1313918--3/23/2010--Deerfield_Capital

related topics

{loan, real, estate}

{stock, price, share}

{loss, insurance, financial}

{tax, income, asset}

{investment, property, distribution}

{provision, law, control}

{personnel, key, retain}

{competitive, industry, competition}

{cost, operation, labor}

{debt, indebtedness, cash}

{regulation, change, law}

{acquisition, growth, future}

{interest, director, officer}

{stock, price, operating}

{financial, litigation, operation}

{customer, product, revenue}

{operation, natural, condition}

{cost, regulation, environmental}

{condition, economic, financial}

{product, liability, claim}

{capital, credit, financial}

{product, market, service}

{control, financial, internal}

Risks Related to Our Business Generally We leverage our investments and incur other significant indebtedness, which may reduce our returns, harm our liquidity and cause our financial condition to deteriorate rapidly. We may not be able to obtain future waivers of the minimum net worth covenant contained in the indenture governing our Trust Preferred Securities. The current prolonged economic slowdown and weakness in the financial markets may impair our investments, reduce our liquidity and harm our operating results. Declines in the fair values of our investments may adversely affect our financial results and credit availability, which may reduce our earnings and liquidity. Declines in the fair value of our investments and inability to generate sufficient cash from operations may adversely affect our ability to maintain adequate liquidity to support our ongoing operations and planned growth. An increase in our borrowing costs relative to the interest we receive on our assets may impair our profitability and thus our available cash. Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly. Because the value we record for certain investments is based on estimates of fair value made by management, we may be unable to realize the value we recorded upon a sale of these investments. Quarterly results may fluctuate and may not be indicative of future quarterly performance. DFR and DCM are the subject of information requests by the SEC in an investigation that could result in SEC proceedings against us. Our business could be impaired if we are unable to attract and retain qualified personnel. We may change our investment strategy without stockholder consent, and our Board does not approve each investment decision made by management. We may enter into warehouse agreements in connection with our planned investment in the equity securities of CDOs or DCM's planned management of CDOs, and if the CDO investments are not consummated, the warehoused collateral will be sold, and we may be required to bear any loss resulting from such sale. Failure to procure adequate capital and funding would hurt our results and reduce the price of our stock. We may in the future issue shares of additional capital stock to raise proceeds for a wide variety of purposes, which could dilute and therefore reduce the value of our existing outstanding capital stock. Ownership limitations in our charter may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares. Future classes of capital stock or other securities may impose, and our currently outstanding Trust Preferred Securities and Series A and Series B Notes do impose, significant covenants and obligations on us and our operations. Loss of our 1940 Act exemption would adversely affect us and reduce the market price of our shares. Our organizational documents do not limit our ability to enter into new lines of business, and we may enter into new businesses, make future strategic investments or acquisitions or enter into joint ventures, each of which may result in additional risks and uncertainties in our business. The NASDAQ may delist our securities, which could limit investors' ability to make transactions in our securities and subject us to additional trading restrictions. The accounting rules applicable to certain of our transactions are highly complex and require the application of significant judgment and assumptions by our management. In addition, changes in accounting interpretations or assumptions could impact our financial statements. Failure to develop effective business continuity plans could disrupt our operations and cause financial losses. We operate in a highly competitive market for investment opportunities. Terrorist attacks and other acts of violence or war may affect the market for our stock, the industry in which we conduct our operations and our profitability. Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flows, and we may also incur significantly increased costs and maintain lower coverage in the future thereby increasing our risk of loss. Maryland anti-takeover statutes may restrict business combination opportunities. Risks Related to Our Investment Management Segment DCM's revenues fluctuate based on the amount or value of client assets, which could decrease for various reasons including investment losses and withdrawal of capital. DCM's performance fees may increase the volatility of our cash flows, which could depress our stock price. Poor investment performance could lead to a loss of clients and a decline in DCM's revenues. DCM derives much of its revenues from contracts that may be terminated on short notice. DCM has experienced and may continue to experience declines in and deferrals of management fee income from its CDOs due to defaults, downgrades and depressed market values with respect to the collateral underlying such CDOs. DCM could lose management fee income from the CDOs it manages or client AUM as a result of the triggering of certain structural protections built into such CDOs. We could incur losses due to trading errors. The loss of key portfolio managers and other personnel could harm DCM's business. DCM may need to offer new investment strategies and products in order to continue to generate revenue. Changes in the fixed income markets could adversely affect DCM. Changes in CDO spreads and the current market environment could continue to make it difficult for DCM to launch new CDOs. DCM depends on third-party distribution channels to market its CDOs and anticipates developing third-party distribution channels to market its investment funds. The fixed income alternative asset management industry is highly competitive, and DCM may lose client assets due to competition from other asset managers that have greater resources than DCM or that are able to offer services and products at more competitive prices. DCM's failure to comply with investment guidelines set by its clients or the provisions of the management agreement and other agreements to which it is a party could result in damage awards against DCM and a loss of AUM, either of which could cause our earnings to decline. DCM could lose client assets as the result of adverse publicity. Changes in laws, regulations or government policies affecting DCM's businesses could limit its revenues, increase its costs of doing business and materially and adversely affect its business. Risks Related to Our Principal Investing Segment We may not realize gains or income from our investments. The lack of liquidity in our investments may impair our results. We will lose money on our repurchase transactions if the counterparty to the transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term or if we default on our obligations under the repurchase agreement. Changes in prepayment rates could reduce the value of our RMBS, which could reduce our earnings and overall liquidity. We have incurred substantial impairments of our assets and may incur significant impairments in the future. There can be no assurance that the actions taken by the U.S. and foreign governments, central banks and other governmental and regulatory bodies for the purpose of seeking to stabilize the financial and real estate markets will achieve the intended effect or benefit our business, and further government or market developments could adversely affect us. Our non-Agency real estate investments are subject to risks particular to real property. The mortgage loans underlying our RMBS and commercial mortgage-backed securities are subject to delinquency, foreclosure and loss, which could result in losses to us. Our Corporate Loan portfolio includes debt of middle market companies. We may invest in the equity and mezzanine securities of CDOs, and such investments involve various risks, including that CDO equity receives distributions from the CDO only if the CDO generates enough income to first pay the holders of its debt securities and its expenses. Increases in interest rates could reduce the value of our investments, which could result in losses or reduced earnings. Our interest rate hedging transactions do not completely insulate us from interest rate risk. Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs. Our derivative contracts could expose us to unexpected economic losses. Our dependence on the management of other entities may adversely affect our business. Our due diligence may not reveal all of an issuer's liabilities and may not reveal other weaknesses in its business. We are exposed to risk based on the concentration of the majority of our repurchase agreements with a single counterparty. The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. government, may adversely affect our business. Changes in laws and regulations other than those affecting Fannie Mae and Freddie Mac could adversely affect our business and ability to operate. Pegasus may not invest the full amount of its capital commitments into DPLC. DPLC may not perform as anticipated, which may affect future investment advisory fees and/or the loss of some or all of our investment. We may lose some or all of our investment in DPLC as a result of certain subordination provisions contained in the documents governing DPLC. Our ability to use NOL and NCL carryovers to reduce future taxable income may be limited. Preserving the ability to use our NOLs and NCLs may cause us to forgo otherwise attractive opportunities. Failure to qualify as a REIT in prior years would subject us to federal income tax. Our foreign corporate subsidiaries could be subject to federal income tax at the entity level, which would greatly reduce the amounts those entities would have available to distribute to us. If we make distributions in excess of our current and accumulated earnings and profits, those distributions will be treated as a return of capital, which will reduce the adjusted basis of your stock, and to the extent such distributions exceed your adjusted basis, you may recognize a capital gain. Risks Related to the Transactions Bounty may exercise significant influence over us, including through its ability to elect three of nine members of our Board. The issuance of our common stock contemplated by the Acquisition Agreement and upon conversion of the Convertible Notes contemplated by the Convertible Notes Agreement will have a substantial dilutive effect on our common stock, which may adversely affect the market price of the our common stock. The market price of our common stock may decline as a result of the issuance of the our common stock contemplated by the Transactions. If the Transactions are not completed, the price of our common stock and our future business and operations could be harmed. Certain elements of the Transactions may discourage other parties from entering into transactions with us. We may not be able to realize all of the benefits of the Acquisition of CNCIM. We must continue to retain, motivate and recruit executive, experts and other key employees, which may be difficult in light of uncertainty regarding the Transactions, and failure to do so could negatively affect the combined company. Our existing stockholders will not receive any of the proceeds from the sale of the Convertible Notes. The Transactions will result in an "ownership change" under Section 382 of the Code.

Full 10-K form ▸

1313918--3/23/2010--Deerfield_Capital_Corp.