
RELATED TO THE UNDERLYING LOANS. ACCOUNTING FOR SUCH INTERESTS REQUIRES US TO
MAKE MANY ASSUMPTIONS THAT MAY NOT BEAR OUT.
Our total net investment in residential credit enhancement securities
includes a portion of securities that are in a first loss position with respect
to the underlying loans. Upon acquisition of a credit enhancement security, we
generally expect that the entire amount of these first loss investments will be
subject to credit loss, potentially even in healthy economic environments. Our
ability to make an attractive return on these investments depends on how quickly
these expected losses occur. If the losses occur more quickly than we
anticipate, we may not recover our investment and/or our rates of return may
suffer significantly.
Second loss credit enhancement securities, which are subject to credit loss
when the entire first loss investment (whether owned by us or by others) has
been eliminated by credit losses, make up another portion of our net investment
in credit enhancement securities. Third loss credit enhancement securities, or
other investments that are protected by various forms of material credit
enhancement, make up the remainder of our net investment in credit enhancement
interests. Given our normal expectations for credit losses, we would anticipate
some future losses on many of our second loss interests, but generally do not
anticipate losses on investments in the third loss or similar positions. If
credit losses are greater than, or occur sooner than, expected, our expected
future cash flows will be reduced and our earnings will be negatively affected.
Credit losses and delinquencies could also affect the cash flow dynamics of
these securitizations and thus extend the period over which we will receive a
return of principal from these investments. In most cases, adverse changes in
anticipated cash flows would reduce our economic and accounting returns and may
also precipitate mark-to-market charges to earnings. From time to time, we may
pledge these interests as collateral for borrowings; a deterioration of credit
results in this portfolio may adversely affect the terms or availability of
these borrowings and, thus, our liquidity.
5
We generally expect to increase our net acquisitions of residential credit
enhancement securities and to increase our net acquisitions of first loss and
second loss investments relative to third loss investments. This may result in
increased risk to us with respect to the credit results of the residential loans
we credit enhance.
In our credit enhancement securities portfolio, we may in the future
benefit from credit rating upgrades or restructuring opportunities through
re-securitizations or other means. If credit results deteriorate, these
opportunities may not be available to us or may be delayed. It is likely, in
many instances, that we will not be able to anticipate increased credit losses
in a pool soon enough to allow us to sell such credit enhancement interests at a
reasonable price.
In anticipation of future credit losses, we designate a portion of the
purchase discount associated with many of our credit enhancement securities as a
form of credit protection. The remaining discount is amortized into income over
time through the effective yield method. If the credit protection we set aside
at acquisition proves to be insufficient, we may need to reduce our effective
yield income recognition in the future or we may adjust our basis in these
interests, thus reducing earnings.
DECREASES IN ESTIMATED CASH FLOWS ON CERTAIN SECURITIES AND LOANS MAY REDUCE
EARNINGS AS A RESULT OF DECLINES IN MARKET VALUES.
We adopted EITF 99-20 in the first quarter of 2001. Generally, under EITF
99-20, if prospective cash flows from certain investments deteriorate even
slightly from prior expectations (due to changes in anticipated credit losses,
prepayment rates, and otherwise) then the asset will be marked-to-market if the
market value is lower than our basis. Any mark-to-market adjustments under EITF
99-20 reduce GAAP earnings in that period. Since we do not expect every asset we
own to always perform equal to or better than our expectations, we expect to
take negative EITF 99-20 adjustments to earnings from time to time.
OUR BUSINESS MAY BE SIGNIFICANTLY HARMED BY A SLOWDOWN IN THE ECONOMY OF
CALIFORNIA.
Approximately half of the residential real estate loans that we own or
credit enhance are secured by property in California. An overall decline in the
economy or the residential real estate market, or the occurrence of a natural
disaster that is not covered by standard homeowners' insurance policies, such as
an earthquake, could decrease the value of mortgaged properties in California.
This, in turn, would increase the risk of delinquency, default or foreclosure on
real estate loans in our residential loan portfolios. This could adversely
affect our credit loss experience and other aspects of our business, including
our ability to securitize real estate loans. Approximately 65% of our commercial
real estate loans and approximately one-third of the loans underlying our
securities portfolio are also secured by properties located in California.
WE MAY HAVE CREDIT LOSSES IN OUR SECURITIES PORTFOLIO.
Most of our securities are backed by residential and, to a lesser extent,
commercial real estate loans. Most of these securities benefit from various
forms of corporate guarantees and/or from credit enhancement provided by third
parties, usually through their ownership of subordinated credit enhancement
interests. Thus, the bulk of our securities investments have at least some
degree of protection from initial credit losses that occur in the underlying
loan pools. However, in the event of greater than expected future delinquencies,
defaults or credit losses, or a substantial deterioration in the financial
strength of any corporate guarantors, our results would likely be adversely
affected. We may experience credit losses in our securities portfolio.
Deterioration of the credit results or guarantees of these assets may reduce the
market value of these assets, thus limiting our borrowing capabilities and
access to liquidity. Generally, we do not control or influence the underwriting,
servicing, management or loss mitigation efforts with respect to these assets.
Results could be affected through credit rating downgrades, market value losses,
reduced liquidity, adverse financing terms, reduced cash flows, experienced
credit losses, or in other ways.
For the non-investment grade assets in our securities portfolio, our
protection against credit loss is smaller and our credit risks and liquidity
risks are increased. If we acquire equity securities, results may be volatile.
We intend to continue to increase the percentage of our securities portfolio
that is rated below AA
6
and that is rated below investment grade, and we intend to continue to expand
the range of types of securities that we acquire; these trends may increase the
potential credit risks in our securities portfolio. A substantial portion of
these lower rated securities are acquired in connection with our Acacia program.
Many of the loans underlying the securities we have acquired for our securities
portfolio are of lesser quality than the loans in our high-quality residential
loan portfolios; these lower quality loans can be expected to have higher rates
of delinquency and loss, and losses to our security interests could occur.
Changes in laws regarding origination practices for lower-quality loans could
reduce the value and credit-worthiness of some of our securities and could
expose us to litigation. Some of our securities are backed by subprime
residential, manufactured housing, second-lien, and diverse commercial real
estate loans that have additional risks not typically found with residential
real estate loans. Some of our securities are unsecured corporate obligations of
REITs that invest in commercial real estate properties; these securities have
commercial real estate risk but also may have additional risks associated with
unsecured lending to corporations. We may invest in other types of securities
that have risks that are not contemplated in this discussion.
WE ASSUME DIRECT CREDIT RISK IN OUR COMMERCIAL REAL ESTATE LOAN INVESTMENTS.
The loans in our commercial real estate loan portfolio, as well as the
loans that collateralize the commercial real estate loan securities we acquire,
may have higher degrees of credit and other risks than do our residential real
estate loans, including various environmental and legal risks. The net operating
income and market values of commercial real estate properties may vary with
economic cycles and as a result of other factors, so that debt service coverage
is unstable. The value of the property may not protect the value of the loan if
there is a default. Our commercial real estate loans are not geographically
diverse, so we are at risk for regional factors. Many of our commercial loans
are not fully amortizing, so the timely recovery of our principal is dependent
on the borrower's ability to refinance at maturity. In those cases in which we
lend against commercial real estate, the real estate is often in transition.
Such lending entails higher risks than traditional commercial property lending
against stabilized properties. Initial debt service coverage ratios,
loan-to-value ratios, and other indicators of credit quality may not meet
standard market criteria for stabilized commercial real estate loans. The
underlying properties may not transition or stabilize as we expect. The personal
guarantees and forms of cross-collateralization that we receive on some loans
may not be effective. We generally do not service our loans; we rely on our
servicers to a great extent to manage our commercial assets and work-out loans
and properties if there are delinquencies or defaults. This may not work to our
advantage. As part of the work-out process of a troubled commercial real estate
loan, we may assume ownership of the property, and the ultimate value of this
asset would depend on our management of, and eventual sale of, the property
which secured the loan. Our loans are illiquid; if we choose to sell them, we
may not be able to do so in a timely manner or for a satisfactory price.
Financing these loans may be difficult, and may become more difficult if credit
quality deteriorates. We have sold senior loan participations on some of our
loans, so that the asset we retain is junior and has concentrated credit,
servicing and other risks. We have directly originated some of our commercial
loans, and participated in the origination of others. This may expose us to
certain credit, legal and other risks that may be greater than is usually
present with acquired loans. We have sold commercial real estate loans. The
representations and warranties we made on these sales are limited, but could
cause losses and claims in some circumstances. On a net basis, we intend to
increase our investment in commercial real estate loans and in junior
participations of these loans, mezzanine and second-lien loans that are junior
to senior loans and in investment grade and non-investment grade commercial real
estate loan securities.
OUR INVESTMENTS IN SUBORDINATED COMMERCIAL REAL ESTATE LOAN-BACKED SECURITIES
AND LOANS ARE SUBJECT TO LOSSES.
In general, losses on an asset securing a commercial real estate 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 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 loan portfolio has been overvalued by the originator, or if the
values subsequently decline and,
7
as a result, less collateral is available to satisfy interest and principal
payments due on the related loan 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 loans underlying
commercial loan-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.
WE INTEND TO INVEST IN DIVERSE TYPES OF ASSETS WITH CREDIT RISKS THAT COULD
ALSO CAUSE LOSSES.
We intend to continue to invest in a variety of types of commercial real
estate loan assets, such as mezzanine loans, second liens, credit enhancement
interests of commercial loan securitizations, junior participations, among
others, that may entail other types of risks. In addition, we intend to continue
to invest in other assets with material credit risk, including sub-prime
residential real estate loans and securities, the equity and debt of
collateralized debt obligations, or CDOs, corporate debt and equity of other
REITs and non-real estate companies, trust preferreds from banks, real estate
and non-real estate asset-backed securities, and other financial and real
property assets.
OUR RESULTS COULD ALSO BE ADVERSELY AFFECTED BY COUNTER-PARTY CREDIT RISK.
We have other credit risks that are generally related to the
counter-parties with which we do business. In the event a counter-party to our
short-term borrowings becomes insolvent, we may fail to recover the full value
of our collateral, thus reducing our earnings and liquidity. In the event a
counter-party to our interest rate agreements becomes insolvent or interprets
our agreements with them in an unfavorable manner to us, our ability to realize
benefits from hedging may be diminished, and any cash or collateral that we
pledged to these counter-parties may be unrecoverable. We may be forced to
unwind these agreements at a loss. In the event that one of our servicers
becomes insolvent or fails to perform, loan delinquencies and credit losses may
increase. We may not receive funds to which we are entitled. In various other
aspects of our business, we depend on the performance of third parties that we
do not control. We attempt to diversify our counter-party exposure and to limit
our counter-party exposure to strong companies with investment-grade credit
ratings, however, we are not always able to do so. Our counter-party risk
management strategy may prove ineffective.
WE MAY BE SUBJECT TO THE RISKS ASSOCIATED WITH INADEQUATE OR UNTIMELY SERVICES
FROM THIRD-PARTY SERVICE-PROVIDERS, WHICH MAY AFFECT OUR RESULTS OF
OPERATIONS.
The majority of our loans and securities are serviced by third-party
service providers. These arrangements allow us to increase the volume of the
loans we purchase without incurring the expenses associated with servicing
operations. However, as with any external service provider, we will be subject
to the risks associated with inadequate or untimely services. Many borrowers
require notices and reminders to keep their loans current and to prevent
delinquencies and foreclosures. A substantial increase in our delinquency rate
that results from improper servicing or mortgage loan performance in general
could adversely affect our ability to securitize our real estate loans in the
future.
WE ARE EXPOSED TO CERTAIN RISKS ASSOCIATED WITH THE ACCUMULATION OF REAL
ESTATE LOAN ASSETS PRIOR TO SECURITIZATION.
Our long-term goal is to fund most of our real estate loan and security
investments with the issuance of mortgage-backed and asset-backed securities
that are nonrecourse to us and are accounted for as the issuance of long-term
debt. Prior to securitization, we acquire and accumulate loans and securities
with short-term recourse debt or equity. During this accumulation period, we are
subject to certain risks such as liquidity risk, market value risk and credit
risk. Untimely execution of a securitization may accentuate
8
these risks. In addition, we may not be able to securitize certain assets, and,
in such event, our earnings and ability to grow may be adversely affected.
FLUCTUATIONS IN OUR RESULTS MAY BE EXACERBATED BY THE STRUCTURAL LEVERAGE THAT
WE EMPLOY AND BY LIQUIDITY RISK.
We report substantial GAAP balance sheet leverage relative to many
financial and non-financial companies, although we believe we employ less
leverage on a recourse basis than most banks, thrifts and other financial
institutions. The bulk of our financing is typically in the form of asset
securitization reported on our GAAP books as long-term debt. We believe this is
generally an effective and lower-risk form of financing compared to many other
forms of debt utilized by financial companies. We believe the amount of leverage
that we employ is appropriate, given the risks in our balance sheet, the
non-recourse nature of the mortgage-backed and asset-backed securities we issue,
the fact that our maximum credit losses are generally limited, and our
management policies. However, in order to operate our business successfully, we
require continued access to short-term debt and securitization assets on
favorable terms with respect to financing costs, capital efficiency, covenants
and other factors. We may not be able to obtain debt or issue securities on such
terms, and, in such event, our earnings and liquidity could be adversely
affected.
Relatively small changes in asset quality, asset yield, cost of borrowed
funds and other factors could have relatively large effects on us and our
stockholders, including fluctuations in earnings and liquidity. Our use of
securitizations and the resulting structural leverage may not enhance our
returns and could erode our financial soundness. In general, we currently intend
to increase our reported GAAP leverage in the future through asset accumulation
funded by non-recourse securitizations accounted for as the issuance of
long-term debt.
Although we do not have a corporate debt rating, the nationally-recognized
credit rating agencies have a strong influence on the amount of capital that we
hold relative to the amount of credit risk we take. The rating agencies
determine the amount of net investment we must make to credit enhance the
securities, mostly rated AAA, that we issue to fund our residential loan
portfolio. They also determine the amount of principal value required for the
credit enhancement interests we acquire. The rating agencies, however, do not
have influence over how we fund our net credit investments nor do they determine
or influence many of our other capital and leverage policies. With respect to
our short-term debt, our lenders, typically large commercial banks and Wall
Street Investment firms, limit the amount of funds that they will advance
against our collateral. We set aide more capital than required by our lenders.
However, recourse lenders can increase the amount of capital that they will
require of us, or the value of our collateral may decline, thus reducing our
liquidity.
We are not regulated by the national regulatory bodies that regulate banks,
thrifts, and the U.S. government-sponsored real estate loan investment companies
Fannie Mae and Freddie Mac. Thus, the amount of financial leverage that we
employ is largely controlled by management, and by our internal risk-adjusted
capital policies.
In the period in which we are accumulating loans, securities, or other
assets in order to build a portfolio of efficient size to issue mortgage-backed
or asset-backed securities, variations in the market for these assets or for
securitization could affect our results. Ultimately, we may not be able to issue
securities, the cost of securitization could be greater than we anticipated, the
net investment in our securitization trust required by the rating agencies could
be greater than anticipated, certain of our assets could not be accepted into
the securitization trust, the market value of our assets to be sold into the
securitization trust may have changed, our hedging activities or agreements with
counter-parties may have been ineffective, or other negative effects could
occur.
We may borrow on a short-term basis to fund a portion of our securities
portfolio, certain credit enhancement securities, residential loans, or other
assets prior to the issuance of securities, to use a certain amount of leverage
with respect to our net investments in credit enhancement interests, to fund a
portion of our commercial loan portfolio, to fund working capital and general
corporate needs, and for other
9
reasons. We borrow short-term by pledging our assets as collateral. We can
usually borrow through uncommitted borrowing facilities for the substantial
majority of our short-term debt because the assets pledged as collateral are
generally liquid, have active trading markets, and have readily discernable
market prices. The term of these borrowings can range from one day to one year.
To fund less liquid or more specialized assets, we typically enter into credit
line agreements from commercial banks and finance companies with a one-year
term. Whether committed or not, we need to roll over short-term debt on a
frequent basis; our ability to borrow is dependent on our ability to deliver
sufficient market value of collateral to meet lender requirements. Our payment
of commitment fees and other expenses to secure borrowing lines may not protect
us from liquidity issues or losses. Variations in lenders' ability to access
funds, lender confidence in us, lender collateral requirements, available
borrowing rates, the acceptability and market values of our collateral, and
other factors could force us to utilize our liquidity reserves or to sell
assets, and, thus, affect our liquidity, financial soundness, and earnings. In
recent years, we believe that the marketplace for our type of secured short-term
borrowing has been stable, but there is no assurance that such stability will
continue. Our current intention is to maintain relatively low levels of
short-term debt over time, with the exception of short-term debt used to fund
assets under accumulation for a securitization. Our plans may change, however.
In the future, we may also borrow on an unsecured basis through bank loans,
issuance of unsecured corporate debt, and other means.
Our various borrowing arrangements subject us to debt covenants. While
these covenants have not meaningfully restricted our operations to date, they
could be restrictive or harmful to us and our stockholders' interests in the
future. Should we violate debt covenants, we may incur expenses, losses, or
reduced ability to access debt.
Prior to and during 2003, a portion of our equity capital base included
convertible preferred stock. On May 2, 2003, we redeemed all outstanding shares
of preferred stock by converting those shares into shares of common stock. Prior
to conversion, our Class B preferred stock had a dividend rate of at least
$0.755 per share per quarter, and had certain rights to dividend distributions
and preferences in liquidation that were senior to those of the holders of our
common stock.
DISRUPTIONS IN MORTGAGE SECURITIZATION MARKET MAY ADVERSELY AFFECT OUR
EARNINGS AND GROWTH.
We depend upon the issuance of securities to finance our operations. If the
market for securitizations should become disrupted, as occurred in 1998 due to a
liquidity crisis in debt markets for some capital market participants, we may be
unable to issue our securities, in which event our ability to continue to
acquire mortgage assets would be adversely impacted. In addition, if the
securitization market were to experience a long-term disruption, for example,
due to an adverse court decision or bankruptcy law change relating to the
bankruptcy-remote structures of the securitizations, our ability to issue
securitizations may be impaired or eliminated for a protracted period or
permanently. In such event, our earnings and ability to grow may be adversely
affected.
CHANGES IN THE MARKET VALUES OF OUR ASSETS AND LIABILITIES CAN ADVERSELY
AFFECT OUR EARNINGS, STOCKHOLDERS' EQUITY, AND LIQUIDITY.
The market values of our assets, liabilities and hedges are affected by
interest rates, the shape of yield curves, volatility, credit quality trends,
loan prepayment rates, supply and demand, capital markets trends and liquidity,
general economic trends, expectations about the future, and other factors. For
the assets that we mark-to-market through our income statement or balance sheet,
such market value fluctuations will affect our earnings and book value. To the
extent that our basis in our assets is thus changed, future reported income may
be affected as well. If we sell an asset that has not been marked-to-market
through our income statement at a reduced market price relative to our basis,
our earnings will be reduced. Market value reductions of the assets that we
pledge for short-term borrowings may reduce our access to liquidity.
Generally, reduced asset market values for the assets that we own may have
negative effects, but might improve our opportunities to acquire new assets at
attractive pricing levels. Conversely, increases in the market values of our
existing assets may have positive effects, but may mean that acquiring new
assets at attractive prices becomes more difficult.
10
CHANGES IN LOAN PREPAYMENT RATES MAY AFFECT OUR EARNINGS, LIQUIDITY, AND THE
MARKET VALUES OF OUR ASSETS.
Residential and commercial real estate loan prepayment rates are affected
by interest rates, borrower behavior and confidence, seasoning of loans, the
value of and amount of equity in the underlying properties, prepayment terms of
the loans, the ease and cost of refinancing, the property turnover rate, media
awareness of refinancing opportunities, and many other factors.
Changes in prepayment rates (including prepayments from liquidated
defaulted loans) may have multiple effects on our operations. Faster loan
prepayment rates may lead to increased premium amortization expenses for premium
and interest-only assets, increased working capital requirements, reduced market
values for certain types of assets, adverse reductions in the average life of
certain assets, adverse changes in hedge ratios, and an increase in the need to
reinvest cash to maintain operations. Premium assets may experience faster rates
of prepayments than discount assets. Slower prepayment rates may lead to reduced
discount amortization income for discount assets, reduced market values for
discount and other types of assets, extension of the average life of certain
investments at a time when this would be contrary to our interests, adverse
changes in hedge ratios, a reduction in cash flow available to support
operations and make new investments, and a reduction in new investment
opportunities, since the volume of new origination and securitizations would
likely decline. Slower prepayment rates may lead to increased credit losses.
The amount of net discount we have on our books is the net of a much larger
premium balance and a much larger discount balance. Changes in prepayment rates
that are not uniform across products could have a material effect on our
earnings. Therefore, our net amortization expense or income can change over time
as our asset composition changes through principal repayments, asset purchases,
and as we mark our assets to market.
INTEREST RATE FLUCTUATIONS CAN HAVE VARIOUS EFFECTS ON US, AND COULD LEAD TO
REDUCED EARNINGS AND/OR INCREASED EARNINGS VOLATILITY.
Our balance sheet and asset/liability operations are complex and diverse
with respect to interest rate movements, so we cannot fully describe all the
possible effects of changing interest rates. We do not seek to eliminate all
interest rate risk. Changes in interest rates, the interrelationships between
various interest rates, and interest rate volatility could have negative effects
on our earnings, the market value of our assets and liabilities, loan prepayment
rates, and our access to liquidity. Changes in interest rates can also affect
our credit results.
Generally, rising interest rates could lead to reduced asset market values
and slower prepayment rates. Initially, our net interest income may be reduced
if short-term interest rates increase, as our cost of funds would likely respond
to this increase more quickly than would our asset yields. Within three to
twelve months of a rate change, however, asset yields for our adjustable rate
residential loans may increase commensurately with the rate increase. Higher
short-term interest rates may reduce earnings in the short-term, but could lead
to higher long-term earnings, as we earn more on the equity-funded portion of
our balance sheet. If we own fixed rate assets that are funded with floating
rate debt, our net interest income from this portion of our balance sheet would
be unlikely to recover until interest rates dropped again or the assets matured.
Some of our adjustable rate residential loans have periodic caps that limit the
extent to which the coupon we earn can rise or fall, usually 2% annual caps, and
life caps that set a maximum coupon. If short-term interest rates rise rapidly
or rise so that our loan coupons reach their periodic or life caps, the ability
of our asset yields to rise along with market rates would be limited, but there
may be no such limits on the increase in our liability costs.
Falling interest rates can also lead to reduced asset market values in some
circumstances, particularly for prepayment-sensitive, premium, and other assets
and for many types of interest rate agreement hedges. Decreases in short-term
interest rates can be positive for earnings in the near-term, as our cost of
funds may decline more quickly than our asset yields would. For longer time
horizons, falling short-term interest
11
rates can reduce our earnings, as we may earn lower yields from the assets that
are equity-funded on our balance sheet.
Changes in the interrelationships between various interest rates can reduce
our net interest income even in the absence of a clearly defined interest rate
trend. For instance, if the short-term interest rate indices that drive our
asset yields were to decline relative to the short-term interest rate indices
that determine our cost of funds, our net interest income would be reduced. As
another example, if short-term interest rates rise relative to long-term
interest rates (a flatter or inverted yield curve) then prepayments on our
adjustable rate residential loans would likely increase and this may reduce
earnings.
HEDGING ACTIVITIES MAY REDUCE LONG-TERM EARNINGS AND MAY FAIL TO REDUCE
EARNINGS VOLATILITY OR TO PROTECT OUR CAPITAL IN DIFFICULT ECONOMIC
ENVIRONMENTS; FAILURE TO HEDGE MAY ALSO HAVE ADVERSE EFFECTS ON OUR RESULTS.
We attempt to hedge certain risks through managing certain characteristics
of our assets and liabilities, and as we deem appropriate, by entering into
various interest rate agreements. The amount and level of interest rate
agreements that we have may vary significantly over time. We generally attempt
to enter into interest rate hedges that provide an appropriate and efficient
method for hedging the desired risk. We may elect accounting treatment under FAS
133 for a portion of our hedges. However, there can be no assurance that
electing FAS 133 accounting for certain hedges will improve the quality of our
reported earnings or that we will continue to meet the requirements of FAS 133
when elected. In addition, the ongoing requirements of FAS 133 are complex and
rigorous; if we fail to meet these requirements we would be required to
de-designate our interest rate agreements as hedges under FAS 133 and commence
mark-to-market accounting through our consolidated statements of income.
Our quarterly earnings may reflect volatility in earnings that are
exaggerated by the resulting accounting treatment for certain hedges.
Hedging against interest rate movements using interest rate agreements
(including interest rate swap instruments and interest rate futures) and other
instruments usually has the effect over long periods of time of lowering
long-term earnings. To the extent that we hedge, it is usually to protect us
from some of the effects of short-term interest rate volatility, to lower
short-term earnings volatility, to stabilize liability costs, or to stabilize
the future cost of anticipated liability issuance. Such hedging may not achieve
its desired goals. Using interest rate agreements to hedge may increase
short-term earnings volatility, if we elect mark-to-market accounting for our
hedges. Reductions in market values of interest rate agreements may not be
offset by increases in market values of the assets or liabilities being hedged.
Conversely, increases in market values of interest rate agreements may not fully
offset declines in market values of assets or liabilities being hedged. Changes
in market values of interest rate agreements may require us to pledge
significant amounts of collateral or cash. Hedging exposes us to counter-party
risks.
We also may hedge by taking short or long positions in U.S. treasuries,
mortgage securities, or other cash instruments. Such hedges may have special
basis, liquidity, and other risks.
MAINTAINING REIT STATUS MAY REDUCE OUR FLEXIBILITY.
To maintain REIT status, we must follow rules and meet certain tests. In
doing so, our flexibility to manage our operations may be reduced. If we make
frequent asset sales to persons deemed customers, we could be viewed as a
"dealer," and thus subject to entity level taxes. Certain types of hedging may
produce non-qualifying income under the REIT rules. Our ability to own non-real
estate related assets and earn non-real estate related income is limited.
Meeting minimum REIT dividend distribution requirements may reduce our
liquidity. Because we must distribute at least 90% of our taxable REIT income as
dividends to maintain our REIT status, we may need to raise new equity capital
if we wish to grow operations at a rapid pace. Stock ownership tests may limit
our ability to raise significant amounts of equity capital from one source.
Failure to meet REIT requirements may subject us to taxation, penalties, and/or
loss of REIT status. REIT laws and taxation could change in a manner adverse to
our operations. To pursue our business plan as a REIT, we generally need to
avoid becoming a registered investment company, or RIC. To avoid RIC
restrictions, we generally need to maintain at least 55% of our assets in
12
whole loan form or in other related forms of assets that qualify for this test.
Meeting this test may restrict our flexibility. Failure to meet this test would
limit our ability to leverage and would impose other restrictions on our
operations. Our ability to invest in taxable subsidiaries is limited under the
REIT rules. Our REIT status affords us certain protections against take-over
attempts. These take-over restrictions may not always work to the advantage of
stockholders. Our stated goal is to not generate income that would be taxable as
unrelated business taxable income, or UBTI, to our tax-exempt stockholders.
Achieving this goal may limit our flexibility in pursuing certain transactions.
Despite our efforts to do so, we may not be able to avoid creating or
distributing UBTI to our stockholders.
We may seek to retain a portion of our earnings from time to time so we can
increase our investments in real estate loans and securities; we will be subject
to income and excise taxes under the REIT tax rules if we do so. New tax rules
regarding dividends have been enacted and future legislative or regulatory
changes may limit the tax benefits accorded to REITs, either of which may reduce
some of a REIT's competitive edge relative to non-REIT corporations.
OUR CASH BALANCES AND CASH FLOWS MAY BECOME LIMITED RELATIVE TO OUR CASH
NEEDS.
We need cash to meet our working capital, minimum REIT dividend
distribution requirements, and other needs. Cash could be required to pay-down
our recourse short-term borrowings in the event that the market values of our
assets that collateralize our debt decline, the terms of short-term debt become
less attractive, or for other reasons. Cash flows from principal repayments
could be reduced should prepayments slow or should credit quality trends
deteriorate (in the latter case since, for certain of our assets, credit tests
must be met for us to receive cash flows). For some of our assets, cash flows
are "locked-out" and we receive less than our pro-rata share of principal
payment cash flows in the early years of the investment. Operating cash flow
generation could be reduced if earnings are reduced, if discount amortization
income significantly exceeds premium amortization expense, or for other reasons.
Our minimum dividend distribution requirements could become large relative to
our cash flow if our income as calculated for tax purposes significantly exceeds
our cash flow from operations. Generally, our cash flow has materially exceeded
our cash requirements; this situation could be reversed, however, with
corresponding adverse consequences to us. We generally maintain what we believe
are ample cash balances and access to borrowings to meet projected cash needs.
In the event, however, that our liquidity needs exceed our access to liquidity,
we may need to sell assets at an inopportune time, thus reducing our earnings.
In an adverse cash flow situation, our REIT status or our solvency could be
threatened.
INCREASED COMPETITION COULD REDUCE OUR ACQUISITION OPPORTUNITIES OR AFFECT OUR
OPERATIONS IN A NEGATIVE MANNER.
We believe that our principal competitors in our business of investing in
real estate loans are banks and thrifts, mortgage and bond insurance companies,
other mortgage REITs, hedge funds and private investment partnerships, life
insurance companies, government sponsored entities such as Fannie Mae, Freddie
Mac, Ginnie Mae, and the Federal Home Loan Banks, mutual funds, pension funds,
mortgage originators, Wall Street broker-dealers, overseas entities, and other
financial institutions. Although we anticipate that we will be able to compete
effectively due to our relatively low level of operating costs, relative freedom
to securitize our assets, our ability to utilize leverage, freedom from certain
forms of regulation, focus on our core business, and the tax advantages of our
REIT status, nevertheless, many of our competitors have greater operating and
financial resources than we do. Competition from these entities, or new
entrants, could raise prices on real estate loans and other assets, reduce our
acquisition opportunities, or otherwise materially affect our operations in a
negative manner. We expect competition to increase.
NEW ASSETS MAY NOT BE AVAILABLE AT ATTRACTIVE PRICES, THUS LIMITING OUR GROWTH
AND/OR EARNINGS.
In order to reinvest proceeds from real estate loan principal repayments,
or to deploy new equity capital that we may raise in the future, we need to
acquire new assets. If pricing of new assets is unattractive, or if the
availability of new assets is much reduced, we may not be able to acquire new
assets that will generate attractive returns. Our new assets may generate lower
returns than the assets that we
13
have on our balance sheet. Generally, unattractive pricing and availability of
new assets is a function of reduced supply and/or increased demand. Supply can
be reduced if originations of a particular product are reduced, or if there are
few sales in the secondary market of seasoned product from existing portfolios.
The supply of new securitized assets appropriate for our balance sheet could be
reduced if the economics of securitization become unattractive or if a form of
securitization that is not favorable for our balance sheet predominates. Also,
assets with a favorable risk/reward ratio may not be available if the risks of
owning such assets increase substantially relative to market pricing levels.
Increased competition could raise prices to unattractive levels.
ACCOUNTING CONVENTIONS AND ESTIMATES CAN CHANGE, AFFECTING OUR REPORTED
RESULTS AND OPERATIONS.
Accounting rules for the various aspects of our business change from time
to time. Changes in accounting rules or the accepted interpretation of these
rules can affect our reported income, earnings, and stockholders' equity. Our
revenue recognition and other aspects of our reported results are based on
estimates of future events. These estimates can change in a manner that
adversely affects our results or demonstrate, in retrospect, that revenue
recognition in prior periods was too high or too low.
OUR POLICIES, PROCEDURES, PRACTICES, PRODUCT LINES, RISKS, HEDGING PROGRAMS,
AND INTERNAL RISK-ADJUSTED CAPITAL GUIDELINES ARE SUBJECT TO CHANGE.
In general, we are free to alter our policies, procedures, practices,
product lines, leverage, risks, internal risk-adjusted capital guidelines, and
other aspects of our business. We can enter new businesses or pursue
acquisitions of other companies. In most cases, we do not need to seek
stockholder approval to make such changes. We will not necessarily notify
stockholders of such changes.
WE DEPEND ON KEY PERSONNEL FOR SUCCESSFUL OPERATIONS.
We depend significantly on the contributions of our executive officers and
staff. Many of our officers and employees would be difficult to replace. The
loss of any key personnel could materially affect our results.
INVESTORS IN OUR COMMON STOCK MAY EXPERIENCE LOSSES, VOLATILITY, AND POOR
LIQUIDITY, AND WE MAY REDUCE OUR DIVIDENDS IN A VARIETY OF CIRCUMSTANCES.
Our earnings, cash flow, book value, and dividends can be volatile and
difficult to predict. Investors should not rely on predictions or management
beliefs. Although we seek to pay a regular common stock dividend rate that is
sustainable, we may reduce our dividend rate in the future for a variety of
reasons. We may not provide public warnings of such dividend reductions prior to
their occurrence. Fluctuations in our current and prospective earnings, cash
flow, and dividends, as well as many other factors such as perceptions, economic
conditions, stock market conditions, and the like, can affect our stock price.
Investors may experience volatile returns and material losses. In addition,
liquidity in the trading of our stock may be insufficient to allow investors to
sell their stock in a timely manner or at a reasonable price.
THE ACTUAL PRICE PAID FOR SHARES ACQUIRED UNDER THE PLAN MAY BE HIGHER THAN
THE DISCOUNTED PRICE DETERMINED USING THE MARKET PRICE FORMULA.
Our Plan includes a requirement that all investments be made at a price
that is at least equal to 95% of the value of our stock on the Investment Date.
If the value of our stock on the Investment Date significantly exceeds the value
of our stock determined using the Market Price formula, the price paid under the
Plan will be increased to ensure compliance with this requirement. The minimum
pricing requirement is included in the Plan in order to ensure compliance with
certain tax rules applicable to REITs. Under those rules, in order to maintain
the deductibility of our dividends, the value of the discounts granted by us
cannot exceed 5% of the value of our shares on the actual date of investment.
Your taxable income attributable to discounts received under the Plan will
be based on the value of our stock on the Investment Date and not on the Market
Price of such stock.
14
REDWOOD TRUST, INC.
We are a real estate finance company. We distribute to our shareholders as
dividends the mortgage payments we receive from our real estate loans and
securities, less interest expenses and operating costs.
Our primary business is owning, financing, and credit enhancing
high-quality jumbo residential mortgage loans. Jumbo residential loans have
mortgage balances that exceed the financing limit imposed on Fannie Mae and
Freddie Mac, both of which are United States government-sponsored real estate
finance entities. Most of the loans that we finance have mortgage loan balances
between $350,000 and $750,000.
We acquire high-quality jumbo residential mortgage loans from large,
high-quality mortgage origination companies. We hold these loans on our balance
sheet to earn interest income. We typically fund these loans with a combination
of equity and long-term amortizing non-recourse debt.
We also acquire mortgage securities representing subordinated interests in
pools of high-quality residential mortgage loans. By acquiring the subordinated
securities of these loan pools, we provide credit-enhancement for the more
senior securities backed by the pool so they can be sold to capital market
investors. Our prospective returns from our investment in these
credit-enhancement securities will be driven primarily by the future credit
performance of these mortgages.
We also own and finance commercial mortgage loans and own a portfolio of
residential and commercial real estate securities. We may acquire or create
other types of assets in the future.
We have elected, and anticipate that we will continue to elect, to be
organized as a real estate investment trust, or REIT. As a REIT, we distribute
substantially all of our net taxable earnings (excluding earnings generated in
but not yet distributed from taxable subsidiaries) to our stockholders as
dividends. As long as we retain our REIT status, we will not pay most types of
corporate income taxes on taxable income earned in Redwood Trust, Inc.
Redwood Trust, Inc. was incorporated in the State of Maryland on April 11,
1994, and commenced operations on August 19, 1994. Our executive offices are
located at One Belvedere Place, Suite 300, Mill Valley, California 94941.
At April 20, 2004, we had outstanding 19,802,270 shares of common stock
listed on the New York Stock Exchange under the symbol "RWT".
We do not currently have any issued and outstanding shares of preferred
stock. If we do issue preferred stock in the future, we would expect that
dividend reinvestment in shares of our common stock would be available to the
holders of the preferred shares.
THE PLAN
The original Dividend Reinvestment Plan was adopted by our Board of
Directors on September 15, 1995 and became effective on October 9, 1995. The
Plan was amended by our Board of Directors as of December 13, 1996 to include
the Stock Purchase program and further amended as of September 30, 2002. The
Plan was further amended by our Board of Directors on March 4, 2004 and, subject
to stockholder approval, will become effective May 6, 2004.
The following series of questions and answers explains and constitutes the
Plan in its entirety. Shareholders who do not participate in the Plan will
receive cash dividends, as declared, and paid in the usual manner.
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PURPOSE
1. WHAT IS THE PURPOSE OF THE PLAN?
The primary purpose of the Plan is to provide eligible holders of shares of
our common stock and interested new investors with a convenient and economical
method of increasing their investment in us by investing cash dividends or
Optional Cash Payments, or both, in additional shares of common stock without
payment of any brokerage commission or service charge and, currently, at a
discount ranging from 0% to 3% from the Market Price.
We may also use the Plan to raise additional capital through the sale each
month of a portion of the shares available for issuance under the Plan to owners
of shares and interested new investors (including brokers or dealers) who, in
connection with any resales of such shares, may be deemed to be underwriters.
Our ability to waive limitations applicable to the amounts which participants
may invest pursuant to the Plan's Optional Cash Payment feature will allow for
these sales.
Under the Plan, if you purchase shares directly from us, the net proceeds
of the sale of those shares will be used to purchase additional real estate
mortgage assets and for general corporate purposes.
The Plan is intended for the benefit of our investors and not for
individuals or investors who engage in transactions which may cause aberrations
in the price or trading volume of shares of common stock. From time to time,
financial intermediaries may engage in positioning transactions to benefit from
the discount from the Market Price of the shares of common stock acquired
through the reinvestment of dividends or Optional Cash Payments under the Plan.
Those transactions may cause fluctuations in the price or trading volume of the
shares of our common stock. We reserve the right to modify, suspend, or
terminate participation in the Plan by otherwise eligible holders of shares of
common or preferred stock or interested new investors to eliminate practices
which are, in our sole discretion, not consistent with the purposes or operation
of the Plan or which adversely affect the price of the shares of common stock or
which could adversely affect our status as a REIT.
AVAILABLE OPTIONS
2. WHAT OPTIONS ARE AVAILABLE UNDER THE PLAN?
Stock Purchase Program. Each month, you may elect to invest Optional Cash
Payments in additional shares of common stock, subject to a minimum per month
purchase of $100 and a maximum per month purchase limit of $10,000, subject to
waiver. You may make Optional Cash Payments each month even if you do not
reinvest dividends.
Dividend Reinvestment Program. Holders of our stock who wish to
participate in the Plan, whether Record Owners, Beneficial Owners, and
interested new investors who make an initial investment through the Stock
Purchase program described above may elect to have all, a portion, or none of
their cash dividends paid on their shares of our stock automatically reinvested
in additional shares of common stock through the Dividend Reinvestment program.
Cash dividends are paid on our common stock, or if and when outstanding on any
other class of equity that pays dividends, when and as declared by our Board of
Directors, generally on a quarterly basis. Subject to the availability of shares
of common stock registered for issuance under the Plan, there is generally no
limitation on the amount of dividends you may reinvest under the dividend
reinvestment feature of the Plan.
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BENEFITS AND DISADVANTAGES
3. WHAT ARE THE BENEFITS AND DISADVANTAGES OF THE PLAN?
BENEFITS
(a) The Plan provides you with the opportunity to automatically reinvest
cash dividends paid on all or a portion of your common stock in additional
shares of common stock without payment of any brokerage commission or service
charge and at a 2% discount from the Market Price.
(b) Whether you are an eligible stockholder or a new investor, the Plan
provides you with the opportunity to make monthly investments of Optional Cash
Payments, subject to minimum and maximum amounts, for the purchase of additional
shares of common stock. If you purchase shares of common stock under the
Optional Cash Payment program, you will not pay any brokerage commission or
service charge, and your purchase price generally will reflect a discount
ranging from 0% to 3% from the Market Price.
(c) All cash dividends paid on participants' Plan shares enrolled in the
Dividend Reinvestment program can be fully invested in additional shares of
common stock because the Plan permits fractional shares to be credited to Plan
accounts. Dividends on such fractional shares, as well as on whole shares, will
also be reinvested in additional shares which will be credited to Plan accounts.
(d) The Plan Administrator, at no charge to you and at your election,
either sends certificates to you for optional shares purchased or provides for
the safekeeping of stock certificates for shares credited to each Plan account.
(e) As a participant in the Plan, you may also elect to deposit with the
Plan Administrator certificates for your other common stock registered in your
name for safekeeping without charge. Because you bear the risk of loss in
sending certificates to the Plan Administrator, certificates should be sent by
registered mail, return receipt requested, and properly insured to the address
specified in Question 4 below. If certificates are later issued either upon your
request or upon termination of your participation, new, differently numbered
certificates will be issued.
(f) Periodic statements reflecting all current activity, including
purchases, sales and latest balances, will simplify your record keeping.
DISADVANTAGES
(a) Neither we nor the Plan Administrator will pay interest on dividends or
Optional Cash Payments held pending reinvestment or investment. In addition,
Optional Cash Payments of less than $100 and that portion of any Optional Cash
Payment which exceeds the maximum monthly purchase limit of $10,000 (unless such
upper limit has been waived by us) may be subject to return to you without
interest. In addition, for pre-approved Optional Cash Payments in excess of
$10,000 used to purchase common stock directly from us, if the Threshold Price,
if any, is not met or the Maximum Price you specified is exceeded, a portion or
all of your Optional Cash Payments in excess of $10,000 will be subject to
return to you without interest.
(b) With respect to Optional Cash Payments, the actual number of shares to
be issued to your Plan account will not be determined until after the end of the
relevant Pricing Period. Therefore, during the Pricing Period you will not know
the actual number of shares, if any, you have purchased.
(c) With respect to shares acquired from us, while the Plan currently
provides for a discount from the Market Price during the Pricing Period, the
Market Price, as so discounted, may exceed the price at which shares of our
common stock are trading on the Investment Date when the shares are issued or
thereafter. The fair market value on the Investment Date generally governs the
amount of taxable income to shareholders and may affect the price at which your
shares are purchased.
(d) Because Optional Cash Payments must be received by the Plan
Administrator by the Optional Cash Payment Due Date, such payments may be
exposed to changes in market conditions for a longer
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period of time than in the case of typical secondary market transactions. In
addition, Optional Cash Payments once received by the Plan Administrator will
not be returned to you unless you send a written request to the Plan
Administrator at least five business days before the commencement of the
relevant Pricing Period with respect to that payment.
(e) There is a nominal fee per transaction, a brokerage commission and
applicable share transfer taxes on resales that you may be required to pay to
the Plan Administrator if you request that the Plan Administrator sell some or
all or your shares of common stock credited to your Plan account.
(f) If you chose to reinvest cash dividends, you will be treated for
federal income tax purposes as having received a distribution in cash on the
distribution payment date. You will have to use other funds (or sell a portion
of the common stock received) to fund the resulting tax liability.
Prospective investors should carefully consider the matters described in
the Risk Factors section of the prospectus before making an investment in our
common stock.
ADMINISTRATION
4. WHO ADMINISTERS THE PLAN?
We have retained Computershare Investor Services LLC, as Plan Administrator
to administer the Plan, keep records, send statements of account activity, and
perform other duties relating to the Plan. The mailing address, telephone
number, website and email addresses are:
Computershare Investor Services LLC
P.O. Box A3309
Chicago, IL 60690-3309
Telephone (888) 472-1955
HTTP://WWW.COMPUTERSHARE.COM
WEB.QUERIES@COMPUTERSHARE.COM
Certificates for Plan Shares purchased pursuant to the Stock Purchase
program but not designated for investment in the Dividend Reinvestment program
will be sent to you or held by the Plan Administrator, at your discretion, free
of charge. Plan Shares designated for the Dividend Reinvestment program will be
held by the Plan Administrator and registered in the Plan Administrator's name
(or its nominee) as agent for each Participant in the Plan. As record holder for
the Plan shares, the Plan Administrator will receive dividends on all Plan
Shares held on the dividend Record Date, will credit such dividends to
Participants' accounts on the basis of whole or fractional Plan Shares held in
such accounts, and will automatically reinvest such dividends in additional
shares of common stock according to the portion of the Participants' shares of
stock designated to participate in the Dividend Reinvestment program. Any
remaining portion of cash dividends not designated for reinvestment will be sent
to you. If the Plan Administrator resigns or otherwise ceases to act as plan
administrator, we will appoint a new plan administrator to administer the Plan,
and advise you of the change.
The Plan Administrator also acts as dividend disbursing agent, transfer
agent, and registrar for our common stock.
PARTICIPATION
For purposes of this section, responses are generally directed (a) to
existing shareholders, according to the method by which their shares are held,
or (b) to investors who are not currently shareholders but would like to make an
initial purchase of common stock to become a Participant.
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5. WHO IS ELIGIBLE TO PARTICIPATE?
A Record Owner (which means a stockholder who owns shares of our stock in
his or her own name) or a Beneficial Owner (which means a stockholder who
beneficially owns shares of our stock that are registered in a name other than
his or her own name, for example, in the name of a broker, bank, or other
nominee) may participate in the Plan. A Record Owner may participate directly in
the Plan. A Beneficial Owner must either become a Record Owner by having one or
more shares transferred into his or her own name or coordinating with his or her
broker, bank, or other nominee to participate in the Plan on his or her behalf.
A broker, bank, or other nominee acting on behalf of a Beneficial Owner must
have a separate account for each Beneficial Owner who is a Participant in the
Plan and for whom it acts as the broker, bank, or other nominee. In addition,
interested investors who are not stockholders may participate in the Plan
through the Optional Cash Payment feature.
We may terminate, by written notice, at any time, any Participant's
participation in the Plan if that participation would or could be in violation
of the restrictions contained in our Articles of Incorporation or By-laws. Those
restrictions prohibit any person or group of persons from acquiring or holding,
directly or indirectly, ownership of shares of our capital stock in excess of
9.8% (by number or value) of the outstanding shares. The meanings given to the
terms "group" and "beneficial ownership" may cause a person who individually
owns less than 9.8% of the shares outstanding to be deemed to be holding shares
in excess of the foregoing limitation. Our Articles of Incorporation provide
that in the event a person acquires shares of capital stock in excess of the
foregoing limitation, the excess shares will be transferred to a trustee for the
benefit of a charitable beneficiary designated by our Board of Directors. Under
our Articles of Incorporation, certain transfers or attempted transfers that
would jeopardize our qualification as a real estate investment trust for tax
purposes may be voided to the fullest extent permitted by law
6. HOW DOES AN ELIGIBLE SHAREHOLDER OR INTERESTED NEW INVESTOR PARTICIPATE?
RECORD OWNERS may join the Plan by completing and signing an enrollment
form and returning it to the Plan Administrator. Enrollment forms may be
obtained at any time from the Plan Administrator.
BENEFICIAL OWNERS who wish to join the Plan must instruct their bank,
broker, or other nominee to arrange participation in the Plan on the Beneficial
Owner's behalf. The bank, broker, or other nominee should then make arrangements
with its securities depository and the securities depository will provide the
Plan Administrator with the information necessary to allow the Beneficial Owner
to participate in the Plan. Should the Beneficial Owner wish to participate in
the Stock Purchase program, a broker and nominee form must also be sent to the
Plan Administrator for the bank, broker, or other nominee to participate in the
Stock Purchase Program on behalf of the Beneficial Owner. To facilitate
participation by Beneficial Owners, we have made arrangements with the Plan
Administrator to reinvest dividends, on a per dividend basis, and accept
Optional Cash Payments under the Stock Purchase program by record holders such
as brokers, banks, and other nominees, on behalf of Beneficial Owners.
Interested Beneficial Owners are cautioned to insure that the broker, bank, or
other nominee passes along the proceeds of any applicable discount to the
beneficiary's account.
Alternatively, a Beneficial Owner may simply request that the number of
shares the Beneficial Owner wishes to be enrolled in the Plan be reclassified or
reregistered by the bank, broker, or other nominee in the Beneficial Owner's own
name as Record Owner to directly participate in the Plan.
NEW INVESTORS may join the Plan as a Record Owner by making an initial
investment in an amount of at least $100 up to $10,000 unless the maximum limit
is specifically waived by us. The new investor should mark the box on the
enrollment form indicating that he or she is a new investor wishing to become a
participant and should designate the amount for initial purchase of common
stock. At the same time, the new participant may designate all, a portion, or
none of the shares to be purchased to be enrolled in the Dividend Reinvestment
program. The enrollment form should be returned to the Plan Administrator, with
payment, on or before the applicable dates discussed below.
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ANY PARTICIPANT WHO RETURNS A PROPERLY EXECUTED ENROLLMENT FORM TO THE PLAN
ADMINISTRATOR WITHOUT SPECIFYING THE NUMBER OF SHARES TO BE INCLUDED IN THE
DIVIDEND REINVESTMENT PROGRAM WILL BE ENROLLED AS HAVING SELECTED THE FULL
DIVIDEND REINVESTMENT OPTION DESCRIBED BELOW.
If an enrollment form requesting reinvestment of dividends is received by
the Plan Administrator at least 2 business days before the Record Date
established for a particular dividend, reinvestment will commence with that
dividend. If an enrollment form is received less than 2 business days before the
Record Date established for a particular dividend, the reinvestment of dividends
will begin on the dividend payment date following the next Record Date if such
stockholder or the participating bank, broker or other nominee is still a holder
of record. Additionally, for Participants wishing to make Optional Cash Payments
to purchase shares under the Stock Purchase program, full payment must be
received by the Plan Administrator by the Optional Cash Payment Due Date. In the
case of new investors making an initial investment to become Participants, both
the enrollment form and full payment of their designated initial investment must
be received by the Optional Cash Payment Due Date.
7. WHAT DOES THE ENROLLMENT FORM PROVIDE?
The enrollment form appoints the Plan Administrator as your agent and
directs us to pay to the Plan Administrator your cash dividends on all or a
specified number of shares of common stock that you own on the applicable Record
Date, as well as on all whole and fractional shares of common stock credited to
your Plan account. The enrollment form directs the Plan Administrator to
purchase for your account on the Investment Date additional shares of common
stock with those dividends and Optional Cash Payments, if any, made by you. The
enrollment form also directs the Plan Administrator to reinvest automatically
all, a portion, or none of the subsequent dividends with respect to shares of
common stock credited to your Plan account. Dividends will continue to be
reinvested on the number of shares of common stock that you own on the
applicable Record Date and on all shares of common stock credited to your Plan
account until you withdraw from the Plan, or we terminate the Plan.
The enrollment form provides for the purchase of initial or additional
shares of common stock through the following investment options:
(1) If you elect "Full Dividend Reinvestment," the Plan Administrator
will apply all cash dividends on all shares of common stock then or
subsequently registered in your name, and all cash dividends on all shares
of common stock credited to your Plan account, together with any Optional
Cash Payments, toward the purchase of additional shares of common stock.
(2) If you elect "Partial Dividend Reinvestment," the Plan
Administrator will apply all cash dividends on a specified number of shares
of common stock that you own on the applicable Record Date registered in
your name and specified on the enrollment form and all cash dividends on
all shares of common stock credited to your Plan account, together with any
Optional Cash Payments, toward the purchase of additional shares of common
stock. The Plan Administrator will pay cash dividends on the remaining
shares of common stock directly to you.
(3) If you elect "All Dividends Paid in Cash", you will continue to
receive cash dividends on shares of common stock held for your benefit
outside the Plan, if any, in the usual manner. However, the Plan
Administrator will apply all cash dividends on all shares of common stock
credited to your Plan account, together with any Optional Cash Payments
that it receives from you, toward the purchase of additional shares of
common stock.
You may select any one of these three options. In each case, the Plan
Administrator will reinvest dividends on all shares of common stock credited to
your Plan account, including dividends on shares of common stock purchased with
any Optional Cash Payments, until you withdraw from the Plan altogether, or
until we terminate the Plan. If you would prefer to receive cash payments of
dividends paid on shares of common stock credited to your Plan account rather
than reinvest such dividends, you must withdraw those shares from the Plan by
written notification to the Plan Administrator.
20
You may change your investment options at any time by requesting a new
enrollment form and returning it to the Plan Administrator at the address set
forth in Question 4.
ANY PARTICIPANT WHO RETURNS A PROPERLY EXECUTED ENROLLMENT FORM TO THE PLAN
ADMINISTRATOR WITHOUT ELECTING AN INVESTMENT OPTION WILL BE ENROLLED AS HAVING
SELECTED THE FULL DIVIDEND REINVESTMENT OPTION.
8. WHAT DOES THE BROKER AND NOMINEE FORM PROVIDE?
The broker and nominee form provides the only means by which a broker,
bank, or other nominee holding shares of a Beneficial Owner in the name of a
major securities depository may invest Optional Cash Payments on behalf of that
Beneficial Owner. A broker and nominee form [should be furnished to you by your
broker, bank or other nominee and] must be delivered to the Plan Administrator
each time such broker, bank, or other nominee transmits Optional Cash Payments
on behalf of a Beneficial Owner.
Before submitting the broker and nominee form, the broker, bank, or other
nominee for a Beneficial Owner must submit a completed enrollment form on behalf
of the Beneficial Owner.
THE PLAN ADMINISTRATOR MUST RECEIVE THE BROKER AND NOMINEE FORM AND
APPROPRIATE INSTRUCTIONS BY NOT LATER THAN THE APPLICABLE RECORD DATE OR THE
PLAN ADMINISTRATOR WILL NOT INVEST THE OPTIONAL CASH PAYMENT UNTIL THE FOLLOWING
INVESTMENT DATE.
9. IS PARTIAL PARTICIPATION POSSIBLE UNDER THE PLAN?
Yes. New investors, Record Owners or the bank, broker, or other nominee for
Beneficial Owners may designate any desired number of their shares for which
dividends are to be reinvested. Dividends will thereafter be reinvested only on
the number of shares specified, and the Record Owner or Beneficial Owner, as the
case may be, will continue to receive cash dividends on the remainder of the
shares.
10. WHEN MAY AN ELIGIBLE SHAREHOLDER OR INTERESTED NEW INVESTOR JOIN THE PLAN?
A Record Owner or a Beneficial Owner may join the Plan at any time. A new
investor may join the Plan by making an initial investment of $100 to $10,000
(or more with our permission) when returning the enrollment form. Once in the
Plan, you remain in the Plan until you withdraw, we or the Plan Administrator
terminate your participation or we terminate the Plan.
11. WHEN WILL DIVIDENDS AND OPTIONAL CASH PAYMENTS BE INVESTED?
When shares are purchased from us, the Plan Administrator will make those
purchases on the Investment Date in each month. The Investment Date will
generally be the dividend payment date for dividends and, generally, the 21st
day of a month for Optional Cash Payments, unless such date is not a business
day in which case it is the 1st business day immediately thereafter, or, in the
case of open market purchases, typically some day or days between the 21st and
the next 10 business days thereafter, as market conditions permit. However, for
Optional Cash Payments, we may designate other Investment Dates for any month,
at our sole discretion.
When the Plan Administrator makes open market purchases, those purchases
may be made on any securities exchange where the shares are traded, in the
over-the-counter market or in negotiated transactions, and may be subject to
such terms with respect to price, delivery, and other matters as agreed to by
the Plan Administrator. Neither we nor you will have any authorization or power
to direct the time or price at which the Plan Administrator purchases shares or
the selection of the broker or dealer through or from whom the Plan
Administrator makes purchases. However, when the Plan Administrator makes open
market purchases with Optional Cash Payments, the Plan Administrator is required
to use its reasonable best efforts to purchase the shares at the lowest possible
price.
If the Plan Administrator receives the enrollment form at least two days
before the Record Date for a dividend payment, the election to reinvest
dividends will begin with that dividend payment. If the Plan Administrator
receives the enrollment form less than two days before any such Record Date,
reinvestment
21
of dividends will begin on the dividend payment date following the next Record
Date if you are still a stockholder of record.
The Plan Administrator will allocate shares and credit shares, computed to
three decimal places, to your account as follows: (1) shares purchased from us
will be allocated and credited as of the appropriate Investment Date; and (2)
shares purchased in open market transactions will be allocated and credited as
of the date on which the Plan Administrator completes the purchases of the
aggregate number of shares to be purchased on behalf of all participants with
dividends to be reinvested or Optional Cash Payments, as the case may be, during
the month.
NO INTEREST WILL BE PAID ON CASH DIVIDENDS PENDING INVESTMENT OR
REINVESTMENT UNDER THE TERMS OF THE PLAN. SINCE NO INTEREST IS PAID ON CASH HELD
BY THE PLAN ADMINISTRATOR, IT NORMALLY WILL BE IN YOUR BEST INTEREST TO DEFER
OPTIONAL CASH PAYMENTS UNTIL SHORTLY BEFORE COMMENCEMENT OF THE PRICING PERIOD.
PURCHASES AND PRICES OF SHARES
12. WHAT WILL BE THE PRICE TO PARTICIPANTS OF SHARES PURCHASED UNDER THE PLAN?
With respect to reinvested dividends whether the shares are acquired
directly from us or on the open market, they will be purchased for the Plan at a
discount of 2% from the Market Price, as defined below.
Each month, we may establish a discount between 0% and 3% from the Market
Price applicable to Optional Cash Payments. The discount may vary each month but
once established will apply uniformly to all purchases made using Optional Cash
Payments during that month.
However, in no event shall the price paid be less than the Minimum Price,
which is 95% of the sum of the fair market value of our common stock on the date
of purchase plus brokerage commissions, if any, paid by us.
The Market Price, in the case of shares purchased directly from us, will be
the average of the daily high and low sales prices, computed to 3 decimal
places, of our common stock on the NYSE or other applicable securities exchange,
as reported in the Wall Street Journal, during the Pricing Period (generally the
10 days on which the NYSE is open and for which trades in our common stock are
reported immediately preceding the relevant Investment Date, or, if no trading
occurs in our common stock on one or more of such days, for the 10 days
immediately preceding the Investment Date for which trades are reported; the
exact number of days depends on the determined Pricing Period). In the case of
shares purchased on the open market, the Market Price will be the weighted
average of the actual prices paid, net of any brokerage commissions, computed to
3 decimal places, for all of the common stock purchased by the Plan
Administrator with all Participants' reinvested dividends and Optional Cash
Payments for the related month.
Neither we nor you will have any authorization or power to direct the time
or price at which the Plan Administrator purchases shares or the selection of
the broker or dealer through or from whom the Plan Administrator makes the
purchases. However, when open market purchases are made by the Plan
Administrator, the Plan Administrator is required to use its best efforts to
purchase the shares at the lowest possible price.
13. WHAT ARE THE RECORD DATES AND INVESTMENT DATES FOR DIVIDEND REINVESTMENT?
For the reinvestment of dividends, the Record Date is the date declared by
our Board of Directors for payment of a dividend. Likewise, the dividend payment
date declared by our Board of Directors constitutes the Investment Date
applicable to the reinvestment of that dividend with respect to shares of common
stock acquired directly from us, except that if any such date is not a business
day, the first business day immediately following such date will be the
Investment Date. The Investment Date with respect to shares of common stock that
the Plan Administrator purchases in open market transactions will typically be
some
22
day or days between the Investment Date and the next 10 business days
thereafter, as market conditions permit. Dividends will be reinvested on the
Investment Date using the applicable Market Price.
14. HOW WILL THE NUMBER OF SHARES PURCHASED FOR YOU BE DETERMINED?
Your Plan account will be credited with the number of shares, including
fractions computed to four decimal places, equal to the total amount to be
invested on your behalf divided by the purchase price per share, less the
applicable discount from the Market Price per share. The total amount to be
invested will depend on the amount of any dividends paid on the number of shares
of common stock that you own on the applicable Record Date and shares of common
stock credited to your Plan account and available for investment on the related
Investment Date, or the amount of any Optional Cash Payments made by you and
available for investment on the related Investment Date. Subject to the
availability of shares of common stock registered for issuance under the Plan,
there is no limit to the number of shares available for issuance pursuant to the
reinvestment of dividends.
15. WHAT IS THE SOURCE OF SHARES OF COMMON STOCK PURCHASED UNDER THE PLAN?
Shares of common stock credited to your Plan account will be purchased
either directly from us, in which event such shares will be authorized but
unissued shares, or on the open market or privately negotiated transactions, or
by a combination of the foregoing, at our option, after a review of current
market conditions and our current and projected capital needs. We will determine
the source of the shares of common stock to be purchased under the Plan at least
three business days before the relevant Investment Date, and will notify the
Plan Administrator of the same. Neither we nor the Plan Administrator will be
required to provide any written notice to you as to the source of the shares of
common stock to be purchased under the Plan, but information regarding the
source of the shares of common stock may be obtained by contacting our investor
relations department at (415) 389-7373.
16. HOW DOES THE OPTIONAL CASH PAYMENT FEATURE OF THE PLAN WORK?
All Record Owners and interested new investors who have timely submitted
signed enrollment forms indicating their intention to participate in the
Optional Cash Payment feature, and all Beneficial Owners whose brokers, banks,
or other nominees have timely submitted signed enrollment forms indicating their
intention to participate in the Optional Cash Payment feature (except for
Beneficial Owners whose brokers, banks, or other nominees hold the shares of the
Beneficial Owners in the name of a major securities depository), are eligible to
make Optional Cash Payments during any month, whether or not a dividend is
declared. If a broker, bank, or other nominee holds shares of a Beneficial Owner
in the name of a major securities depository, Optional Cash Payments must be
made through the use of the broker and nominee form. Optional cash payments must
be accompanied by an enrollment form or a broker and nominee form, as
applicable. The Plan Administrator will apply any Optional Cash Payment received
from you no later than one business day before commencement of that month's
Pricing Period to the purchase of additional shares of common stock for your
account on the following Investment Date and will enroll all, a portion or none
of such shares in the Dividend Reinvestment program as directed on the
enrollment form.
The Optional Cash Discount will be established each month by us and will
range between 0% and 3% of the Market Price. You are not obligated to
participate in the Optional Cash Payment feature of the Plan. Optional cash
payments need not be in the same amount each month.
17. WHAT LIMITATIONS APPLY TO OPTIONAL CASH PAYMENTS?
Each Optional Cash Payment is subject to a minimum per month purchase of
$100 and a maximum per month purchase limit of $10,000. For purposes of these
limitations, all Plan accounts under your common control or management (which
will be determined at our sole discretion) will be aggregated. Generally,
Optional Cash Payments of less than $100 and that portion of any Optional Cash
Payment which exceeds the maximum monthly purchase limit of $10,000, unless such
limit has been waived by us, will be returned to you without interest at the end
of the relevant Pricing Period.
23
You may make Optional Cash Payments of up to $10,000 each month without our
prior approval, subject to our right to modify, suspend, or terminate
participation in the Plan by otherwise eligible holders of shares of common
stock or interested new investors to eliminate practices which are, in our sole
discretion, not consistent with the purposes or operation of the Plan or which
adversely affect the price of the shares of common stock or our status as a REIT
for tax purposes.
Optional cash payments in excess of $10,000 may be made by you only upon
our acceptance of a completed Request for Waiver form from you and the Plan
Administrator's receipt of that form. There is no pre-established maximum limit
applicable to Optional Cash Payments that may be made pursuant to accepted
Requests for Waivers. A Request for Waiver form must be received each month by
us and the Plan Administrator and accepted by us and notice of our acceptance
must have been received by the Plan Administrator no later than the Optional
Cash Payment Due Date for the applicable Investment Date. Request for Waiver
forms will be furnished at any time upon request to the Plan Administrator at
the address or telephone number specified in Question 4. If you are interested
in obtaining further information about a Request for Waiver, you should contact
our investor relations department at (415) 389-7373.
Your written Request for Waiver must specify the proposed investment
amount(s), Pricing Period(s), calculation of the Purchase Price(s) and
Investment Date(s), prior to the commencement of the requested Pricing
Period(s). If Requests for Waiver are submitted for any monthly period for an
aggregate amount in excess of the amount we are willing to accept, we may honor
such requests in order of receipt, pro rata or by any other method which we
determine to be appropriate.
Waivers will be considered on the basis of a variety of factors, which may
include our current and projected capital needs, the alternatives available to
us to meet those needs, prevailing market prices for shares of common stock and
our other securities, general economic and market conditions, expected
aberrations in the price or trading volume of the shares of common stock, the
potential disruption of the price of the shares of common stock by a financial
intermediary, the number of shares of common stock that you hold, your past
actions under the Plan, the aggregate amount of Optional Cash Payments for which
such waivers have been submitted, and the administrative constraints associated
with granting such waivers. Grants of waivers will be made in our absolute
discretion.
Unless we waive our right to do so, we may establish for any Pricing Period
a minimum Threshold Price applicable only to the investment of Optional Cash
Payments that exceed $10,000 and that are made pursuant to Requests for Waivers,
to provide us with the ability to set a minimum price at which shares of common
stock will be sold under the Plan each month pursuant to such requests. A
Threshold Price will only be established when shares of common stock will be
purchased directly from us on the applicable Investment Date. We will, at least
three business days before each Optional Cash Payment Due Date, determine
whether to establish a Threshold Price and, if a Threshold Price is established,
its amount and so notify the Plan Administrator. The determination whether to
establish a Threshold Price and, if a Threshold Price is established, its
amount, will be made by us at our discretion after a review of current market
conditions, the level of participation in the Plan, and our current and
projected capital needs. Neither we nor the Plan Administrator will be required
to provide any written notice to you as to whether a Threshold Price has been
established for any Pricing Period, but information regarding the Threshold
Price may be obtained by contacting us at (415) 380-2304 or by visiting our
website at http://www.redwoodtrust.com.
The Threshold Price, if any, for Optional Cash Payments made through
Requests for Waivers, if established for a Pricing Period, will be a stated
dollar amount that the average of the high and low trading prices of the shares
of common stock on the New York Stock Exchange during the Pricing Period must
equal or exceed. In the event that the Threshold Price is not satisfied for a
trading day in the Pricing Period, then the trading price for such day will be
excluded from the computation of the Market Price for such period and the
investment made on the corresponding Investment Date will be reduced. For
example, for a ten day Pricing Period, for each trading day on which the
Threshold Price is not satisfied, 1/10 of each Optional Cash Payment made by you
pursuant to a Request for Waiver will be returned to you, without interest, as
soon as practicable after the end of the applicable Pricing Period. Thus, for
example, if the
24
Threshold Price is not satisfied for three of the ten trading days in a Pricing
Period, 3/10 of your Optional Cash Payment made pursuant to a Request for Waiver
will be returned to you by check, without interest, as soon as practicable after
the end of the applicable Investment Date. The Plan Administrator expects to
mail such checks within five to ten business days from the end of the applicable
Investment Date. This return procedure will only apply when shares are purchased
directly from us for Optional Cash Payments made through Requests for Waivers
and we have set a Threshold Price with respect to the relevant Pricing Period.
Setting a Threshold Price for a Pricing Period will not affect the setting
of a Threshold Price for any subsequent Pricing Period. The Threshold Price
concept and return procedure discussed above apply only to Optional Cash
Payments made through Requests for Waivers.
For any Pricing Period, we may waive our right to set a Threshold Price for
Optional Cash Payments made through Requests for Waivers. You may ascertain
whether the Threshold Price applicable to a given Pricing Period has been set or
waived, as applicable, by calling our automated information line at (415)
380-2304.
Likewise, your Optional Cash Payments made pursuant to a Request for Waiver
may specify a Maximum Price per share that you are willing to pay -- and if the
Market Price less the applicable discount exceeds such Maximum Price, and the
stock is to be purchased directly from us and not on the open market, your
investment will not be made and your full payment will instead be returned to
you without interest.
Each month, at least three business days before the commencement of the
relevant Pricing Period, we will establish the discount from the Market Price
applicable to Optional Cash Payments during the corresponding Pricing Period and
will notify the Plan Administrator of the same. The discount may be between 0%
and 3% of the Market Price and may vary each month, but once established will
apply uniformly to all Optional Cash Payments made during that month. The
discount will be established in our sole discretion after a review of current
market conditions, the level of participation in the Plan, and our current and
projected capital needs. The discount applies only to Optional Cash Payments.
Neither we nor the Plan Administrator will be required to provide any written
notice to you as to the discount, but information regarding the discount
applicable to the next Pricing Period may be obtained by calling our automated
information line at (415) 380-2304 or by visiting our website at
http://www.redwoodtrust.com. Setting a discount for a Pricing Period will not
affect the setting of a discount for any subsequent Pricing Period.
18. WHAT ARE THE DUE DATES AND INVESTMENT DATES FOR OPTIONAL CASH PAYMENTS?
Optional cash payments will be invested on the related Investment Date. The
Optional Cash Payment Due Date is one business day before commencement of the
related Pricing Period and the Investment Date is on or about the 21st day of
each month or, in the case of open market purchases, the Investment Date will be
such day or days between the 21st and the next 10 business days thereafter, as
market conditions permit. We may provide for more than one Optional Cash Payment
per month, at our sole discretion.
Optional cash payments that the Plan Administrator timely receives will be
applied to the purchase of shares of common stock on the Investment Dates which
relate to the related Pricing Period. No interest will be paid by us or the Plan
Administrator on Optional Cash Payments held pending investment. Generally,
Optional Cash Payments not timely received will be returned to you without
interest at the end of the Pricing Period; you may resubmit those Optional Cash
Payments before commencement of the next or a later Pricing Period.
For a schedule of expected Optional Cash Payment Due Dates and Investment
Dates, or visit our website at HTTP://WWW.REDWOODTRUST.COM.
19. WHEN MUST THE PLAN ADMINISTRATOR RECEIVE OPTIONAL CASH PAYMENTS?
Each month the Plan Administrator will apply any Optional Cash Payment for
which good funds are timely received to the purchase of shares of common stock
for your account during the next Pricing
25
Period. For funds to be invested during the next Pricing Period, the Plan
Administrator must have received a check, money order, or wire transfer by the
end of the business day immediately preceding the first trading day of the
ensuing Pricing Period and that check, money order, or wire transfer must have
cleared on or before the first Investment Date in such Pricing Period. Wire
transfers may be used only if the Plan Administrator approves it verbally in
advance. Checks and money orders are accepted subject to timely collection as
good funds and verification of compliance with the terms of the Plan. Checks or
money orders should be made payable to "Computershare Investor Services
LLC -- Redwood Trust, Inc. DSPP" and submitted together with, initially, the
enrollment form or, subsequently, the form for additional investments attached
to your statements. Checks returned for any reason will not be resubmitted for
collection.
You can automatically invest a specified monthly amount (not less than $100
and not more than $10,000 per month) deducted directly from your U.S. bank
account by completing the automatic monthly deduction section on the enrollment
form and returning it to the Plan Administrator. Funds will be transferred from
your account three business days prior to the Optional Cash Payment Due Date
each month. You can change or stop automatic monthly investments by completing
and returning a new automatic monthly deduction section on the enrollment form
or by sending written notification to the Plan Administrator. The Plan
Administrator must receive your instructions and authorization ten business days
prior to the monthly Optional Cash Payment Due Date.
NO INTEREST WILL BE PAID BY US OR THE PLAN ADMINISTRATOR ON OPTIONAL CASH
PAYMENTS HELD PENDING INVESTMENT. SINCE NO INTEREST IS PAID ON CASH HELD BY THE
PLAN ADMINISTRATOR, IT NORMALLY WILL BE IN YOUR BEST INTEREST TO DEFER OPTIONAL
CASH PAYMENTS UNTIL SHORTLY BEFORE COMMENCEMENT OF THE PRICING PERIOD.
For payments to be invested on the Investment Date, in addition to the
receipt of good funds by the Optional Cash Payment Due Dates, the Plan
Administrator must be in receipt of an enrollment form or a broker and nominee
form, as appropriate, as of the same date.
20. MAY OPTIONAL CASH PAYMENTS BE RETURNED?
Yes. Upon telephone or written request to the Plan Administrator received
at least five business days before the commencement of the relevant Pricing
Period for the Investment Date with respect to which Optional Cash Payments have
been delivered to the Plan Administrator, such Optional Cash Payments will be
returned to you as soon as practicable. Requests received less than five
business days before such date will not be returned but instead will be invested
on the next related Investment Date. Additionally, in the case of shares being
purchased from us, 1/10 of each Optional Cash Payment will be returned by check,
without interest, as soon as practicable after the end of the Pricing Period for
each trading day that does not meet the Threshold Price, if any, applicable to
Optional Cash Payments made pursuant to Requests for Waivers. Similarly, if the
Market Price less any applicable discount exceeds the requested Maximum Price,
all your waiver request funds will be returned. Also, each Optional Cash
Payment, to the extent that it does not either conform to the limitations, or
clear within the time limits, will be subject to return to you as soon as
practicable.
21. ARE THERE ANY EXPENSES TO YOU IN CONNECTION WITH YOUR PARTICIPATION UNDER
THE PLAN?
No. You will incur no brokerage commissions or service charges in
connection with the reinvestment of dividends and in connection with all
purchases made pursuant to Optional Cash Payments under the Plan. We will pay
all other costs of administration of the Plan. Additionally, you may elect to
send the certificates for your other shares of common stock to the Plan
Administrator for safekeeping, and there is no fee for this service. However,
should you request that the Plan Administrator sell all or any portion of your
shares you may pay a nominal fee per transaction to the Plan Administrator, any
related brokerage commissions, and applicable stock transfer taxes.
26
ACCOUNT STATEMENTS
22. WHAT KIND OF REPORTS WILL BE SENT TO YOU?
You will receive a statement of your account following each purchase or
sale transaction and following any withdrawal of shares. These statements are
your continuing record of the cost of your purchases and should be retained for
income tax purposes. In addition, you will receive copies of other
communications sent to holders of the shares of common stock, including our
annual report to stockholders, the notice of annual meeting and proxy statement
in connection with our annual meeting of stockholders, and Internal Revenue
Service information for reporting dividends paid.
DIVIDENDS ON FRACTIONS
23. WILL YOU BE CREDITED WITH DIVIDENDS ON FRACTIONS OF SHARES?
Yes, fractional shares are computed to four decimal places and dividends
are rounded to the nearest penny.
CERTIFICATES FOR COMMON SHARES
24. WILL CERTIFICATES BE ISSUED FOR SHARES PURCHASED?
No. Shares of common stock purchased for you will be held in the name of
the Plan Administrator or its nominee. No certificates will be issued to you for
shares in the Plan unless you submit a written request to the Plan Administrator
or until participation in the Plan is terminated. At any time, you may request
that the Plan Administrator send you a certificate for some or all of the whole
shares credited to your account. You should mail this request to the Plan
Administrator at the address set forth in the answer to Question 4. Any
remaining whole shares and any fractions of shares will remain credited to your
Plan account. Certificates for fractional shares will not be issued under any
circumstances.
25. IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED?
Your Plan account is maintained in the name registered at the time of your
enrollment in the Plan. Share certificates for whole shares purchased under the
Plan will be similarly registered when issued upon your request. If you are a
Beneficial Owner, you should place the request through your banker, broker, or
other nominee. If you wish to pledge shares credited to your Plan account, you
must first withdraw those shares from the Plan account. If you wish to withdraw
your shares and have any or all of the full shares held in their Plan account
issued and delivered to you in physical form, you may do so by sending a written
instruction to the Plan Administrator at the address set forth in Question 4.
Registration of withdrawn shares in a name other than yours will require the
guaranty of your signature.
WITHDRAWALS AND TERMINATION
26. WHEN MAY PARTICIPANTS WITHDRAW FROM THE PLAN?
You may withdraw from the Plan with respect to all or a portion of the
shares held in your Plan account at any time. If the request to withdraw is
received before a dividend Record Date set by our Board of Directors for
determining stockholders of record entitled to receive a dividend, the request
will be processed on the day following the Plan Administrator's receipt of the
request.
If the Plan Administrator receives your request to withdraw on or after a
dividend Record Date, but before a payment date, the Plan Administrator, in its
sole discretion, may either pay such dividend in cash or reinvest it in shares
for your account. The request for withdrawal will then be processed as promptly
as
27
possible following such dividend payment date. All dividends subsequent to such
dividend payment date or Investment Date will be paid in cash unless you
re-enroll in the Plan, which may be done at any time.
Any Optional Cash Payments which have been sent to the Plan Administrator
before a request for withdrawal will also be invested on the next Investment
Date unless you expressly request return of that payment in the request for
withdrawal, and the Plan Administrator receives the request for withdrawal at
least five business days before the Record Date for the Investment Date with
respect to which Optional Cash Payments have been delivered to the Plan
Administrator.
27. HOW DO YOU WITHDRAW FROM THE PLAN?
If you wish to withdraw from the Plan with respect to all or a portion of
the shares held in your Plan account, you must notify the Plan Administrator in
writing at its address set forth in the answer to Question 4. Upon your
withdrawal from the Plan or termination of the Plan by us, certificates for the
appropriate number of whole shares credited to your account under the Plan will
be issued. Registration of withdrawn shares in a name other than yours will
require the guaranty of your signature.
Upon withdrawal from the Plan, you may also request in writing that the
Plan Administrator sell all or part of the shares credited to your Plan account.
The Plan Administrator will sell the shares as requested within ten business
days after processing the request for withdrawal. The timing and price of the
sale are at the sole discretion of the Plan Administrator. The Plan
Administrator will send a check for the proceeds of the sale, less any brokerage
commissions and service charges paid to the Plan Administrator and any
applicable share transfer taxes, generally within five business days of the
sale.
Cash will be paid in lieu of any fraction of a share, based on the
prevailing market price.
28. ARE THERE ANY AUTOMATIC TERMINATION PROVISIONS?
Yes. Participation in the Plan will be terminated if the Plan Administrator
receives written notice of the death or adjudicated incompetence of a
Participant, together with satisfactory supporting documentation of the
appointment of a legal representative, at least five business days before the
next Record Date for purchases made through the reinvestment of dividends or
commencement of the relevant Pricing Period for Optional Cash Payments, as
applicable. In the event written notice of death or adjudicated incompetence and
such supporting documentation is received by the Plan Administrator less than
five business days before the next Record Date for purchases made through the
reinvestment of dividends or Optional Cash Payments, as applicable, shares will
be purchased for the Participant with the related cash dividend or Optional Cash
Payment and participation in the Plan will not terminate until after such
dividend or payment has been reinvested. Thereafter, no additional purchase of
shares will be made for the Participant's account and the Participant's shares
and any cash dividends paid thereon will be forwarded to the Participant's legal
representative.
Further, participation in the Plan may be terminated if all whole shares
have been disbursed from your stockholder account and your Plan account, leaving
only a fraction of a share.
Lastly, participation in the Plan may be terminated if we have reason to
believe that your continued participation may cause your share ownership to
violate our 9.8% charter limit on share ownership or you do not respond to our
effort to determine compliance with such requirements.
WE RESERVE THE RIGHT TO MODIFY, SUSPEND, OR TERMINATE PARTICIPATION IN THE
PLAN BY OTHERWISE ELIGIBLE HOLDERS OF SHARES OF COMMON STOCK OR INTERESTED NEW
INVESTORS TO ELIMINATE PRACTICES WHICH ARE, IN OUR SOLE DISCRETION, NOT
CONSISTENT WITH THE PURPOSES OR OPERATION OF THE PLAN OR WHICH ADVERSELY AFFECT
THE PRICE OF THE SHARES OF COMMON STOCK OR OUR STATUS AS A REIT.
28
OTHER INFORMATION
29. WHAT HAPPENS IF YOU SELL OR TRANSFER ALL OF THE SHARES REGISTERED IN YOUR
NAME?
If you dispose of all shares registered in your name and all shares held in
your Plan account, and are not shown as a Record Owner on a dividend Record
Date, you may be terminated from the Plan as of that date and the termination
treated as though a withdrawal notice had been received before the Record Date.
30. WHAT HAPPENS IF WE DECLARE A STOCK DIVIDEND OR A STOCK SPLIT?
Any dividend payable in shares and any additional shares distributed by us
in connection with a share split in respect of shares credited to your Plan
account will be added to that account. Share dividends or split shares which are
attributable to shares registered in your own name and not in your Plan account
will be mailed directly to you as in the case of stockholders not participating
in the Plan.
31. HOW WILL SHARES HELD BY THE PLAN ADMINISTRATOR BE VOTED AT MEETINGS OF
SHAREHOLDERS?
If you are a Record Owner, you will receive a proxy card covering both
directly held shares and shares held in the Plan. If you are a Beneficial Owner,
you will receive a proxy covering shares held in the Plan through your broker,
bank, or other nominee. If a proxy is returned properly signed (or returned
electronically) and marked for voting, all the shares covered by the proxy will
be voted as marked. If a proxy is returned properly signed (or returned
electronically) but no voting instructions are given, all of your shares will be
voted in accordance with recommendations of our Board of Directors, unless
applicable laws require otherwise. If the proxy is not returned, or if it is
returned unexecuted or improperly executed or improperly completed, shares
registered in your name may be voted only by you in person; neither we nor the
Plan Administrator will vote such shares.
32. WHAT ARE OUR RESPONSIBILITIES AND THE PLAN ADMINISTRATOR'S RESPONSIBILITIES
UNDER THE PLAN?
We and the Plan Administrator will not be liable in administering the Plan
for any act done in good faith or required by applicable law or for any good
faith omission to act including, without limitation, any claim of liability
arising out of failure to terminate a participant's account upon his or her
death, with respect to the prices at which shares are purchased and/or the times
when such purchases are made or with respect to any fluctuation in the market
value before or after purchase or sale of shares. Notwithstanding the foregoing,
nothing contained in the Plan limits our liability with respect to alleged
violations of federal securities laws.
We and the Plan Administrator will be entitled to rely on completed forms
and the proof of due authority to participate in the Plan, without further
responsibility of investigation or inquiry.
33. MAY THE PLAN BE CHANGED OR DISCONTINUED?
Yes. We may suspend, terminate, or amend the Plan at any time. Notice will
be sent to all current Plan participants of any suspension or termination, or of
any amendment that alters the Plan terms and conditions, as soon as practicable
after such action by us.
We may appoint a successor administrator or agent in place of the Plan
Administrator at any time. You will be promptly informed of any such
appointment.
Any questions of interpretation arising under the Plan will be determined
by us, in our sole discretion, and any such determination will be final.
29
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
34. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE PLAN?
The following summarizes certain federal income tax considerations to
current stockholders who participate in the Plan. New investors and current
stockholders should also consult the general discussion under the caption
"Federal Income Tax Considerations" for a summary of federal income tax
considerations related to the ownership of our stock.
The following summary is based upon an interpretation of current federal
tax law. It is important that you consult your own tax advisors to determine
particular tax consequences, including state income tax (and non-income tax,
such as stock transfer tax) consequences, which vary from state to state and
which may result from participation in the Plan and the subsequent disposition
of shares of common stock acquired pursuant to the Plan. Income tax consequences
to Participants residing outside the United States will vary from jurisdiction
to jurisdiction.
Chapman and Cutler LLP, our tax counsel, has rendered an opinion that the
following are the material federal income tax consequences of participating in
the Plan. However, the opinions of counsel are not binding on the Internal
Revenue Service or on the courts, and no assurance can be given that the
conclusions reached by Chapman and Cutler LLP would be sustained in court.
DIVIDEND REINVESTMENT PROGRAM
Participants in the Dividend Reinvestment program under the Plan will be
treated for federal income tax purposes as having received a distribution in an
amount equal to the fair market value on the Investment Date of the shares
acquired with reinvested dividends plus brokerage commissions, if any, paid on
your behalf. Such shares will have a tax basis equal to the same amount and the
holding period for such shares will begin on the day following the Investment
Date.
For federal income tax purposes, the fair market value of shares acquired
under the Plan will likely be treated as equal to 100% of the average of the
high and low sale prices of shares on the related Investment Date. Such average
sales price on that specific date may vary from the market price determined
under the Plan for such shares
Such distribution will be taxable as ordinary income to the extent of our
current or accumulated earnings and profits and generally won't be eligible for
the reduced rates on dividends paid from previously taxed earnings. To the
extent the distribution is in excess of our current or accumulated earnings and
profits, the distribution will be treated first as a tax-free return of capital,
reducing the tax basis in your shares, and the distribution in excess of your
tax basis will be taxable as gain realized from the sale of your shares.
EXAMPLE 1:
The following example may be helpful to illustrate the federal income tax
consequences of the reinvestment of dividends at a 2% discount from the Market
Price where the fair market value for tax purposes is the same as the Market
Price.
Cash dividends reinvested................................... $100.00
Assumed Market Price*....................................... $30.00
Less 2% discount per share.................................. $(0.60)
Net purchase price per share................................ $29.40
Number of shares purchased ($100.00/$29.40)................. 3.4014
Total taxable dividend resulting from transaction (30.00 x
3.4014)**................................................. $102.04
---------------
* This Market Price is assumed for illustrative purposes only, and may vary
from the actual Market Price of our common stock.
30
** Assumes trading price on Investment Date also equals $30.00 and no brokerage
commissions were paid on your behalf.
STOCK PURCHASE PROGRAM
The taxation of discounts, if any, associated with optional cash purchases
is not entirely clear. You may be treated as having received a dividend
distribution in an amount equal to the excess, if any, of the fair market value
of the shares acquired for your account on the Investment Date (plus brokerage
commissions, if any) over the amount of your Optional Cash Payment. The fair
market value on an Investment Date may differ from the Market Price determined
under the Plan for such shares. You should be aware that we will treat the
entire amount of such excess value as a distribution for tax reporting purposes
that is taxable as a dividend. It is possible, however, that such excess should
not be treated as a taxable distribution, or if it is, that all or a portion of
such distribution should be treated as a tax-free return of capital.
PARTICIPANTS ARE STRONGLY ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS IN THIS
REGARD.
Shares acquired under the Stock Purchase program under the Plan will have a
tax basis equal to the amount of the payment plus the dividend income, if any,
recognized as a result. Your holding period for shares of common stock acquired
pursuant to the Plan will begin on the day following the Investment Date.
EXAMPLE 2:
The following example may be helpful to illustrate the federal income tax
consequences of the Optional Cash Payment feature at a 2% discount from the
Market Price where the fair market value for tax purposes differs from the
Market Price.
Optional Cash Payment....................................... $100.00
Assumed Market Price*....................................... $30.00
Less 2% discount per share.................................. $(0.60)
Net purchase price per share................................ $29.40
Number of shares purchased ($100.00/$29.40)................. 3.4014
Total taxable dividend resulting from transaction (3.4014 X
$30.50 - $100.00)**....................................... $ 3.74
---------------
* This Market Price is assumed for illustrative purposes only, and may vary
from the actual Market Price of our common stock.
** Assumes trading price on Investment Date equals $30.50 and no brokerage
commissions were paid on your behalf.
You will not realize any taxable income upon receipt of certificates for
whole shares of common stock credited to your account, either upon your request
for certain of those shares of common stock or upon your termination of
participation in the Plan. You will recognize gain or loss upon the sale or
exchange of shares of common stock acquired under the Plan. You will also
recognize gain or loss upon receipt, following termination of participation in
the Plan, of a cash payment for any fractional share equivalent credited to your
account. The amount of any such gain or loss will be the difference between the
amount that you received for the shares of common stock or fractional share
equivalent and the tax basis thereof.
35. WHY IS MY TAXABLE INCOME FROM DISCOUNTS RECEIVED UNDER THE PLAN DIFFERENT
THAN THE STATED AMOUNT OF THE DISCOUNT OFFERED BY THE PLAN?
Under existing tax authorities, taxable income derived from such discounts
is based on the fair market value of our shares on the Investment Date. However,
when shares for the Plan are purchased from us, rather than in the open market,
the Market Price is generally based on the average price at which our shares
trade during a specified Pricing Period prior to the Investment Date. This
formula often produces a different value for our shares than the price at which
our shares actually trade on the Investment Date. The effect of this tax rule is
illustrated in the numeric examples contained in Question 34 above.
31
You should also note that in order to maintain the deductibility of our
dividends for tax purposes, our Plan also requires that every investment must be
made at a price that is a least equal to 95% of the value of our stock on the
Investment Date. If the value of our stock on the Investment Date significantly
exceeds the value of our stock determined under the Market Price formula, the
price paid under the Plan will be increased to ensure compliance with this tax
requirement.
EXAMPLE 3:
The following example may be helpful to illustrate the effects of the
minimum pricing requirement described above. The Minimum Price is relevant when
the trading price of our stock on the Investment Date significantly exceeds the
price determined using the Market Price formula. Although this example describes
a dividend reinvestment scenario, the Minimum Price requirement also applies to
Optional Cash Payments.
Cash dividends reinvested................................... $100.00
Assumed Market Price*....................................... $30.00
Less 2% discount per share.................................. $(0.60)
Purchase price before Minimum Price requirement............. $29.40
Minimum Price requirement**................................. $31.35
Number of shares purchased ($100.00/$31.35)................. 3.1898
Total taxable dividend resulting from transaction (3.1898 x
$33.00)**................................................. $105.26
---------------
* This Market Price is assumed for illustrative purposes only, and may vary
from the actual Market Price of our common stock.
** This Minimum Price is computed assuming we pay no brokerage commissions and
the trading price of our common stock on the Investment Date equals $33.00.
If we pay a $0.20 per share brokerage commission when the trading price on
the Investment Date is $33.00 the Minimum Price per share will be $31.54 (or
95% of $33.20).
36. HOW ARE INCOME TAX WITHHOLDING PROVISIONS APPLIED TO YOU?
If you fail to provide certain federal income tax certifications in the
manner required by law, distributions on shares of common stock, proceeds from
the sale of fractional shares and proceeds from the sale of shares of common
stock held for your account will be subject to federal income tax backup
withholding imposed at the fourth lowest tax rate applicable to unmarried
individuals, or such other rate as is then in effect. If withholding is required
for any reason, the appropriate amount of tax will be withheld before investment
or payment. Certain stockholders (including most corporations) are, however,
exempt from the above withholding requirements.
If you are a foreign stockholder you need to provide the required federal
income certifications to establish your status as a foreign stockholder so that
the foregoing backup withholding does not to apply to you. You also need to
provide the required certifications if you wish to claim the benefit of
exemptions from federal income tax withholding or reduced withholding rates
under a treaty or convention entered into between the United States and your
country of residence. Generally, distributions to a foreign stockholder are
subject to federal income tax withholding at 30% (or a lower treaty rate if
applicable), but may be as much as 35% for certain types of income. Certain
distributions or portion of a distribution to a foreign stockholder may still be
subject to federal income tax withholding even when the distribution or that
portion of the distribution is not treated as dividend under federal income tax
laws. If you are a foreign stockholder whose distributions are subject to
federal income tax withholding, the appropriate amount will be withheld and the
balance will be credited to your account to purchase shares of common stock.
32
37. WHO BEARS THE RISK OF MARKET FLUCTUATIONS IN OUR SHARES OF COMMON STOCK?
Your investment in shares held in the Plan account is no different from
your investment in directly held shares. You bear the risk of any loss and enjoy
the benefits of any gain from market price changes with respect to those shares.
38. WHO SHOULD BE CONTACTED WITH QUESTIONS ABOUT THE PLAN?
All correspondence regarding the Plan should be directed to the Plan
Administrator at the address set forth in Question 4. Please mention Redwood
Trust, Inc. and this plan in all correspondence.
39. HOW IS THE PLAN INTERPRETED?
Any question of interpretation arising under the Plan will be determined by
us and any such determination will be final. We may adopt additional terms and
conditions of the Plan and its operation will be governed by the laws of the
State of California.
40. WHAT ARE SOME OF YOUR RESPONSIBILITIES UNDER THE PLAN?
Shares of common stock credited to your Plan account are subject to escheat
to the state in which you reside in the event that such shares are deemed, under
such state's laws, to have been abandoned by you. You, therefore, should notify
the Plan Administrator promptly in writing of any change of address. Account
statements and other communications to you will be addressed to you at the last
address of record that you provide to the Plan Administrator.
You will have no right to draw checks or drafts against your Plan account
or to instruct the Plan Administrator with respect to any shares of common stock
or cash held by the Plan Administrator except as expressly provided in the Plan.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax
considerations relevant to Redwood Trust and its stockholders. This discussion
is based on existing United States federal income tax law, which is subject to
change, possibly retroactively. This discussion does not address all aspects of
United States federal income taxation that may be relevant to a particular
stockholder in light of its personal investment circumstances or to certain
types of investors subject to special treatment under the federal income tax
laws (including financial institutions, insurance companies, broker-dealers and,
except to the limited extent discussed below, tax-exempt entities and foreign
taxpayers) and it does not discuss any aspects of state, local or foreign tax
law. This discussion assumes that stockholders will hold their common stock as a
"capital asset" (generally, property held for investment) under the Code.
Stockholders are advised to consult their tax advisors as to the specific tax
consequences to them of purchasing, holding, and disposing of the common stock,
including the application and effect of Federal, state, local, and foreign
income and other tax laws.
In reading the tax disclosure set forth below, it should be noted that
although Redwood Trust is combined with all of its subsidiaries for financial
accounting purposes, for federal income tax purposes, only Redwood Trust and
Sequoia Mortgage Funding Corporation (and their assets and income) constitute
the REIT, and Redwood Trust's remaining domestic subsidiaries constitute a
separate consolidated group subject to regular corporate income taxes. Redwood's
foreign subsidiaries (i.e., Acacia CDO 1, Ltd., Acacia CDO 2, Ltd., Acacia CDO
3, Ltd. and Acacia CDO 4, Ltd.), are not generally subject to U.S. corporate
income taxes (see discussion below under Taxable REIT Subsidiaries).
GENERAL
In the opinion of Chapman and Cutler LLP, special tax counsel to Redwood
Trust, Redwood Trust, exclusive of any taxable affiliates, has been organized
and operated in a manner which qualifies it as a
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REIT under the Code since the commencement of its operations on August 19, 1994
through December 31, 2003, the date of Redwood Trust's latest audited financial
statements received by special tax counsel. However, whether Redwood Trust does
and continues to so qualify will depend on actual operating results and
compliance with the various tests for qualification as a REIT relating to its
income, assets, distributions, ownership and certain administrative matters, the
results of which are not reviewed by special tax counsel on an ongoing basis. No
assurance can be given that the actual results of Redwood Trust's operations for
any one taxable year will satisfy those requirements. Moreover, certain aspects
of Redwood Trust's planned method of operations have not been considered by the
courts or the Internal Revenue Service in any published authorities that
interpret the requirements of REIT status. There can be no assurance that the
courts or the Internal Revenue Service will agree with this opinion. In
addition, qualification as a REIT depends on future transactions and events that
cannot be known at this time. Accordingly, special tax counsel will be unable to
opine whether Redwood Trust will in fact qualify as a REIT under the Code in all
events and for all periods.
The opinions of special tax counsel are based upon existing law, including
the Internal Revenue Code of 1986, as amended, existing treasury regulations,
revenue rulings, revenue procedures, proposed regulations and case law, all of
which is subject to change both prospectively or retroactively. Moreover,
relevant laws or other legal authorities may change in a manner that could
adversely affect Redwood Trust or its stockholders.
If Redwood Trust failed to qualify as a REIT in any particular year, it
would be subject to federal income tax as a regular, domestic corporation, and
its stockholders would be subject to tax in the same manner as stockholders of a
regular corporation. In such event, Redwood Trust could be subject to
potentially substantial income tax liability in respect of each tax year that it
fails to qualify as a REIT as well as the four tax years following the year of
the failure and the amount of earnings and cash available for distribution to
its stockholders could be significantly reduced.
The following is a brief summary of certain technical requirements that
Redwood Trust must meet on an ongoing basis in order to qualify, and remain
qualified, as a REIT under the Code.
STOCK OWNERSHIP TESTS
The capital stock of Redwood Trust must be held by at least 100 persons for
at least 335 days of a twelve-month year, or a proportionate part of a short tax
year. In addition, no more than 50% of the value of Redwood Trust's capital
stock may be owned, directly or indirectly, by five or fewer individuals at all
times during the last half of the tax year. Under the Code, most tax-exempt
entities including employee benefit trusts and charitable trusts (but excluding
trusts described in 401(a) and exempt under 501(a)) are generally treated as
individuals for these purposes. Redwood Trust must satisfy these stock ownership
requirements each tax year. Redwood Trust must solicit information from certain
of its stockholders to verify ownership levels and maintain records regarding
those who do not respond. Redwood Trust's Articles of Incorporation impose
certain repurchase obligations and restrictions regarding the transfer of
Redwood Trust's shares in order to aid in meeting the stock ownership
requirements. If Redwood Trust were to fail either of the stock ownership tests,
it would generally be disqualified from REIT status, unless, in the case of the
"five or fewer" requirement, the "good faith" exemption is available.
ASSET TESTS
Redwood Trust must generally meet the following asset tests ("REIT Asset
Tests") at the close of each quarter of each tax year:
(a) at least 75% of the value of Redwood Trust's total assets must
consist of qualified real estate assets, government securities,
cash, and cash items ("75% Asset Test");
(b) the value of Redwood Trust's assets consisting of securities (other
than those includible under the 75% Asset Test) must not exceed 25%
of the total value of Redwood Trust's assets;
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(c) the value of Redwood Trust's assets consisting of securities of one
or more taxable REIT subsidiaries must not exceed 20% of the value
of Redwood Trust's total assets; and
(d) the value of securities held by Redwood Trust, other than those of
a taxable REIT subsidiary or taken into account for purposes of the
75% Asset Test, must not exceed either (i) 5% of the value of
Redwood Trust's total assets in the case of securities of any one
non-government issuer, or (ii) 10% of the outstanding vote or value
of any such issuer's securities.
In applying the above tests, a REIT is generally required to re-value all
of its assets at the end of any quarter in which it acquires a substantial
amount of new securities or other property other than qualified real estate
assets. Redwood Trust intends to monitor closely the purchase, holding, and
disposition of its assets in order to comply with the REIT Asset Tests. Redwood
Trust expects that substantially all of its assets will be qualified real estate
assets and intends to limit or hold through taxable REIT subsidiaries any assets
not qualifying as qualified real estate assets so as to comply with the above
REIT Asset Tests. If it is anticipated that the above limits would be exceeded,
Redwood Trust intends to take appropriate measures to avoid exceeding such
limits, including the disposition of non-qualifying assets within the permitted
time periods for cure.
GROSS INCOME TESTS
Redwood Trust must generally meet the following gross income tests ("REIT
Gross Income Tests") for each tax year:
(a) at least 75% of Redwood Trust's gross income must be derived from
certain specified real estate sources including interest income and
gain from the disposition of qualified real estate assets,
foreclosure property or "qualified temporary investment income"
(i.e., income derived from "new capital" within one year of the
receipt of such capital) ("75% Gross Income Test"); and
(b) at least 95% of Redwood Trust's gross income for each tax year must
be derived from sources of income qualifying for the 75% Gross
Income Test, or from dividends, interest, and gains from the sale
of stock or other securities (including certain interest rate swap
and cap agreements, options, futures and forward contracts entered
into to hedge variable rate debt incurred to acquire qualified real
estate assets) not held for sale in the ordinary course of business
("95% Gross Income Test").
Redwood Trust intends to maintain its REIT status by carefully monitoring
its income, including income from hedging transactions and sales of mortgage
assets, to comply with the REIT Gross Income Tests. In accordance with the Code,
Redwood Trust will treat income generated by its interest rate caps and other
hedging instruments as qualifying income for purposes of the 95% Gross Income
Tests to the extent the interest rate cap or other hedging instrument was
acquired to reduce the interest rate risks with respect to any indebtedness
incurred or to be incurred by Redwood Trust to acquire or carry real estate
assets. In addition, Redwood Trust will treat income generated by other hedging
instruments as qualifying or non-qualifying income for purposes of the 95% Gross
Income Test depending on whether the income constitutes gains from the sale of
securities as defined by the Investment Company Act of 1940. Under certain
circumstances, for example, (i) the sale of a substantial amount of mortgage
assets to repay borrowings in the event that other credit is unavailable or (ii)
an unanticipated decrease in the qualifying income of Redwood Trust which
results in the non-qualifying income exceeding 5% of gross income, Redwood Trust
may be unable to comply with certain of the REIT Gross Income Tests. Inadvertent
failures to comply with the REIT Gross Income Tests will not result in
disqualification of the REIT if certain disclosure and reasonable cause criteria
are met and a 100% tax on the amount equal to the qualified income shortfall is
paid. See "-- Taxation of Redwood Trust" below for a discussion of the tax
consequences of failure to comply with the REIT provisions of the Code.
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DISTRIBUTION REQUIREMENT
Redwood Trust generally is required to distribute to its stockholders an
amount equal to at least 95% of Redwood Trust's REIT taxable income determined
before deduction of dividends paid and by excluding net capital gains. Such
distributions must be made in the tax year to which they relate or, if declared
before the timely filing of Redwood Trust's tax return for such year and paid
not later than the first regular dividend payment after such declaration, in the
following tax year.
The Internal Revenue Service, or IRS, has ruled generally that if a REIT's
dividend reinvestment plan allows stockholders of the REIT to elect to have cash
distributions reinvested in shares of the REIT at a purchase price equal to at
least 95% of the fair market value of such shares on the distribution date, then
such distributions generally qualify towards this distribution requirement.
Redwood Trust maintains a Direct Stock Purchase and Dividend Reinvestment Plan,
or DRP, and intends that the terms of its DRP will comply with the IRS public
ruling guidelines for such plans.
If Redwood Trust fails to meet the distribution test as a result of an
adjustment to Redwood Trust's taxable income by the IRS, Redwood Trust may be
able to avoid disqualification as a REIT by paying a "deficiency" dividend
within a specified time period and in accordance with other requirements set
forth in the Code. Redwood Trust would be liable for interest based on the
amount of the deficiency dividend. A deficiency dividend is not permitted if the
deficiency is due to fraud with intent to evade tax or to a willful failure to
file timely tax return.
QUALIFIED REIT SUBSIDIARIES
A Qualified REIT Subsidiary is any corporation in which a REIT owns 100% of
the stock issued by such corporation and for which no election has been made to
classify it as a taxable REIT subsidiary. Sequoia Mortgage Funding Corporation,
a wholly-owned subsidiary of Redwood Trust, is treated as a Qualified REIT
Subsidiary. As such its assets, liabilities, and income are generally treated as
assets, liabilities, and income of Redwood Trust for purposes of each of the
above REIT qualification tests.
TAXABLE REIT SUBSIDIARIES
A Taxable REIT Subsidiary is any corporation in which a REIT owns stock
(directly or indirectly) and for which the REIT and such corporation make a
joint election to classify the corporation as a Taxable REIT Subsidiary.
Effective January 1, 2001, RWT Holdings, Inc., or Holdings, and Redwood Trust
elected to treat Holdings, Sequoia Residential Funding, and Holdings' other
subsidiaries as Taxable REIT Subsidiaries of Redwood Trust. In 2002, Redwood
Trust made a Taxable REIT Subsidiary election for Acacia CDO 1, Ltd., a newly
formed corporation. In 2003, Redwood Trust made a Taxable REIT Subsidiary
election for Acacia CDO 2, Ltd., Acacia CDO 3, Ltd., and Acacia CDO 4, Ltd.,
each newly formed corporation. As Taxable REIT Subsidiaries, they are not
subject to the REIT asset, income, and distribution requirements nor are their
assets, liabilities, or income treated as assets, liabilities, or income of
Redwood Trust for purposes of each of the above REIT qualification tests.
Redwood Trust generally intends to engage in securitization transactions
(other than certain non-REMIC, debt-for-tax securitizations) through its Taxable
REIT Subsidiaries. In addition, Redwood Trust generally intends to make a
Taxable REIT Subsidiary election with respect to any other corporation in which
it acquires equity or equity-like securities constituting more than 10% by vote
or value of such corporation and that is not otherwise a Qualified REIT
Subsidiary. However, the aggregate value of all of Redwood Trust's Taxable REIT
Subsidiaries must be limited to 20% of the total value of the REIT's assets. In
addition, Redwood Trust will be subject to a 100% penalty tax on any rent,
interest, or other charges that it imposes on any Taxable REIT Subsidiary in
excess of an arm's length price for comparable services. Redwood Trust expects
that any rents, interest, or other charges imposed on Holdings or any other
Taxable REIT Subsidiary will be at arm's length prices.
Redwood Trust generally expects to derive income from its Taxable REIT
Subsidiaries by way of dividends. Such dividends are not real estate source
income for purposes of the 75% Gross Income Test.
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Therefore, when aggregated with Redwood Trust's other non-real estate source
income, such income must be limited to 25% of the REIT's gross income each year.
Redwood Trust will monitor the value of its investment in, and the distributions
from, its Taxable REIT Subsidiaries to ensure compliance with all applicable
REIT income and asset tests.
Taxable REIT Subsidiaries doing business in the United States are generally
subject to corporate level tax on their net income and generally will be able to
distribute only net after-tax earnings to its stockholders, including Redwood
Trust, as dividend distributions. Acacia CDOs are considered foreign
subsidiaries not engaged in trade or business in the United States for tax
purposes and therefore are not subject to U.S. corporate income taxation
(although income from our equity investments in the Acacia CDOs is generally
includable in REIT taxable income or the taxable income of our other Taxable
REIT Subsidiaries that are its stockholders). There is no guarantee that the IRS
will not take the position that Acacia CDOs are doing business in the U.S.,
which position, if sustained, would subject them to corporate level tax on their
effectively connected U.S. trade or business income. If this were to occur, then
the Acacia CDOs would generally only be able to contribute net after-tax
earnings to REIT dividend distributions.
TAXATION OF REDWOOD TRUST
In any year in which Redwood Trust qualifies as a REIT, Redwood Trust will
generally not be subject to federal income tax on that portion of its REIT
taxable income or capital gain that is distributed to its stockholders. Redwood
Trust will, however, be subject to federal income tax at normal corporate income
tax rates upon any undistributed taxable income or capital gain.
In addition, notwithstanding its qualification as a REIT, Redwood Trust may
also be subject to tax in certain other circumstances. As described above, if
Redwood Trust fails to satisfy the REIT Gross Income Tests, but nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will generally be subject to a 100% tax on the greater of the amount by
which Redwood Trust fails either the 75% or the 95% Gross Income Test. Redwood
Trust will also be subject to a tax of 100% on net income derived from any
"prohibited transaction," which refers to dispositions of property classified as
"property held for sale to customers in the ordinary course of business" (i.e.,
"dealer" property). Redwood Trust does not believe that it has or will engage in
transactions that would result in it being classified as a dealer or deemed to
have disposed of dealer property; however, there can be no assurance that the
IRS will agree. If Redwood Trust has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, it will be subject to federal income tax on such
income at the highest corporate income tax rate. In addition, a nondeductible
excise tax, equal to 4% of the excess of required distributions over the amounts
actually distributed will be imposed on Redwood Trust for each calendar year to
the extent that dividends paid during the year, or declared during the last
quarter of the year and paid during January of the succeeding year, are less
than the sum of (1) 85% of Redwood Trust's "ordinary income," (2) 95% of Redwood
Trust's capital gain net income, plus (3) any undistributed income remaining
from earlier years. Redwood Trust may also be subject to the corporate
alternative minimum tax, as well as other taxes in certain situations not
presently contemplated.
If Redwood Trust fails any of the above described REIT qualification tests
in any tax year and the relief provisions provided by the Code do not apply,
Redwood Trust would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at the regular corporate income
tax rates. Distributions to stockholders in any year in which Redwood Trust
fails to qualify as a REIT would not be deductible by Redwood Trust, nor would
distributions generally be required to be made under the Code. Further, unless
entitled to relief under certain other provisions of the Code, Redwood Trust
would also be disqualified from re-electing REIT status for the four tax years
following the year in which it became disqualified.
37
Redwood Trust may also voluntarily revoke its election to be taxed as a
REIT, although it has no intention of doing so, in which event Redwood Trust
will be prohibited, without exception, from electing REIT status for the year to
which the revocation relates and the following four tax years.
Redwood Trust intends to monitor on an ongoing basis its compliance with
the REIT requirements described above. In order to maintain its REIT status,
Redwood Trust may be required to limit the types of assets that it might
otherwise acquire, or hold certain assets at times when it might otherwise have
determined that the sale or other disposition of such assets would have been
more prudent.
TAXATION OF STOCKHOLDERS
For any tax year in which Redwood Trust is treated as a REIT for federal
income tax purposes, distributions (including constructive or in-kind
distributions) made to holders of common stock other than tax-exempt entities
(and not designated as capital gain dividends) will generally be subject to tax
as ordinary income to the extent of Redwood Trust's current and accumulated
earnings and profits as determined for federal income tax purposes. If the
amount distributed exceeds a stockholder's allocable share of such earnings and
profits, the excess will be treated as a return of capital to the extent of the
stockholder's adjusted basis in the common stock, which will not be subject to
tax, and thereafter as a taxable gain from the sale or exchange of a capital
asset.
Distributions designated by Redwood Trust as capital gain dividends will
generally be subject to tax as long-term capital gain to stockholders, to the
extent that the distribution does not exceed Redwood Trust's actual net capital
gain for the tax year. Alternatively, Redwood Trust can also elect by written
notice to its stockholders to designate a portion of its net capital gain income
as being retained and pay directly the tax on such net capital gains. In that
instance, each stockholder generally be required to include the deemed capital
gains dividend in its income, will be entitled to claim a credit or refund on
its tax return for the tax paid by Redwood Trust with respect to such deemed
dividend, and will be entitled to increase its tax basis in Redwood Trust shares
by an amount equal to the excess of the deemed capital gain dividend over the
tax deemed paid by it.
Distributions by Redwood, whether characterized as ordinary income or as
capital gain, are not eligible for the corporate dividends received deduction
that exists under current law. Furthermore, distributions by Redwood
characterized as ordinary income generally are not subject to the reduced 15%
and 5% tax rates otherwise applicable to certain types of dividends as of
January 1, 2003. However, dividend distributions by Redwood characterized as
capital gain distributions recognized subsequent to May 5, 2003, will be subject
to the reduced 5% and 15% tax rates made effective by the Jobs and Growth Relief
Reconciliation Tax Act of 2003.
In the event that Redwood Trust realizes a loss for the tax year,
stockholders will not be permitted to deduct any share of that loss. Further, if
Redwood Trust (or a portion of its assets) were to be treated as a taxable
mortgage pool, or if it were to hold residual interests in real estate mortgage
investment conduits, or REMICs, or financial asset securitization investment
trusts, or FASITs, any "excess inclusion" income derived therefrom and allocated
to a stockholder would not be allowed to be offset by a net operating loss of
such stockholder.
Dividends declared during the last quarter of a tax year and actually paid
during January of the following tax year are generally treated as if received by
the stockholder on December 31 of the tax year in which they are declared and
not on the date actually received. In addition, Redwood Trust may elect to treat
certain other dividends distributed after the close of the tax year as having
been paid during such tax year, but stockholders will be treated as having
received such dividend in the tax year in which the distribution is made.
Generally, a dividend distribution of earnings from a REIT is considered
for estimated tax purposes only when the dividend is made. However, any person
owning at least 10% of the vote or value of a closely-held REIT must accelerate
recognition of year-end dividends received from the REIT in
38
computing estimated tax payments. Redwood Trust is not currently, and does not
intend to be, a closely-held REIT.
Upon a sale or other disposition of the common stock, a stockholder will
generally recognize a capital gain or loss in an amount equal to the difference
between the amount realized and the stockholder's adjusted basis in such stock,
which gain or loss generally will be long-term if the stock was held for more
than twelve months. Any loss on the sale or exchange of common stock held by a
stockholder for six months or less will generally be treated as a long-term
capital loss to the extent of designated capital gain dividends received by such
stockholder. If stock is sold after a record date but before a payment date for
declared dividends on such stock, a stockholder will nonetheless be required to
include such dividend in income in accordance with the rules above for
distributions, whether or not such dividend is required to be paid over to the
purchaser.
DRP participants will generally be treated as having received a dividend
distribution, subject to tax as ordinary income, in an amount equal to the fair
market value of the common stock purchased with the reinvested dividend proceeds
generally on the date Redwood Trust credits such common stock to the DRP
participant's account, plus brokerage commissions, if any, allocable to the
purchase of such common stock. DRP participants will have a tax basis in the
shares equal to such value. DRP participants may not, however, receive any cash
with which to pay the resulting tax liability. Shares received pursuant to the
DRP will have a holding period beginning on the day after their purchase by the
plan administrator.
If Redwood Trust makes a distribution of stockholder rights with respect to
its common stock, such distribution generally will not be treated as taxable
when made. However, if the fair market value of the rights on the date of
issuance is 15% or more of the value of the common stock, or if the stockholder
so elects regardless of the value of the rights, the stockholder must make an
allocation of its existing tax basis between the rights and the common stock
based on their relative value on the date of the issuance of the rights. On the
exercise of the rights, the stockholder will generally not recognize gain or
loss. The stockholder's basis in the shares received from the exercise of the
rights will be the amount paid for the shares plus the basis, if any, of the
rights exercised. Distribution of stockholder rights with respect to other
classes of securities holders generally would be taxable based on the value of
the rights on the date of distribution.
Redwood Trust is required under Treasury Department regulations to demand
annual written statements from the record holders of designated percentages of
its stock disclosing the actual and constructive ownership of such stock and to
maintain permanent records showing the information it has received as to the
actual and constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.
In any year in which Redwood Trust does not qualify as a REIT,
distributions made to its stockholders would be taxable in the same manner
discussed above, except that no distributions could be designated as capital
gain dividends, distributions would be eligible for the corporate dividends
received deduction and may be eligible for the reduced tax rates on dividends
(if paid out of previously-taxed earnings), the excess inclusion income rules
would not apply, and stockholders would not receive any share of Redwood Trust's
tax preference items. In such event, however, Redwood Trust would be subject to
potentially substantial federal income tax liability, and the amount of earnings
and cash available for distribution to its stockholders could be significantly
reduced or eliminated.
TAXATION OF TAX-EXEMPT ENTITIES
Subject to the discussion below regarding a "pension-held REIT," a
tax-exempt stockholder is generally not subject to tax on distributions from
Redwood Trust or gain realized on the sale of the common stock, provided that
such stockholder has not incurred indebtedness to purchase or hold Redwood
Trust's common stock, that its shares are not otherwise used in an unrelated
trade or business of such stockholder, and that Redwood Trust, consistent with
its stated intent, does not form taxable mortgage pools or hold residual
interests in REMICs or FASITs that give rise to "excess inclusion" income as
defined under the Code. However, if Redwood Trust was to hold a residual
interest in a REMIC or
39
FASIT, or if a pool of its assets were to be treated as a "taxable mortgage
pool," a portion of the dividends paid to a tax-exempt stockholder may be
subject to tax as unrelated business taxable income or UBTI. Although Redwood
Trust does not intend to acquire such residual interests or believe that it, or
any portion of its assets, will be treated as a taxable mortgage pool, no
assurance can be given that the IRS might not successfully maintain that such a
taxable mortgage pool exists.
If a qualified pension trust (i.e., any pension or other retirement trust
that qualifies under Section 401(a) of the Code) holds more than 10% by value of
the interests in a "pension-held REIT" at any time during a tax year, a
substantial portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is a REIT
(i) that would not have qualified as a REIT but for the provisions of the Code
which look through qualified pension trust stockholders in determining ownership
of stock of the REIT and (ii) in which at least one qualified pension trust
holds more than 25% by value of the interest of such REIT or one or more
qualified pension trusts (each owning more than a 10% interest by value in the
REIT) hold in the aggregate more than 50% by value of the interests in such
REIT. Assuming compliance with the ownership limit provisions in Redwood Trust's
Articles of Incorporation it is unlikely that pension plans will accumulate
sufficient stock to cause Redwood Trust to be treated as a pension-held REIT.
Distributions to certain types of tax-exempt stockholders exempt from
federal income taxation under Sections 501 (c)(7), (c)(9), (c)(17), and (c)(20)
of the Code may also constitute UBTI, and such prospective investors should
consult their tax advisors concerning the applicable "set aside" and reserve
requirements.
STATE AND LOCAL TAXES
Redwood Trust and its stockholders may be subject to state or local
taxation in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of Redwood Trust and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the common stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
HOLDERS
The following discussion summarizes certain United States Federal tax
consequences of the acquisition, ownership and disposition of common stock by an
initial purchaser that, for United States federal income tax purposes, is a
"Non-United States Holder." Non-United States Holder is any beneficial holder
that is: not a citizen or resident of the United States; not a corporation,
partnership, or other entity created or organized in the United States or under
the laws of the United States or of any political subdivision thereof; and not
an estate or trust whose income is includible in gross income for United States
federal income tax purposes regardless of its source. This discussion does not
consider any specific facts or circumstances that may apply to particular
Non-United States Holder's acquiring, holding, and disposing of common stock, or
any tax consequences that may arise under the laws of any foreign, state, local,
or other taxing jurisdiction.
DIVIDENDS
Dividends paid by Redwood Trust out of earnings and profits, as determined
for United States federal income tax purposes, to a Non-United States Holder
will generally be subject to withholding of United States federal income tax at
the rate of 30%, unless reduced or eliminated by an applicable tax treaty or
unless such dividends are treated as effectively connected with a United States
trade or business. Distributions paid by Redwood Trust in excess of its earnings
and profits will be treated as a tax-free return of capital to the extent of the
holder's adjusted basis in his shares, and thereafter as gain from the sale or
exchange of a capital asset as described below. If it cannot be determined at
the time a distribution is made whether such distribution will exceed the
earnings and profits of Redwood Trust, the distribution will be subject to
withholding at the same rate as dividends. Amounts so withheld, however, will be
40
refundable or creditable against the Non-United States Holder's United States
Federal tax liability if it is subsequently determined that such distribution
was, in fact, in excess of the earnings and profits of Redwood Trust. If the
receipt of the dividend is treated as being effectively connected with the
conduct of a trade or business within the United States by a Non-United States
Holder, the dividend received by such holder will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax).
For any year in which Redwood Trust qualifies as a REIT, distributions to a
Non-United States Holder that are attributable to gain from the sales or
exchanges by Redwood Trust of "United States real property interests" will be
treated as if such gain were effectively connected with a United States business
and will thus be subject to tax at the normal capital gain rates applicable to
United States stockholders (subject to applicable alternative minimum tax) under
the provisions of the Foreign Investment in Real Property Tax Act of 1980, or
FIRPTA. Also, distributions subject to FIRPTA may be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder not entitled to a
treaty exemption. Redwood Trust is required to withhold 35% of any distribution
that could be designated by Redwood Trust as a capital gains dividend. This
amount may be credited against the Non-United States Holder's FIRPTA tax
liability. It should be noted that mortgage loans without substantial equity or
with shared appreciation features generally would not be classified as "United
States real property interests."
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale or other disposition of its
shares of common stock unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-United States
Holder, (ii) in the case of a Non-United States Holder who is a nonresident
alien individual and holds such shares as a capital asset, such holder is
present in the United States for 183 or more days in the tax year and certain
other requirements are met, or (iii) the Non-United States Holder is subject to
tax under the FIRPTA rules discussed below. Gain that is effectively connected
with the conduct of a business in the United States by a Non-United States
Holder will be subject to the United States federal income tax on net income
that applies to United States persons generally (and, with respect to corporate
holders and under certain circumstances, the branch profits tax) but will not be
subject to withholding. Non-United States Holders should consult applicable
treaties, which may provide for different rules.
Gain recognized by a Non-United States Holder upon a sale of common stock
will generally not be subject to tax under FIRPTA if Redwood Trust is a
"domestically-controlled REIT," which is defined generally as a REIT in which at
all times during a specified testing period less than 50% in value of its shares
were held directly or indirectly by non-United States persons. Because only a
minority of Redwood Trust's stockholders are believed to be Non-United States
Holders, Redwood Trust anticipates that it will qualify as a
"domestically-controlled REIT." Accordingly, a Non-United States Holder should
not be subject to United States federal income tax from gains recognized upon
disposition of its shares.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Redwood Trust will report to its U.S. stockholders and the Internal Revenue
Service the amount of distributions paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding with respect to distributions
paid (at the rate generally equal to the fourth lowest rate of federal income
tax then in effect) unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates that fact; or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide Redwood Trust with its correct taxpayer identification number may also
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the stockholder's income tax liability.
In addition, Redwood Trust
41
may be required to withhold a portion of dividends and capital gain
distributions to any stockholders that do not certify under penalties of perjury
their non-foreign status to Redwood Trust.
ERISA INVESTORS
Because our common stock will qualify as a "publicly offered security,"
employee benefit plans and individual retirement accounts may purchase shares of
common stock and treat such shares, and not the underlying assets, as plan
assets. Fiduciaries of ERISA plans should consider (i) whether an investment in
our common stock satisfies ERISA diversification requirement, (ii) whether the
investment is in accordance with the ERISA plans' governing instruments and
(iii) whether the investment is prudent.
DIVIDENDS
For a list of anticipated dividend Record and Investment Dates, visit our
website at HTTP://WWW.REDWOODTRUST.COM.
USE OF PROCEEDS
We do not know either the number of shares of common stock that will be
ultimately sold pursuant to the Plan or the prices at which such shares will be
sold. We will receive proceeds from the purchase of shares of common stock
through the Plan only to the extent that such purchases are made directly from
us and not from open market purchases by the Plan Administrator. We intend to
use the net proceeds from the sale of such shares of our common stock for the
purchase of additional mortgage assets and for other general corporate purposes.
PLAN OF DISTRIBUTION
Except to the extent the Plan Administrator purchases common stock in open
market transactions, the common stock acquired under the Plan will be sold
directly by us through the Plan. We may sell common stock to owners of shares
(including brokers or dealers) who, in connection with any resales of such
shares, may be deemed to be underwriters. Such shares, including shares acquired
pursuant to waivers granted with respect to the Stock Purchase program of the
Plan, may be resold in market transactions (including coverage of short
positions) on any national security exchange on which shares of common stock
trade or in privately negotiated transactions. Our common stock is currently
listed on the NYSE.
Under certain circumstances, it is expected that a portion of the shares of
common stock available for issuance under the Plan will be issued pursuant to
such waivers. The difference between the price such owners pay to us for shares
of common stock acquired under the Plan, after deduction of the applicable
discount from the Market Price, and the price at which such shares are resold,
may be deemed to constitute underwriting commissions received by such owners in
connection with such transactions.
Subject to the availability of shares of common stock registered for
issuance under the Plan, there is no total maximum number of shares that can be
issued pursuant to the reinvestment of dividends. From time to time, financial
intermediaries may engage in positioning transactions to benefit from the
discount from the Market Price of common stock acquired through the reinvestment
of dividends under the Plan.
We will pay any and all brokerage commissions and related expenses incurred
in connection with purchases of common stock under the Plan. Upon withdrawal by
a participant from the Plan by the sale of common stock held under the Plan, the
participant will receive the proceeds of such sale less a nominal fee per
transaction paid to the Plan Administrator (if such resale is made by the Plan
Administrator at the request of a participant), any related brokerage
commissions and any applicable transfer taxes.
42
Common stock may not be available under the Plan in all jurisdictions. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any common stock or other securities in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission" or "SEC"). Reports, proxy statements and other information filed by
us may be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at 233 Broadway, New York, New York
10279-0001, and at 500 West Madison Street, Chicago, Illinois 60661. Copies may
also be obtained from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1
800 SEC-0330. Our common stock is currently listed on the New York Stock
Exchange under the trading symbol "RWT". Holders of the common stock will
receive annual reports containing audited financial statements with a report
thereon by our independent certified public accountants, and quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.
We file information electronically with the Commission, and the Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants (including the Company) that file
electronically with the Commission. The address of the Commission's Web site is:
HTTP://WWW.SEC.GOV.
We will provide without charge to each person, including any beneficial
owner, to whom a Prospectus is delivered, upon written or oral request of that
person, a copy of any document incorporated herein by reference (other than
exhibits to those documents unless the exhibits are specifically incorporated
herein by reference into the documents that this Prospectus incorporates by
reference). Requests should be directed to Redwood Trust, Inc., One Belvedere
Place, Suite 300, Mill Valley, California 94941, telephone (415) 389-7373.
For more information about us, please visit HTTP://WWW.REDWOODTRUST.COM.
Information on our web site and on web sites linked to it is not part of this
prospectus.
INCORPORATION OF IMPORTANT INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made by us with the SEC which we may make under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act (other than information
in listed documents and future filings that is deemed not to be filed) until all
of the securities being offered are sold:
(a) Our Annual Report on Form 10-K for the fiscal year ended December
31, 2003; and
(b) The description of our common stock included in our registration
statement on Form 8-A filed July 18, 1995 (Reg. No. 0-26434) and as amended
by Form 8-A/A filed August 4, 1995, under the Exchange Act.
43
LEGAL OPINIONS
The validity of the common stock offered and certain legal matters will be
passed upon by Tobin & Tobin, a professional corporation, San Francisco,
California. Certain tax matters will be passed on by Chapman and Cutler LLP, San
Francisco, California.
EXPERTS
The financial statements incorporated in this registration statement by
reference to the Annual Report on Form 10-K for the year ended December 31,
2003, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
44
GLOSSARY
"Beneficial Owners" are shareholders who beneficially own shares of our
stock that are registered in a name other than their own (for example, in the
name of a bank, broker, or other nominee).
"business day" means any day other than Saturday, Sunday, or legal holiday
on which the New York Stock Exchange or another applicable securities exchange
is closed or a day on which Redwood Trust, Inc. or the Plan Administrator is
authorized or obligated by law to close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means Redwood Trust, Inc.'s common stock, $.01 par value.
"Company" means Redwood Trust, Inc., a Maryland corporation.
"Company Stock" or "Company's Stock" means Redwood Trust, Inc.'s common
stock and any other classes of equity securities outstanding from time to time,
collectively.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Investment Date" means, with respect to common stock acquired pursuant to
a dividend reinvestment, in the case of shares acquired directly from us, the
quarterly dividend payment date declared by our Board of Directors (unless such
date is not a business day in which case it is the 1st business day immediately
thereafter) or, in the case of open market purchases, some day or days between
the 21st day of the month and the next 10 business days thereafter, as market
conditions permit; and with respect to common stock acquired pursuant to an
Optional Cash Payment, in the case of shares acquired directly from us, on or
about the 21st day of each month; or in the case of open market purchases, some
day or days between the 21st and the next 10 business days thereafter, as market
conditions permit. For Optional Cash Payments, we may designate other Investment
Dates for any month, in our sole discretion.
"Market Price" means, with respect to reinvested dividends and Optional
Cash Payments for shares acquired directly from us, the average daily high and
low sales prices, computed to 4 decimal places, of the common stock on the NYSE
or another applicable securities exchange, as reported in the Wall Street
Journal, during the Pricing Period (the 10 days on which the NYSE or another
applicable securities exchange is open and for which trades in our common stock
are reported immediately preceding the relevant Investment Date, or, if no
trading occurs in the common stock on one or more of such days, for the 10 days
immediately preceding the Investment Date for which trades are reported). With
respect to reinvested dividends and Optional Cash Payments for shares to be
acquired on the open market, Market Price means the weighted average of the
actual prices paid, computed to 4 decimal places, for all of the common stock
purchased by the Plan Administrator with all participants' reinvested dividends
and Optional Cash Payments for the related month.
"Maximum Price" means, with respect to Requests for Waivers and subsequent
purchases of stock directly from us, the amount established by you above which
you will not purchase our common stock at the Investment Date. That is, should
the Market Price, less applicable discount, exceed the Maximum Price you
established, no purchases will be made if the stock is purchased directly from
us. Your ability to establish a Maximum Price does not apply to open market
purchases.
"Minimum Price" means 95% of the sum of the fair market value of our common
stock on the Investment Date plus brokerage commissions, if any, paid on your
behalf.
"NYSE" means the New York Stock Exchange.
"Optional Cash Discount" means the discount from the Market Price
applicable to Optional Cash Payments. Such discount will vary between 0% and 3%
of the Market Price (based on a variety of potential considerations and may vary
from month to month.
"Optional Cash Payment Due Date" means 1 day before the relevant Pricing
Period.
45
"Participant" means a record owner of our common stock, the beneficial
owner of our common stock whose bank, broker or other nominee participates on
the beneficial owner's behalf, or a new investor who wishes to participate in
the Plan upon making an initial investment in our common stock.
"Plan" means the Redwood Trust, Inc. Direct Stock Purchase and Dividend
Reinvestment Plan.
"Plan Administrator" means a plan administrator that administers the Plan,
keeps records, sends statements of account to each Participant, and performs
other duties related to the Plan. Computershare Investor Services LLC currently
serves as plan administrator of the Plan.
"Plan Shares" are all shares of common stock held in a participant's
account under the Plan, including shares purchased through the Stock Purchase
program and all whole and fractional shares credited to a participant's Plan
account as the result of reinvestment of dividends on shares of our common stock
enrolled in the Dividend Reinvestment program.
"Pricing Period" is the period encompassing the 10 days during which our
common stock is traded on the NYSE or other securities exchange preceding the
relevant dividend reinvestment or Optional Cash Payment Investment Date.
"Record Date" means, with respect to reinvestments of dividends, the date
declared by our Board of Directors for payment of such dividends.
"Record Owner" refers to shareholders who own shares of our common stock in
their own names.
"Request for Waiver" means a written request from a Participant, requesting
that we waive the $10,000 Optional Cash Payment limitation and allow the
Participant to make Optional Cash Payments in excess of $10,000.
"Securities Act" means the Securities Act of 1933, as amended.
"Threshold Price" means the minimum price, if any, established by us that
the average high and low prices of the common stock must equal or exceed during
each day of the Pricing Period for Optional Cash Payments made pursuant to
Requests for Waivers.
46
SCHEDULE A
REDWOOD TRUST, INC.
DIRECT STOCK PURCHASE PLAN SCHEDULE -- 2004
THRESHOLD PRICE &
OPTIONAL CASH OPTIONAL CASH PRICING PERIOD
DISCOUNT DATE WAIVER DUE DATE PAYMENT DUE DATE COMMENCEMENT DATE INVESTMENT DATE
----------------- --------------- ---------------- ----------------- ---------------
December 29, 2003 December 30, 2003 January 5, 2004 January 6, 2004 January 21, 2004
January 29, 2004 February 3, 2004 February 5, 2004 February 6, 2004 February 23, 2004
February 27, 2004 March 3, 2004 March 5, 2004 March 8, 2004 March 22, 2004
March 29, 2004 April 1, 2004 April 5, 2004 April 6, 2004 April 21, 2004
April 29, 2004 May 4, 2004 May 6, 2004 May 7, 2004 May 21, 2004
May 27, 2004 June 2, 2004 June 4, 2004 June 7, 2004 June 23, 2004
June 28, 2004 July 1, 2004 July 6, 2004 July 7, 2004 July 21, 2004
July 30, 2004 August 4, 2004 August 6, 2004 August 9, 2004 August 23, 2004
August 27, 2004 September 1, 2004 September 3, 2004 September 7, 2004 September 21, 2004
September 29, 2004 October 4, 2004 October 6, 2004 October 7, 2004 October 21, 2004
October 29, 2004 November 3, 2004 November 5, 2004 November 8, 2004 November 22, 2004
November 29, 2004 December 2, 2004 December 6, 2004 December 7, 2004 December 21, 2004
December 30, 2004 January 4, 2005 January 6, 2005 January 7, 2005 January 21, 2005
COMMON DIVIDENDS REINVESTED:
RECORD DATE INVESTMENT DATE
----------- ---------------
March 31, 2004 April 21, 2004
June 30, 2004 July 21, 2004
September 30, 2004 October 21, 2004
December 31, 2004 January 21, 2005
The dates indicated are those expected to be applicable under the Plan with
respect to future regular dividends, if and when declared by the Board of
Directors. Actual record and payment dates will be determined by the Board of
Directors and are subject to change.
FOR FUTURE REFERENCE:
THRESHOLD PRICE &
OPTIONAL CASH OPTIONAL CASH PRICING PERIOD
DISCOUNT SET DATE WAIVER DUE DATE PAYMENT DUE DATE COMMENCEMENT DATE INVESTMENT DATE
----------------- --------------- ---------------- ----------------- ---------------
5 business days 2 business days 1 business day 10 trading days The 21st (or first
prior to Optional prior to Optional prior to Pricing prior to business day
Cash Payment Date Cash Payment Date Period Investment Date thereafter)
A-1
---------------------------------------------------------
---------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR ANY
OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF OUR COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES, NOR SHALL ANY SALES OF THE SECURITIES BE
MADE PURSUANT TO THIS PROSPECTUS, IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION OR SALE IS UNLAWFUL.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
WE DO NOT CLAIM THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE STATED ON THE COVER.
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
2,000,000 SHARES
REDWOOD TRUST, INC.
COMMON STOCK
(REDWOOD TRUST LOGO)
--------------------
PROSPECTUS
MAY , 2004
--------------------
---------------------------------------------------------
---------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be incurred in connection with the issuance and
distribution of the securities being registered are as set forth below. All such
expenses, except for the SEC registration and filing fees, are estimated:
SEC Registration............................................ $12,308
Legal Fees and Expenses..................................... $20,000
Accounting Fees and Expenses................................ $10,000
Printing Fees............................................... $25,000
Miscellaneous............................................... $ 7,692
-------
Total..................................................... $75,000
=======
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 2-418 of the Corporations and Associations Article of the Annotated
Code of Maryland provides that a Maryland corporation may indemnify any director
of the corporation and any person who, while a director of the corporation, is
or was serving at the request of the corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise or employee benefit plan,
is made a party to any proceeding by reason of service in that capacity unless
it is established that the act or omission of the director was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; or the director actually received an
improper personal benefit in money, property or services; or, in the case of any
criminal proceeding, the director had reasonable cause to believe that the act
or omission was unlawful. Indemnification may be against judgments, penalties,
fines, settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding, but if the proceeding was one by or in the right
of the corporation, indemnification may not be made in respect of any proceeding
in which the director shall have been adjudged to be liable to the corporation.
Such indemnification may not be made unless authorized for a specific proceeding
after a determination has been made, in the manner prescribed by law, that
indemnification is permissible in the circumstances because the director has met
the applicable standard of conduct. On the other hand, the director must be
indemnified for expenses if he has been successful in the defense of the
proceeding or as otherwise ordered by a court. The law prescribes the
circumstances under which the corporation may advance expenses to, or obtain
insurance or similar protection for, directors.
The law also provides for comparable indemnification for corporate officers
and agents.
The Registrant's Articles of Incorporation provide that our directors and
officers shall, and our agents in the discretion of the Board of Directors may,
be indemnified to the fullest extent required or permitted from time to time by
the laws of Maryland.
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of our directors and
officers to the corporation and our stockholders for money damages except to the
extent that (1) it is proved that the person actually received an improper
benefit or profit in money, property or services for the amount of the benefit
or profit in money, property or services actually received, or (2) a judgment or
other final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. Our Articles of Incorporation contain a provision providing for
elimination of the liability of our directors and officers or our stockholders
for money damages to the maximum extent permitted by Maryland law from time to
time.
II-1
ITEM 16. EXHIBITS.
5.1 Opinion of Tobin & Tobin, a professional corporation, as to
legality (including consent of such firm)
8.1 Opinion of Chapman and Cutler LLP, as to certain tax matter
(including consent of such firm)
23.1 Consent of Tobin & Tobin (see Item 5.1 above)
23.2 Consent of Chapman and Cutler LLP (see Item 8.1 above)
23.3 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (set forth on signature page)
ITEM 17. UNDERTAKINGS.
(a) 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 the 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 the undertakings set forth in clauses (i) and (ii) of
this paragraph do not apply if the information required to be included in a
post-effective amendment is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in this 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.
(b) 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 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement 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.
(c) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or
II-2
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.
(d) That,
(1) For purposes of determining any liability under the Securities
Act, 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.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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 Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City and County of San Francisco, State of California,
on May 3, 2004.
REDWOOD TRUST, INC.
By: /s/ GEORGE E. BULL III
------------------------------------
George E. Bull III
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-3 has been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE POSITION DATE
--------- -------- ----
/s/ GEORGE E. BULL III Chairman of the Board, Chief May 3, 2004
------------------------------------------------ Executive Officer and Director
George E. Bull III (Principal Executive Officer)
*/s/ DOUGLAS B. HANSEN President, Assistant Secretary and May 3, 2004
------------------------------------------------ Director
Douglas B. Hansen
*/s/ RICHARD D. BAUM Director May 3, 2004
------------------------------------------------
Richard D. Baum
*/s/ THOMAS C. BROWN Director May 3, 2004
------------------------------------------------
Thomas C. Brown
*/s/ MARIANN BYERWALTER Director May 3, 2004
------------------------------------------------
Mariann Byerwalter
*/s/ GREG H. KUBICEK Director May 3, 2004
------------------------------------------------
Greg H. Kubicek
*/s/ CHARLES J. TOENISKOETTER Director May 3, 2004
------------------------------------------------
Charles J. Toeniskoetter
*/s/ DAVID L. TYLER Director May 3, 2004
------------------------------------------------
David L. Tyler
*/s/ HAROLD F. ZAGUNIS Vice President, Chief Financial May 3, 2004
------------------------------------------------ Officer, Treasurer, and Secretary
Harold F. Zagunis (Principal Financial Officer)
II-4
*/s/ MICHAEL S. CHURCHILL Assistant Vice President, Controller May 3, 2004
------------------------------------------------ (Principal Accounting Officer)
Michael S. Churchill
By: */s/ GEORGE E. BULL III
-----------------------------------------------
George E. Bull III
Attorney-in-fact
II-5
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
5.1 Opinion of Tobin & Tobin, a professional corporation, as to
legality (including consent of such firm)
8.1 Opinion of Chapman and Cutler LLP, as to certain tax matter
(including consent of such firm)
23.1 Consent of Tobin & Tobin (see Item 5.1 above)
23.2 Consent of Chapman and Cutler LLP (see Item 8.1 above)
23.3 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (set forth on signature page)
II-6