AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1996
REGISTRATION NO. 333-08001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
-------------------
CHASE PREFERRED CAPITAL CORPORATION
(Exact name of Registrant as specified in its governing instruments)
-------------------
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(212) 270-6000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
-------------------
]NEILA B. RADIN, ESQ.
CHASE PREFERRED CAPITAL CORPORATION
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(212) 270-6000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
-------------------
WITH COPIES TO:
<TABLE>
<S> <C>
CELIA A. FELSHER, ESQ. MARK J. WELSHIMER, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY SULLIVAN & CROMWELL
ONE CHASE MANHATTAN PLAZA 125 BROAD STREET
NEW YORK, NEW YORK 10005 NEW YORK, NEW YORK 10004
TEL: (212) 530-5000 TEL: (212) 558-4000
FAX: (212) 530-5219 FAX: (212) 558-3588
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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. / / ____________
-------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1996
20,000,000 SHARES
CHASE PREFERRED CAPITAL CORPORATION
% CUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
-------------------
Dividends on the % Cumulative Preferred Stock, Series A, par value $25.00
per share (the "Series A Preferred Shares"), of Chase Preferred Capital
Corporation (the "Company") will be cumulative from , 1996 and will be
payable quarterly in arrears on the last day of March, June, September and
December of each year, commencing December 31, 1996, at the rate of % per
annum of the initial liquidation preference (an amount equal to $ per
annum per share).
The Series A Preferred Shares are not redeemable prior to , 2001
(except upon the occurrence of a Tax Event as described herein). On and after
, 2001, the Series A Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at a redemption price of $25.00 per
share, plus accrued and unpaid dividends, if any, thereon. The Series A
Preferred Shares will not be subject to any sinking fund or mandatory redemption
and will not be convertible into any other securities of the Company.
The Company has been formed for the purpose of acquiring, holding and
managing real estate mortgage assets. The Company expects that all of its
mortgage assets will be acquired from The Chase Manhattan Bank, a banking
corporation organized under the laws of the State of New York (the "Bank"), or
its affiliates. All of the shares of the Company's common stock, par value
$300.00 per share (the "Common Stock"), are owned by the Bank. The Chase
Manhattan Corporation, a Delaware corporation and the parent of the Bank
("CMC"), has indicated to the Company that, so long as any Series A Preferred
Shares are outstanding, it intends to maintain direct or indirect ownership of
at least 80% of the outstanding Common Stock of the Company.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED BY
THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK OR CMC. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY
THE BANK OR CMC.
The Company expects to qualify as a real estate investment trust for federal
income tax purposes, commencing with the taxable year ending December 31, 1996.
No person or persons acting as a group is permitted to beneficially own more
than 9.9% of any series of preferred stock of the Company, including the Series
A Preferred Shares, with limited exceptions.
Prior to the offering, there has been no market for the Series A Preferred
Shares. The Series A Preferred Shares have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance, under the symbol
"CMBPr". Trading of the Series A Preferred Shares on the New York Stock Exchange
is expected to commence within seven business days after the initial delivery of
the Series A Preferred Shares.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A PREFERRED
SHARES OFFERED HEREBY. AMONG THE RISKS WHICH PROSPECTIVE INVESTORS SHOULD
CONSIDER ARE THE FOLLOWING:
. No prior operating history of the Company;
. Dependence on the Bank as Advisor and Servicer;
. Possible conflicts of interest between the Company and the Bank and its
affiliates;
. Possible restrictions on operations of the Company by bank regulatory
authorities;
. Possible adverse effect on the Company's cash flow in the event of a
significant decline in interest rates;
. Geographic concentration (i) in California of properties securing the
Company's initial residential mortgage loan portfolio and (ii) in the New
York metropolitan tri-state area of properties securing the Company's
initial commercial mortgage loan portfolio.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Per Share................................ $25.00 $ $
Total(3)................................. $500,000,000 $ $
</TABLE>
- ------------
(1) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933.
(2) Before deducting expenses payable by the Company estimated at $1,020,000.
(3) The Company has granted the several Underwriters an option for five business
days to purchase up to an additional 2,000,000 Series A Preferred Shares at
the initial public offering price per Series A Preferred Share, less
underwriting discounts, solely to cover over-allotments, if any. If such
option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $550,000,000,
$ and $ , respectively. The Underwriters have agreed to
reimburse the Company for accrued dividends, if any, on such Series A
Preferred Shares, from the date of original issue to their time of delivery.
See "Underwriting".
-------------------
The Series A Preferred Shares are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Series A
Preferred Shares will be ready for delivery through the facilities of The
Depository Trust Company in New York, New York on or about , 1996, against
payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
BEAR, STEARNS & CO. INC CHASE SECURITIES INC. LEHMAN BROTHERS
MORGAN STANLEY & CO. SALOMON BROTHERS INC
INCORPORATED
-------------------
The date of this Prospectus is , 1996.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY................... 3
The Company......................... 3
Risk Factors........................ 3
The Offering........................ 4
The Formation....................... 6
Business and Strategy............... 7
Tax Status of the Company........... 9
RISK FACTORS......................... 10
No Operating History................ 10
Dependence upon Bank as Advisor and
Servicer.......................... 10
Relationship with the Bank and its
Affiliates; Conflicts of Interest.. 10
Bank Regulatory Restrictions on
Operations of the Company.......... 11
Interest Rate Risk.................. 11
Risks Associated with Mortgage Loans
Generally.......................... 11
Risk of Future Revisions in Policies
and Strategies by Board of
Directors............................ 14
Tax Risks........................... 14
Risk Associated with Leverage....... 15
No Third Party Valuation of the
Mortgage Loans; No Arm's-Length
Negotiations with Affiliates......... 15
No Prior Market for Series A
Preferred Shares.................. 16
THE COMPANY.......................... 16
USE OF PROCEEDS...................... 17
CAPITALIZATION....................... 18
BUSINESS AND STRATEGY................ 19
General............................. 19
Dividends........................... 19
Liquidity and Capital Resources..... 20
General Description of Mortgage
Assets; Investment Policy............ 20
Acquisition of Initial Portfolio.... 22
Management Policies and Programs.... 23
Description of Initial Portfolio.... 26
Servicing........................... 37
Employees........................... 39
Competition......................... 39
Legal Proceedings................... 39
MANAGEMENT........................... 40
Directors and Executive Officers.... 40
Independent Directors............... 41
PAGE
----
Audit Committee..................... 41
Credit Committee.................... 41
Compensation of Directors and
Officers............................. 42
Limitations on Liability of
Directors and Officers............ 42
The Advisor......................... 42
CERTAIN TRANSACTIONS CONSTITUTING THE
FORMATION............................ 44
The Formation....................... 44
Benefits to the Bank and its
Affiliates........................ 45
DESCRIPTION OF SERIES A PREFERRED
SHARES............................... 46
General............................. 46
Dividends........................... 46
Voting Rights....................... 47
Redemption.......................... 48
Rights Upon Liquidation............. 48
Independent Director Approval....... 49
Restrictions on Ownership........... 49
DESCRIPTION OF CAPITAL STOCK......... 50
Common Stock........................ 50
Preferred Stock..................... 50
Restrictions on Ownership and
Transfer............................. 51
FEDERAL INCOME TAX CONSIDERATIONS.... 53
Taxation of the Company............. 53
Failure to Qualify.................. 58
Taxation of United States
Stockholders......................... 58
Taxation of Foreign Stockholders.... 59
Information Reporting Requirements
and Backup Withholding Tax........ 61
Other Tax Consequences.............. 62
ERISA CONSIDERATIONS................. 62
General............................. 62
Plan Asset Regulation............... 62
Effect of Plan Asset Status......... 63
Prohibited Transactions............. 63
Unrelated Business Taxable Income... 64
EXPERTS.............................. 65
RATINGS.............................. 65
CERTAIN LEGAL MATTERS................ 65
ADDITIONAL INFORMATION............... 65
GLOSSARY............................. 66
INDEX TO FINANCIAL STATEMENT.........F-1
UNDERWRITING.........................U-1
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" commencing at
page for the definitions of certain terms used in this Prospectus. The
offering of 20,000,000 shares of % Cumulative Preferred Stock, Series A, par
value $25.00 per share (the "Series A Preferred Shares"), is referred to herein
as the "Offering". Unless otherwise indicated, all information in this
Prospectus assumes that the over-allotment option described in "Underwriting" is
not exercised.
THE COMPANY
Chase Preferred Capital Corporation (the "Company") is a newly-formed
Delaware corporation incorporated on June 28, 1996 and created for the purpose
of acquiring, holding and managing real estate mortgage assets ("Mortgage
Assets"). The Company has been formed by The Chase Manhattan Bank, a banking
corporation organized under the laws of the State of New York (the "Bank"), to
provide the Bank and its parent, The Chase Manhattan Corporation, a Delaware
corporation ("CMC"), with a means of raising capital for bank regulatory
purposes. The Series A Preferred Shares will be treated as capital for
regulatory purposes for both the Bank and CMC. The issuance of the Series A
Preferred Shares by the Company is a more cost-effective means of raising
capital for the Bank and CMC than if the Bank or CMC were to issue preferred
stock themselves because of the Company's ability to deduct for income tax
purposes the dividends payable on the Series A Preferred Shares as a result
of its qualification as a REIT. The Company will elect to be subject to tax
as a real estate investment trust (a "REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"), and will generally not be subject to federal
income tax to the extent that it distributes its earnings to its stockholders
and maintains its qualification as a REIT. All of the shares of the Company's
common stock, par value $300.00 per share (the "Common Stock"), are owned by
the Bank. CMC has indicated to the Company that, for so long as any Series A
Preferred Shares are outstanding, it intends to maintain direct or indirect
ownership of at least 80% of the outstanding Common Stock of the Company.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK OR CMC. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY
THE BANK OR CMC.
The principal executive offices of the Company are located at 270 Park
Avenue, New York, New York 10017, telephone number (212) 270-6000.
RISK FACTORS
The purchase of the Series A Preferred Shares offered hereby is subject to
certain risks. See "Risk Factors" commencing on page 9. Among such risks are the
following:
. The Company is a newly organized corporation with no operating
history.
. The Company will be dependent in virtually every phase of its
operations on the diligence and skill of the officers and employees of the
Bank and its affiliates.
. Because of the relationship between the Company and the Bank and its
affiliates, conflicts of interest may arise between the Bank and its
affiliates and the Company.
. As a subsidiary of the Bank, the Company is subject to the risk that
banking authorities will restrict the ability of the Company to transfer
assets, to make distributions to stockholders, including dividends to the
holders of Series A Preferred Shares, or to redeem shares of Preferred
Stock.
. Because the rate at which dividends are required to be paid is fixed,
a significant decline in interest rates might adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.
. Risks associated with mortgage loans generally, and particularly the
geographic concentration of the Company's mortgage loan portfolio, could
adversely affect the value of the Series A Preferred Shares and the Mortgage
Loans (defined below) held by the Company.
. The board of directors of the Company (the "Board of Directors") may
amend or revise (in certain circumstances subject to the approval of a
majority of the Independent Directors (defined below)) the policies of the
Company set forth herein, including the Company's policy regarding incurring
indebtedness.
. The Company is subject to risks associated with the failure of the
Company to maintain its status as a REIT.
3
<PAGE>
THE OFFERING
For a more complete description of the terms of the Series A Preferred
Shares specified in the following summary, see "Description of Series A
Preferred Shares".
<TABLE>
<CAPTION>
<S> <C>
ISSUER............................ Chase Preferred Capital Corporation, a newly-formed
Delaware corporation created for the purpose of
acquiring, holding and managing Mortgage Assets.
SECURITIES OFFERED................ 20,000,000 Series A Preferred Shares.
RANKING........................... With respect to the payment of dividends and amounts
upon liquidation, the Series A Preferred Shares will
rank senior to the Company's Common Stock. Additional
shares of preferred stock, par value $25.00 per share,
of the Company (the "Preferred Stock") ranking senior to
the Series A Preferred Shares may not be issued without
the approval of holders of at least 66 2/3% of the
Series A Preferred Shares. Additional shares of
Preferred Stock ranking on a parity with the Series A
Preferred Shares may not be issued without the approval
of a majority of the Independent Directors.
USE OF PROCEEDS................... The net proceeds to the Company from the Offering,
together with proceeds received in connection with the
sale of shares of Common Stock to the Bank, will be used
to purchase the Company's initial portfolio of Mortgage
Assets and to pay the expenses of the Offering and the
formation of the Company (currently estimated by the
Company to be approximately $18 million in the
aggregate). See "Use of Proceeds".
DIVIDENDS......................... Dividends on the Series A Preferred Shares will be
cumulative from the date of original issue and will be
payable quarterly on the last day of March, June,
September and December of each year, commencing December
31, 1996, at the rate of % per annum of the initial
liquidation preference (an amount equivalent to
$ per annum per share). Dividends on the Series
A Preferred Shares will accrue whether or not the
Company has earnings, whether or not there are funds
legally available for the payment of such dividends and
whether or not such dividends are declared. See
"Description of Series A Preferred Shares--Dividends".
LIQUIDATION PREFERENCE............ The liquidation preference for each Series A Preferred
Share is $25.00, plus an amount equal to accrued and
unpaid dividends, if any, thereon. See "Description of
Series A Preferred Shares--Rights Upon Liquidation".
REDEMPTION........................ The Series A Preferred Shares are not redeemable prior
to , 2001 (except upon the occurrence of a Tax Event as
defined in "Description of Series A Preferred Shares--
Redemption"). On and after , 2001, the Series A
Preferred Shares may be redeemed for cash at the option
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
of the Company, in whole or in part, at any time and
from time to time, at a redemption price of $25.00 per
share, plus accrued and unpaid dividends, if any,
thereon. Upon the occurrence of a Tax Event, the Company
will have the right at any time to redeem the Series A
Preferred Shares in whole (but not in part) at a
redemption price of $25.00 per share, plus accrued and
unpaid dividends, if any, thereon. The Series A
Preferred Shares will not be subject to any sinking fund
or mandatory redemption and will not be convertible into
any other securities of the Company. See "Description of
Series A Preferred Shares--Redemption".
VOTING RIGHTS..................... Except as described herein with respect to certain
voting rights in the Company, holders of Series A
Preferred Shares will not have any voting rights. In any
matter on which the Series A Preferred Shares may vote
(as expressly provided herein or as may be required by
law), each Series A Preferred Share will be entitled to
one vote. See "Description of Series A Preferred
Shares--Voting Rights".
OWNERSHIP LIMITS.................. Ownership of more than 9.9% of any outstanding series of
Preferred Stock, including the Series A Preferred Shares
offered hereby, is restricted in order to preserve the
Company's status as a REIT for federal income tax
purposes. See "Description of Capital
Stock--Restrictions on Ownership and Transfer".
TRADING........................... The Series A Preferred Shares have been approved for
listing on the New York Stock Exchange, subject to
official notice of issuance, under the symbol "CMBPr".
RATINGS........................... It is expected that the Series A Preferred Shares will
be rated A by Duff & Phelps Inc., A by Fitch Investors
Service, L.P., a1 by Moody's Investors Service, Inc. and
A- by Standard and Poor's Ratings Services. A security
rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal
at any time by the assigning rating organization.
</TABLE>
5
<PAGE>
THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company,
CMC, the Bank and its affiliates will engage in the transactions described under
"Certain Transactions Constituting the Formation--The Formation". These
transactions are designed (i) to facilitate the Offering, (ii) to transfer the
ownership of the Initial Portfolio (defined below) to the Company and (iii) to
enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1996.
The following chart outlines the relationship between the Company, the Bank
and its affiliates relevant to the Offering following completion of the
Offering:
The Chase Manhattan Corporation
100% 100%
Common Common
Stock Stock
Chase Manhattan
Bank USA, The Chase Manhattan Bank Public Preferred
National Association Stockholders
Sub-
Servicing
Agreement
100% Advisory
Common Agreement
Stock
Chase Manhattan 100% 100%
Mortgage Corporation Common Series A
Stock Preferred Shares
Servicing
Agreement
CHASE PREFERRED CAPITAL CORPORATION
(The Company)
BENEFITS TO THE BANK AND ITS AFFILIATES
CMC and the Bank are required by the Board of Governors of the Federal
Reserve System to maintain certain levels of capital for bank regulatory
purposes. The Bank has informed the Company that the Series A Preferred Shares
will be treated as capital of both CMC and the Bank for regulatory purposes.
The Bank has indicated to the Company that such treatment, together with the
Company's ability to deduct, for income tax purposes, the dividends payable on
the Series A Preferred Shares as a result of the Company's qualification as a
REIT, will provide each of CMC and the Bank with a more cost-effective means of
obtaining capital for regulatory purposes than if the Bank or CMC were to issue
preferred stock themselves.
The Bank will realize certain other benefits from the Offering and the other
transactions constituting the formation of the Company, including (i) the
receipt by the Bank of the net proceeds from the sale of the Series A Preferred
Shares in connection with the sale to the Company of the Initial Portfolio and
(ii) the receipt of advisory and servicing fees under the Advisory Agreement and
the Servicing Agreements. It is also expected that the Bank will receive
dividends in respect of the Common Stock held by the Bank. See "Certain
Transactions Constituting the Formation--Benefits to the Banks and Its
Affiliates".
6
<PAGE>
BUSINESS AND STRATEGY
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to stockholders.
The Company expects that all of its Mortgage Assets will be acquired from the
Bank or affiliates of the Bank as whole loans ("Mortgage Loans") secured by
first mortgages or deeds of trust on single-family (one- to four-unit)
residential real estate properties or by commercial real estate properties. The
Company may also from time to time acquire mortgage securities that qualify as
real estate assets under Section 856(c)(6)(B) of the Code, that are rated by at
least one nationally recognized independent rating organization and that
represent interests in or obligations backed by pools of mortgage loans
("Mortgage-Backed Securities"). Mortgage loans underlying the Mortgage-Backed
Securities will be secured by single-family residential, multifamily or
commercial real estate properties located in the United States.
Simultaneously with the consummation of the Offering, the Bank will purchase
shares of Common Stock for a price equal to $500 million. The Company will use
the aggregate proceeds of $1 billion received in connection with both the
Offering and such sale of shares of Common Stock to the Bank to purchase a
portfolio of Mortgage Loans (the "Initial Portfolio") from the Bank. If the
Underwriters exercise their option to purchase additional Series A Preferred
Shares to cover over-allotments, the Bank will purchase additional shares of
Common Stock for a price equal to the aggregate public offering price of the
additional Series A Preferred Shares purchased pursuant to the Underwriters'
over-allotment option, and the Company will use the additional proceeds from any
such additional sales of Series A Preferred Shares and shares of Common Stock to
purchase additional Mortgage Loans of the types described in "Business and
Strategy--Description of the Initial Portfolio". Simultaneously with the
consummation of the Offering (or upon the exercise by the Underwriters of their
over-allotment option), the Bank will also purchase additional shares of Common
Stock for a price equal to the aggregate amount of underwriting discounts and
expenses incurred by the Company in connection with the Offering (including
without limitation any underwriting discounts associated with the exercise by
the Underwriters of their over-allotment option) and all expenses incurred by
the Company in connection with its formation in order to provide the Company
with funds sufficient to pay such expenses. See "Use of Proceeds".
On September 1, 1996, the Mortgage Loans included in the Initial Portfolio
had an aggregate outstanding principal balance of $1,011,114,000. Approximately
89% (measured by aggregate outstanding principal balance) of the Initial
Portfolio consists of Mortgage Loans secured solely by first mortgages or deeds
of trust on single-family (one- to four-unit) residential properties
("Residential Mortgage Loans"). See "Business and Strategy--Description of the
Initial Portfolio-- Residential Mortgage Loans". The remainder of the Company's
Initial Portfolio consists of Mortgage Loans secured by first mortgages or deeds
of trust on commercial real estate properties ("Commercial Mortgage Loans"). See
"Business and Strategy--Description of Initial Portfolio-- Commercial Mortgage
Loans". The Bank will enter into servicing agreements with respect to the
Residential Mortgage Loans and the Commercial Mortgage Loans (the "Servicing
Agreements") pursuant to which it will service the Mortgage Loans included in
the Initial Portfolio and will be entitled to receive fees in connection with
the servicing of such Mortgage Loans. The Bank in its role as servicer under the
Servicing Agreements is hereinafter referred to as the "Servicer". The Company
anticipates that Chase Manhattan Mortgage Corporation, an indirect wholly-owned
subsidiary of CMC, will perform the actual servicing of the Mortgage Loans
included in the Initial Portfolio pursuant to sub-servicing agreements with the
Bank. See "Business and Strategy-- Servicing".
The Company and the Bank believe that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $1 billion) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been or
will be obtained for purposes of the Offering. See "Risk Factors--No Third Party
Valuation of the Mortgage Loans; No Arm's-Length Negotiations with Affiliates".
7
<PAGE>
The Company will enter into an advisory agreement with the Bank (the
"Advisory Agreement") pursuant to which the Bank will administer the day-to-day
operations of the Company. The Bank in its role as advisor under the terms of
the Advisory Agreement is hereinafter referred to as the "Advisor". The Advisor
will be responsible for (i) monitoring the credit quality of Mortgage Assets
held by the Company, (ii) advising the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets and (iii)
holding documents relating to the Mortgage Assets as custodian on behalf of the
Company. The Advisor may from time to time subcontract all or a portion of its
obligations under the Advisory Agreement to one or more of its affiliates
involved in the business of managing Mortgage Assets. If no affiliate of the
Advisor is engaged in the business of managing Mortgage Assets, the Advisor may,
with the approval of a majority of the Board of Directors, as well as a majority
of the Independent Directors, subcontract all or a portion of its obligations
under the Advisory Agreement to unrelated third parties. The Advisor will not,
in connection with the subcontracting of any of its obligations under the
Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement. The Advisor and its personnel have
substantial experience in mortgage finance and in the administration of Mortgage
Loans.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $250,000. See "Management--The Advisor".
See "Certain Transactions Constituting the Formation--Benefits to the Bank
and Its Affiliates" for information regarding the aggregate amounts payable to
the Bank and its affiliates in connection with the Offering and the transactions
to be entered into connection with the Offering.
The Company's Board of Directors is composed of seven members, two of whom
will be Independent Directors. An "Independent Director" is a director who is
not a current officer or employee of the Company, CMC, the Bank or any affiliate
of the Bank or of any other person or persons that, in the aggregate, own more
than 50% of the outstanding Common Stock. Certain actions by the Company require
the prior approval of a majority of Independent Directors. So long as there are
only two Independent Directors, any action that requires the approval of a
majority of the Independent Directors must be approved by both Independent
Directors. Pursuant to the Certificate of Designation establishing the Series A
Preferred Shares, the Independent Directors are required to take into account
the interests of the holders of both the Series A Preferred Shares and the
Common Stock in assessing the benefit to the Company of any proposed action
requiring their approval. The Company currently has four officers. The Company
has no other employees and does not anticipate that it will require additional
employees. See "Management".
The Company may from time to time purchase additional Mortgage Loans or
interests in Mortgage Loans out of proceeds received in connection with the
repayment or disposition of Mortgage Loans or the issuance of additional shares
of Common Stock and Preferred Stock. Additional shares of Preferred Stock
ranking senior to the Series A Preferred Shares may not be issued by the Company
without the approval of holders of at least 66 2/3% of the outstanding Series A
Preferred Shares. Additional shares of Preferred Stock ranking on a parity with
the Series A Preferred Shares may not be issued by the Company without the
approval of a majority of the Independent Directors. See "Description of Series
A Preferred Shares--Voting Rights" and "-- Independent Director Approval". The
Company does not currently intend to issue any additional shares of Preferred
Stock unless it simultaneously issues additional shares of Common Stock to the
Bank, and the aggregate proceeds to be received from such issuance of Common
Stock approximately equals the sum of the aggregate offering price of such
additional Preferred Stock
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and the Company's expenses (including any underwriting discounts or placement
fees) incurred in connection with the issuance of such additional shares of
Preferred Stock. It is currently anticipated that the Company will issue
additional shares of Preferred Stock if such issuance would provide the Bank
and CMC with the most cost-effective means of raising capital for bank
regulatory purposes at the time. See "Certain Transactions Constituting the
Formation-- Benefits to the Bank and Its Affiliates".
The Company currently anticipates that all of the Mortgage Loans that it may
acquire in the future will be purchased from the Bank and affiliates of the
Bank. No arrangements or procedures are currently in place regarding the
acquisition by the Company of Mortgage Loans from unaffiliated third parties.
The Company expects that any additional Mortgage Loans acquired by the Company
will be whole loans, will represent first lien positions, will be acquired on a
basis consistent with secondary market standards and will have been originated
and underwritten in conformity with standards generally applied by the Bank or
affiliates of the Bank at the time the Mortgage Loans were originated. The
Company currently intends to maintain approximately 90% of its portfolio of
Mortgage Assets in Residential Mortgage Loans and approximately 10% of its
portfolio in Commercial Mortgage Loans. The Company's current policy is not to
acquire any Commercial Mortgage Loan if such Commercial Mortgage Loan would
constitute more than 5% of the total book value of the Mortgage Assets of the
Company at the time of its acquisition. The Company's current policy prohibits
the acquisition of any Mortgage Loan or any interest in a Mortgage Loan (other
than an interest resulting from the acquisition of Mortgage-Backed Securities),
which Mortgage Loan (i) is delinquent in the payment of principal or interest;
(ii) is or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) has been, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest. The Company
anticipates that the Mortgage Loans acquired by the Company in the future will
be serviced by the Bank or an affiliate of the Bank. Loans that are in
Nonaccrual Status are generally loans that are past due 90 days or more in
principal or interest and Classified loans are troubled loans which are deemed
substandard and where the collectibility of such loan is doubtful.
As a newly-formed entity, the Company has no prior operating history. As of
the date hereof, it has $1,000 in assets, $1,000 in stockholder's equity and no
indebtedness. Immediately after the issuance by the Company of the Series A
Preferred Shares to the public and the Common Stock to the Bank and the purchase
by the Company of the Initial Portfolio, the Company (assuming that (i) the
Underwriters' over-allotment option is not exercised and (ii) there are $18
million in aggregate offering and organizational expenses) will have $1 billion
in Mortgage Assets, $500 million of stated capital attributable to the Series A
Preferred Shares, $155.4 million of stated capital attributable to the Common
Stock and $344.6 million of additional paid-in capital. See "Capitalization".
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ending December 31, 1996. As a
REIT, the Company generally will not be subject to federal income tax on net
income and capital gains that it distributes to the holders of its Common Stock
and Preferred Stock, including the Series A Preferred Shares.
A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to
stockholders at least 95% of its "REIT taxable income". Notwithstanding
qualification for taxation as a REIT, the Company may be subject to federal,
state and/or local tax. See "Risk Factors--Tax Risks" and "Federal Income Tax
Considerations".
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RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Series A Preferred Shares in the Offering.
NO OPERATING HISTORY
The Company is a newly organized corporation with no operating history and
no revenues to date.
DEPENDENCE UPON BANK AS ADVISOR AND SERVICER
The Company will be dependent for the selection, structuring and monitoring
of its Mortgage Assets on the diligence and skill of its officers (all of whom
are also officers of the Bank or its affiliates) and the officers and employees
of the Bank, as Advisor. See "Management". In addition, the Company will be
dependent upon the expertise of the Bank, as Servicer, for the servicing of its
Mortgage Loans. The Advisor may subcontract all or a portion of its obligations
under the Advisory Agreement, and the Servicer may subcontract all or a portion
of its obligations under the Servicing Agreements, to one or more affiliates,
and under certain conditions to non-affiliates, involved in the business of
managing or servicing, as the case may be, Mortgage Assets. In the event the
Advisor or the Servicer subcontracts its obligations in such a manner, the
Company will be dependent upon the subcontractor to provide any such services.
See "Management--The Advisor" and "Business and Strategy--Servicing".
RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock of the
Company and administers the day-to-day activities of the Company in its role as
Advisor under the Advisory Agreement. The Bank also services the Company's
Mortgage Loans in its role as Servicer under each of the Servicing Agreements.
In addition, other than the Independent Directors, all of the officers and
directors of the Company are also officers and directors of the Bank or its
affiliates. As the holder of all of the outstanding voting stock of the Company,
the Bank will have the right to elect all directors of the Company, including
the Independent Directors.
The Bank and its affiliates may have interests which are not identical to
those of the Company. Consequently, conflicts of interest may arise with respect
to transactions, including without limitation, the Company's acquisition of the
Initial Portfolio; future acquisitions of Mortgage Loans from the Bank or its
affiliates; servicing of Mortgage Loans, particularly with respect to Mortgage
Loans that become Classified or placed in Nonaccrual Status or which have been,
more than once during the preceding twelve months, more than 30 days past due in
the payment of principal and interest; future dispositions of Mortgage Loans to
CMC or any of its non-bank subsidiaries; and the modification of the Advisory
Agreement or the Servicing Agreements.
For example, conflicts of interest may arise between the Bank and the
Company with respect to the Commercial Mortgage Loans included in the Initial
Portfolio. The Company's interest will be limited to its interest in the
Commercial Mortgage Loan, but the Bank may have other interests as a result of
the Bank's overall relationship with the mortgagor in the course of its middle
market commercial lending business. In addition, certain of the Commercial
Mortgage Loans are cross-collateralized with other credit facilities with the
Bank. As a result of the Bank having a relationship with the mortgagor of a
Commercial Mortgage Loan, including as lender with respect to other outstanding
loans to such mortgagor, the Bank, in its role as Advisor and Servicer, may be
subject to conflict with respect to such Commercial Mortgage Loan, in the event
that such Commercial Mortgage Loan becomes Classified or placed in Nonaccrual
Status or otherwise past due in the
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payment of principal and interest. As a result of such conflict, the Company may
hold a Commercial Mortgage Loan for a shorter or longer period of time than
would otherwise be the case if the Bank were not the Servicer of the Commercial
Mortgage Loan or the Advisor to the Company.
It is the intention of the Company, CMC and the Bank that any agreements and
transactions between the Company, on the one hand, and CMC, the Bank or their
affiliates, on the other hand, are fair to all parties and consistent with
market terms, including the prices paid and received for Mortgage Loans,
including those in the Initial Portfolio, on their acquisition or disposition by
the Company or in connection with the servicing of such Mortgage Loans. The
requirement in the Certificate of Designation establishing the Series A
Preferred Shares that certain actions of the Company be approved by a majority
of the Independent Directors is also intended to ensure fair dealings between
the Company and CMC, the Bank and their respective affiliates. However, there
can be no assurance that such agreements or transactions will be on terms as
favorable to the Company as those that could have been obtained from
unaffiliated third parties. See "Business and Strategy--Management Policies and
Programs--Conflict of Interest Policies".
BANK REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of the Bank, federal and state banking
authorities will have the right to examine the Company and its activities. Under
certain circumstances, including any determination that the Bank's relationship
to the Company results in an unsafe and unsound banking practice, such banking
authorities will have the authority to issue orders which could restrict the
ability of the Company to transfer assets, to make distributions to its
stockholders (including dividends to the holders of Series A Preferred Shares)
or to redeem shares of Preferred Stock. Such actions could potentially result in
the Company failing to qualify as a REIT. See "--Tax Risks".
INTEREST RATE RISK
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. The Company anticipates that most of its Mortgage
Loans will bear interest at adjustable rates. If there is a decline in interest
rates (as measured by the indices upon which the interest rates of the Mortgage
Loans are based), then the Company will experience a decrease in income
available to be distributed to its stockholders. In such an interest rate
environment, the Company may experience an increase in prepayments on its
Residential Mortgage Loans and may find it more difficult to purchase additional
Mortgage Loans bearing rates sufficient to support payment of the dividends on
the Series A Preferred Shares. In addition, certain Residential Mortgage Loan
products which the Company will hold could allow borrowers in such an interest
rate environment to convert an adjustable rate mortgage to a fixed rate
mortgage, thus "locking in" a low fixed interest rate. Because the rate at which
dividends are required to be paid on the Series A Preferred Shares is fixed,
there can be no assurance that an interest rate environment in which there is a
significant decline in interest rates would not adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by, among
other things, a decline in real estate values. In the event the Mortgage Assets
held by the Company become nonperforming, the Company may not have funds
sufficient to pay dividends on the Series A Preferred Shares. Factors that could
affect the value of the Mortgage Assets held by the Company include the
following:
GEOGRAPHIC CONCENTRATION
Certain geographic regions of the United States may from time to time
experience natural disasters or weaker regional economic conditions and housing
markets, and, consequently, may
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experience higher rates of loss and delinquency on Mortgage Loans generally. Any
concentration of the Mortgage Loans in such a region may present risks in
addition to those present with respect to Mortgage Loans generally.
Approximately 57% of the residential properties underlying the Company's
Residential Mortgage Loans included in the Initial Portfolio are located in
California. Substantially all of the commercial properties underlying its
Commercial Mortgage Loans are located in the New York metropolitan tri-state
area. Both these sets of Mortgage Loans may be subject to a greater risk of
default than other comparable Mortgage Loans in the event of adverse economic,
political or business developments or natural hazards that may affect such
regions and the ability of property owners in such regions to make payments of
principal and interest on the underlying mortgages. The Company will not
maintain any special hazard insurance policies which could mitigate any damages
caused by natural disasters (such as earthquakes) which may occur in such
regions. In the event of any such natural disaster, the Company's ability to pay
dividends on the Series A Preferred Shares could be adversely affected. See
"Business and Strategy-- Description of Initial Portfolio--Geographic
Distribution" herein for further information regarding the geographic
concentration of the Mortgage Loans in the Initial Portfolio.
NO CREDIT ENHANCEMENT OR SPECIAL HAZARD INSURANCE
As described in "--Geographic Concentration" above, the Company generally
does not intend to obtain credit enhancements such as mortgagor bankruptcy
insurance or to obtain special hazard insurance for its Mortgage Loans, other
than standard hazard insurance, which will in each case only relate to
individual Mortgage Loans. Accordingly, during the time it holds Mortgage Loans
for which third party insurance is not obtained, the Company will be subject to
risks of borrower defaults and bankruptcies and special hazard losses that are
not covered by standard hazard insurance (such as those occurring from
earthquakes). In addition, in the event of a default on any Mortgage Loan held
by the Company resulting from declining property values or worsening economic
conditions, among other factors, the Company would bear the risk of loss of
principal to the extent of any deficiency between (i) the value of the related
mortgaged property, plus any payments from an insurer (or guarantor in the case
of Commercial Mortgage Loans) and (ii) the amount owing on the Mortgage Loan.
SPECIAL RISKS RELATING TO COMMERCIAL MORTGAGE LOANS
The Company anticipates that approximately 10% (measured by aggregate
outstanding principal amount) of its portfolio of Mortgage Assets on an ongoing
basis will consist of Commercial Mortgage Loans. Commercial Mortgage Loans have
certain distinct risk characteristics. The Company's current policy is not to
acquire any Commercial Mortgage Loan if such Commercial Mortgage Loan would
constitute more than 5% of the total book value of the Mortgage Assets of the
Company at the time of its acquisition. Commercial Mortgage Loans generally lack
standardized terms, which may complicate their structure. Commercial real estate
properties themselves tend to be unique and are more difficult to value than
residential real estate properties. Commercial Mortgage Loans also tend to have
shorter maturities than Residential Mortgage Loans and may not be fully
amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. In addition, commercial real estate
properties, particularly industrial and warehouse properties, are generally
subject to relatively greater environmental risks than non-commercial properties
and to the corresponding burdens and costs of compliance with environmental laws
and regulations. See "--Environmental Considerations". Also, there may be costs
and delays involved in enforcing rights of a property owner against tenants in
default under the terms of leases with respect to commercial properties. For
example, tenants may seek the protection of the bankruptcy laws, which could
result in termination of lease contracts.
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REAL ESTATE MARKET CONDITIONS
The results of the Company's operations will be affected by various factors,
many of which are beyond the control of the Company, such as: (i) local and
other economic conditions affecting real estate value, (ii) the ability of
tenants to make lease payments, (iii) the ability of a property to attract and
retain tenants, which may in turn be affected by local conditions such as an
oversupply of space or a reduction in demand for rental space in the area, the
attractiveness of properties to tenants, competition from other available space,
the ability of the owner to pay leasing commissions, provide adequate
maintenance and insurance, pay tenant improvement costs and make other tenant
concessions, (iv) interest rate levels and the availability of credit to
refinance such loans at or prior to maturity and (v) increased operating costs,
including energy costs, real estate taxes and costs of compliance with
environmental controls and regulations. The results of the Company's operations
depend on, among other things, the level of interest income generated by the
Company's Mortgage Assets, the market value of such Mortgage Assets and the
supply of and demand for such Mortgage Assets. Further, no assurance can be
given that the values of the properties securing the Mortgage Loans included in
the Company's Initial Portfolio have remained or will remain at the levels
existing on the dates of origination of such Mortgage Loans.
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS
Even assuming that the mortgaged properties underlying the Mortage Loans
held by the Company provide adequate security for such Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property securing
a Mortgage Loan is regulated by state statutes and rules and is subject to many
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a mortgaged property. In the event of a default by a
mortgagor, these restrictions, among other things, may impede the ability of the
Company to foreclose on or sell the mortgaged property or to obtain proceeds
sufficient to repay all amounts due on the related Mortgage Loan. In addition,
the Servicer will be entitled to deduct from collections received all expenses
reasonably incurred in attempting to recover amounts due and not yet repaid on
liquidated Mortgage Loans, including legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses, thereby reducing amounts
available to the Company.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the servicing and collection of the Mortgage Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Company to collect all or part of the principal of or interest on
the Mortgage Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the Company to damages and administrative
sanctions.
ENVIRONMENTAL CONSIDERATIONS
In the event that the Company is forced to foreclose on a defaulted Mortgage
Loan to recover its investment in such Mortgage Loan, the Company may be subject
to environmental liabilities in connection with the underlying real property
which could exceed the value of the real property. Although the Company intends
to exercise due diligence to discover potential environmental liabilities prior
to the acquisition of any property through foreclosure, hazardous substances or
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wastes, contaminants, pollutants or sources thereof (as defined by state and
federal laws and regulations) may be discovered on properties during the
Company's ownership or after a sale thereof to a third party. If such hazardous
substances are discovered on a property which the Company has acquired in
foreclosure or otherwise, the Company may be required to remove those substances
and clean up the property. There can be no assurances that in such a case the
Company would not incur full recourse liability for the entire costs of any
removal and clean-up, that the cost of such removal and clean-up would not
exceed the value of the property or that the Company could recoup any of such
costs from any third party. The Company may also be liable to tenants and other
users of neighboring properties. In addition, the Company may find it difficult
or impossible to sell the property prior to or following any such clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and operating
policies and strategies of the Company, certain of which are described in this
Prospectus. These policies may be amended or revised from time to time at the
discretion of the Board of Directors (in certain circumstances subject to the
approval of a majority of the Independent Directors) without a vote of the
Company's stockholders, including holders of the Series A Preferred Shares. The
ultimate effect of any change in the policies and strategies set forth in this
Prospectus on a holder of Series A Preferred Shares may be positive or negative.
See "Business and Strategy--Management Policies and Programs".
TAX RISKS
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company intends to operate so as to qualify as a REIT under the Code.
Although the Company believes that it will be owned and organized and will
operate in such a manner, and Milbank, Tweed, Hadley & McCloy will render
certain opinions, described under "Federal Income Tax Considerations" below,
regarding the Company's qualification as a REIT, no assurance can be given that
the Company will be able to operate in such a manner so as to qualify as a REIT
or to remain so qualified. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretations. The determination of various factual
matters and circumstances, not entirely within the Company's control and not
addressed by the opinion of Milbank, Tweed, Hadley & McCloy, may affect the
Company's ability to qualify as a REIT. Although the Company is not aware of any
proposal in Congress to amend the tax laws in a manner that would materially and
adversely affect the Company's ability to operate as a REIT, no assurance can be
given that new legislation or new regulations, administrative interpretations or
court decisions will not significantly change the tax laws in the future with
respect to qualification as a REIT or the federal income tax consequences of
such qualification.
The Company is relying on the opinion of Milbank, Tweed, Hadley & McCloy,
counsel to the Company, regarding various issues affecting the Company's ability
to qualify, and retain qualification, as a REIT. Such legal opinions are not
binding on the Internal Revenue Service ("IRS").
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
its taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. As a result, the amount available for distribution to the Company's
stockholders would be reduced for the year or years involved. In addition,
unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. A failure of the Company
to qualify as a REIT would not by itself give the Company the right to redeem
the Series A Preferred Shares. See "Description of Series A Preferred
Shares--Redemption."
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Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. As long as any Series A Preferred Shares are
outstanding, any such determination by the Company may not be made without the
approval of a majority of the Independent Directors. The tax law prohibits the
Company from electing treatment as a REIT for the four taxable years following
the year of such revocation. See "Federal Income Tax Considerations".
REIT REQUIREMENTS WITH RESPECT TO STOCKHOLDER DISTRIBUTIONS
To obtain favorable tax treatment as a REIT qualifying under the Code, the
Company generally will be required each year to distribute as dividends to its
stockholders at least 95% of its "REIT taxable income" (excluding capital
gains). Failure to comply with this requirement would result in the Company's
income being subject to tax at regular corporate rates. In addition, the Company
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions considered as paid by it with respect to any calendar year
are less than the sum of 85% of its ordinary income for the calendar year, 95%
of its capital gains net income for the calendar year and any undistributed
taxable income from prior periods.
REDEMPTION UPON OCCURRENCE OF A TAX EVENT
At any time following the occurrence of a Tax Event (as defined under
"Description of Series A Preferred Shares--Redemption"), even if such Tax Event
occurs prior to , 2001, the Company will have the right to redeem
the Series A Preferred Shares in whole but not in part. See "Description of
Series A Preferred Shares--Redemption". Upon the occurrence of a Tax Event,
should the Company not redeem the Series A Preferred Shares, the Company's
ability to pay dividends on the Series A Preferred Shares may be adversely
affected.
RISK ASSOCIATED WITH LEVERAGE
Although the Company does not currently intend to incur any indebtedness in
connection with the acquisition and holding of Mortgage Loans, the Company may
do so at any time (although indebtedness in excess of 20% of the aggregate
amount of net proceeds received in connection with the issuance of Preferred
Stock and Common Stock may not be incurred without the approval of a majority of
the Independent Directors of the Company). To the extent the Company were to
change its policy with respect to the incurrence of indebtedness, the Company
would be subject to risks associated with leverage, including, without
limitation, changes in interest rates, prepayment risk and risks of various
hedging strategies.
NO THIRD PARTY VALUATION OF THE MORTGAGE LOANS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and the Bank intend that the fair value of the Initial Portfolio
will approximately equal the amount (approximately $1 billion) that the Company
will pay for the Initial Portfolio. However, no third party valuations of the
Mortgage Loans constituting the Initial Portfolio were obtained for purposes of
the Offering, and there can be no assurance that the fair value of the Initial
Portfolio does not differ from the purchase price payable by the Company.
In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Loans even in circumstances where an affiliate of the Company is selling the
Mortgage Loans to, or purchasing the Mortgage Loans from, the Company.
Accordingly, although the Company, the Bank and CMC intend that future
acquisitions or dispositions of Mortgage Loans be on a fair value basis, there
can be no assurance that the consideration to be paid (or received) by the
Company to (or from) the Bank, CMC or any of their
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respective affiliates in connection with future acquisitions or dispositions of
Mortgage Loans will not differ from the fair value of such Mortgage Loans.
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES
Prior to the Offering, there has been no public market for the Series A
Preferred Shares and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be resold
at or above the initial public offering price.
THE COMPANY
The Company is a newly-formed Delaware corporation created for the purpose
of acquiring, holding and managing Mortgage Assets that will generate net income
for distribution to stockholders. The Company has been formed by the Bank to
provide the Bank and CMC with a means of raising capital for bank regulatory
purposes. The Series A Preferred Shares will be treated as capital for both CMC
and the Bank for regulatory purposes. The issuance of the Series A Preferred
Shares by the Company is a more cost effective means of raising capital for the
Bank and CMC than if the Bank or CMC were to issue preferred stock themselves,
because of the Company's ability to deduct for income tax purposes the dividends
payable on the Series A Preferred Shares as a result of the Company's
qualification as a REIT.
The Company anticipates that approximately 90% of its portfolio of Mortgage
Assets will represent interests in Residential Mortgage Loans and that
approximately 10% of its portfolio of Mortgage Assets will represent interests
in Commercial Mortgage Loans (in each case measured by aggregate outstanding
principal amounts).
The Company expects that all of its Mortgage Assets will be acquired as
whole loans from the Bank or affiliates of the Bank. The Bank will administer
the day-to-day operations of the Company in its role as Advisor under the
Advisory Agreement. The Company will elect to be subject to tax as a REIT under
the Code, and will generally not be subject to federal income tax to the extent
that it distributes its earnings to its stockholders and maintains its
qualification as a REIT.
All of the Common Stock of the Company is owned by the Bank, and all of the
common stock of the Bank is owned by CMC. CMC is a bank holding company
organized under the laws of Delaware in 1968 and registered under the Bank
Holding Company Act of 1956, as amended. On March 31, 1996, The Chase Manhattan
Corporation ("Old Chase") merged with and into Chemical Banking Corporation, and
Chemical Banking Corporation, as the surviving corporation of the merger,
changed its name to "The Chase Manhattan Corporation". As a result of the
merger, CMC has become the largest banking institution in the United States,
with over $300 billion in assets and $20 billion in stockholders' equity. CMC
has indicated to the Company that, for so long as any Series A Preferred Shares
are outstanding, it intends to maintain direct or indirect ownership of at least
80% of the outstanding Common Stock of the Company.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK OR CMC. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY
THE BANK OR CMC.
For a further description of the operations of the Company, see "Business
and Strategy", "Management", "Risk Factors" and "Federal Income Tax
Considerations".
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USE OF PROCEEDS
The proceeds to the Company from the sale of the Series A Preferred Shares
offered hereby are expected to be $500,000,000 (assuming the Underwriters'
over-allotment option is not exercised). Simultaneously with the consummation of
the Offering, the Bank will purchase shares of Common Stock for a price equal to
$500,000,000. The Company will use the aggregate proceeds of $1 billion received
in connection with both the Offering and the sale of shares of Common Stock to
the Bank to purchase the Initial Portfolio from the Bank. See "Business and
Strategy".
If the Underwriters exercise their option to purchase additional Series A
Preferred Shares to cover over-allotments in the Offering, the Bank will
purchase additional shares of Common Stock for a price equal to the aggregate
initial public offering price of such additional Series A Preferred Shares. The
Company will use the additional proceeds from any such additional sales of
Series A Preferred Shares and shares of Common Stock to purchase additional
Mortgage Loans of the types described in "Business and Strategy--Description of
Initial Portfolio". The Company expects that it will purchase any such
additional Commercial and Residential Mortgage Loans within six months from the
exercise by the Underwriters of their over-allotment option. Pending such
purchase, the Company will invest such additional proceeds in Mortgage-Backed
Securities or short-term money market investments.
Simultaneously with the consummation of the Offering, the Bank will also
purchase additional shares of Common Stock for a price equal to the aggregate
amount of underwriting discounts and expenses incurred by the Company in
connection with the Offering and all expenses incurred by the Company in
connection with its formation and the offering of the Series A Preferred Shares
(currently estimated by the Company to be approximately $18 million in the
aggregate) in order to provide the Company with funds sufficient to pay such
expenses. Simultaneously with the consummation of any sale of additional Series
A Preferred Shares in connection with the exercise by the Underwriters of their
over-allotment option, the Bank will also purchase additional shares of Common
Stock for a price equal to the aggregate amount of underwriting discounts and
expenses incurred by the Company in connection with the exercise of such
overallotment option in order to provide the Company with funds sufficient to
pay such expenses.
The following table illustrates the use of proceeds by the Company from the
sale of the Series A Preferred Shares offered hereby (assuming the Underwriters'
over-allotment option is not exercised) and the sale of shares of Common Stock
to the Bank described above.
<TABLE>
<S> <C>
Gross proceeds from the offering of
Series A Preferred Shares................................................ $ 500,000,000
Gross proceeds from the issuance of shares
of Common Stock to the Bank.............................................. $ 1
Public Offering Expenses:
Underwriting discounts.................................................
Other expenses of the formation and Offering........................... 1
--------------
Net proceeds to be applied to the purchase of Mortgage
Assets to be acquired from the Bank.................................... $1,000,000,000
--------------
--------------
</TABLE>
- -------------------
1 Assumes that expenses incurred by the Company in connection with its formation
and the Offering of the Series A Preferred Shares, other than underwriting
discounts, are $ . If such expenses are in excess of $ , the Bank will
purchase additional shares of Common Stock for a purchase price equal to such
excess.
Neither the Bank nor any of its affiliates will receive any transaction fees
upon completion of the Offering, including any advance payment in respect of
servicing or advisory fees.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
11, 1996 (the date of the most recent audited financial statement of the
Company) and as adjusted to reflect (i) the consummation of the Offering
(assuming the Underwriters' over-allotment option is not exercised) and (ii) the
transactions described in "Certain Transactions Constituting The Formation--The
Formation" and the use of the net proceeds therefrom as described under "Use of
Proceeds".
<TABLE>
<CAPTION>
JULY 11, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
DEBT
Total long-term debt.............................................. $ -- $ --
---------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $25.00 per share; none authorized, none
issued and outstanding, actual; and 50,000,000 shares
authorized, 20,000,000 shares issued and outstanding, as
adjusted.......................................................... -- 500,000
Common Stock, par value $1.00 per share(1); 1,000 shares
authorized, 1,000 shares issued and outstanding, actual; and
5,000,000 shares authorized, 518,001 shares issued and
outstanding, as adjusted.......................................... 1 155,4001
Additional paid-in capital........................................ -- 344,6011
---------- -----------
Total stockholders' equity.................................... $ 1 $ 1,000,001
---------- -----------
TOTAL CAPITALIZATION.............................................. $ 1 $ 1,000,001
---------- -----------
---------- -----------
</TABLE>
- ------------
1 The Company was formed with an initial capitalization of $1,000. Prior to
consummation of the Offering, the charter of the Company will be amended to
increase the authorized capital of the Company and to increase the par value
of the Common Stock to $300.00 per share. Since the par value per share of the
Preferred Stock equals the issue price of a Series A Preferred Share, the full
$500 million raised in the Offering will represent Preferred Stock capital.
The par value of the Common Stock will equal 30% of its purchase price of
$1,000 per share and, accordingly, the Bank will be acquiring 518,000 shares
of Common Stock upon the consummation of the Offering for an aggregate
purchase price of $518 million (such number of shares of Common Stock includes
Common Stock acquired by the Bank in order to provide sufficient funds to pay
aggregate offering and organization expenses, currently estimated by the
Company to be approximately $18 million). As a result of these issuances of
Common Stock, the Common Stock capital amount, upon consummation of the
Offering, will equal $155.4 million. The additional paid-in capital of $344.6
million represents the excess of the purchase price for the Common Stock over
the par value of such shares after deducting the aggregate amount of offering
and organization expenses.
18
<PAGE>
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and manage
Mortgage Loans that will generate net income for distribution to stockholders.
The Company will acquire the Initial Portfolio of Mortgage Loans from the Bank
for an aggregate purchase price of approximately $1 billion. See "Certain
Transactions Constituting the Formation".
In order to preserve its status as a REIT under the Code, substantially all
of the assets of the Company will consist of Mortgage Loans and other qualified
REIT real estate assets of the type set forth in Section 856(c)(6)(B) of the
Code. See "Federal Income Tax Considerations".
DIVIDENDS
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to approximately 100%
of the Company's "REIT taxable income" (excluding capital gains). In order to
remain qualified as a REIT, the Company must distribute annually at least 95% of
its "REIT taxable income" (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the Series A Preferred Shares and none
or no material portion of the dividends on the Common Stock will constitute
non-taxable returns of capital.
Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. Because (i) the Mortgage Assets are interest
bearing, (ii) the Series A Preferred Shares represent only approximately 50% of
the Company's capitalization and (iii) the Company does not anticipate incurring
any indebtedness, the Company currently expects that both its cash available for
distribution and its "REIT taxable income" will be in excess of amounts needed
to pay accrued dividends on the Series A Preferred Shares, even in the event of
a significant drop in interest rate levels. Accordingly, the Company expects
that it will, after paying all accrued and unpaid dividends on the Series A
Preferred Shares, pay dividends on an annual basis to holders of its Common
Stock. Assuming (i) the Mortgage Loans included in the Initial Portfolio are
held for the 12-month period following completion of the Offering, (ii)
principal repayments are reinvested in additional Mortgage Loans with
characteristics similar to those of the Mortgage Loans included in the Initial
Portfolio and (iii) interest rates remain constant during such 12-month period,
the Company anticipates that the Initial Portfolio will generate interest income
of approximately $72 million, after payment of servicing and advisory fees,
during such 12-month period. Since the aggregate annual dividend payment on the
Series A Preferred Shares is $ million, based on the foregoing, the Company
anticipates that $ million would be available for payment of dividends on the
Common Stock held by the Bank.
There are several limitations which restrict the Company's ability to pay
dividends on the Common Stock (none of which should adversely affect either the
ability of the Company to pay dividends in respect of the Series A Preferred
Shares or the ability of the Company to maintain its status as a REIT). First,
under the Company's current dividend policy, the Company may not make any
distribution in respect of the Common Stock with respect to any year to the
extent that, after taking into account such proposed distribution, total cash or
property distributions on the Company's outstanding shares of Preferred Stock
and Common Stock with respect to that year would exceed 105% of the Company's
"REIT taxable income" (excluding capital gains) for that year plus net capital
gains of the Company for that year. This policy regarding the limitations on
payment of dividends in respect of Common Stock may not be modified without the
approval of a majority of the Independent Directors. Second, no cash or property
dividends may be paid on the Common Stock unless all accrued and unpaid
dividends on the Series A Preferred Shares, and all other capital
19
<PAGE>
stock of the Company ranking senior to the Common Stock, have been paid. Third,
Delaware law provides that dividends (as well as other distributions) may be
paid on the capital stock of the Company only out of (i) the Company's capital
surplus (i.e., the excess of the Company's net assets over the aggregate par
value of all shares of capital stock issued by the Company) and (ii) the
Company's net profits for the year in which the dividend is declared and for the
preceding year. Because the aggregate par value of the Series A Preferred Shares
and the outstanding shares of Common Stock will, upon consummation of the
Offering, equal $655.4 million (assuming the Underwriters' over-allotment option
is not exercised and there are $18 million of offering and organizational
expenses), the amount of dividends which the Company could legally pay on its
Common Stock cannot exceed an amount which would cause the Company's net assets
to be less than $655.4 million.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
federal and state banking authorities will have the authority to issue an order
which restricts the ability of the Company to make dividend payments to its
stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Loans as Mortgage Loans held by the Company are repaid. The
acquisition of such additional Mortgage Loans will be funded with the proceeds
of principal repayments on its portfolio of Mortgage Loans. The Company does not
anticipate that it will have any other material capital expenditures. The
Company believes that cash generated from the payment of interest and principal
on its Mortgage Loan portfolio will provide sufficient funds to meet both
operating requirements and payment of dividends by the Company in accordance
with the REIT Requirements for the foreseeable future.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
RESIDENTIAL MORTGAGE LOANS
The Company may from time to time acquire both conforming and nonconforming
Residential Mortgage Loans. Conforming Residential Mortgage Loans comply with
the requirements for inclusion in a loan guarantee program sponsored by either
the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA"). Under current regulations, the maximum principal
balance allowed on conforming Residential Mortgage Loans ranges from $207,000
for one-unit residential loans ($310,500 for such residential loans secured by
mortgaged properties located in either Alaska or Hawaii) to $397,800 for
four-unit residential loans ($596,700 for such residential loans secured by
mortgaged properties located in either Alaska or Hawaii). Nonconforming
Residential Mortgage Loans are Residential Mortgage Loans that do not qualify in
one or more respects for purchase by FNMA or FHLMC under their standard
programs. The Company expects that a majority of the nonconforming Residential
Mortgage Loans it purchases (including substantially all of those included the
Initial Portfolio) will be nonconforming because they either have original
principal balances which exceed the requirements for FHLMC or FNMA programs or
because they bear interest on a basis that varies from the standard requirements
of such programs. Of the types of Residential Mortgage Loans included in the
Initial Portfolio (see "--Description of Types of Residential Mortgage Loans"),
the only Residential Mortgage Loans that bear interest on a basis consistent
with such standard requirements are the One-Year ARMs and the 30-year fixed rate
loans. A substantial portion of the Company's nonconforming Residential Mortgage
Loans are expected to meet the requirements for sale to national private
mortgage conduit programs or other investors in the secondary mortgage market.
20
<PAGE>
Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties, including stock allocated to a dwelling unit in a residential
cooperative housing corporation. Residential real estate properties underlying
Residential Mortgage Loans consist of individual dwelling units, individual
cooperative apartment units, individual condominium units, two- to four-family
dwelling units, planned unit developments and townhouses. The Company currently
expects that most of the Residential Mortgage Loans to be acquired by it will be
adjustable rate Mortgage Loans; however, the Company will also purchase fixed
interest rate Residential Mortgage Loans.
COMMERCIAL MORTGAGE LOANS
The Company may from time to time acquire Commercial Mortgage Loans secured
by industrial and warehouse properties, recreational facilities, office
buildings, retail space and shopping malls, hotels and motels, hospitals,
nursing homes or senior living centers; however the Company expects that
substantially all of the Commercial Mortgage Loans it acquires will be secured
by offices, industrial warehouses and manufacturing facilities in the New York
metropolitan tri-state area. The Company anticipates that substantially all of
these commercial real estate properties at origination were at least 70%
occupied by the borrowers of the related Commercial Mortgage Loan or their
affiliates, which are customers of the Bank or its affiliates. However, there is
no requirement regarding the percentage of any commercial real estate property
that must be leased at the time the Company acquires a Commercial Mortgage Loan
secured by such commercial real estate property. Unlike Residential Mortgage
Loans, Commercial Mortgage Loans generally lack standardized terms. Although
Commercial Mortgage Loans are generally nonrecourse to the borrower, the Company
anticipates that substantially all of the Commercial Mortgage Loans that it will
acquire will either be recourse to the borrower or supported by a guarantee of
an affiliate of the borrower. However, there is no requirement that Commercial
Mortgage Loans acquired by the Company have third party guarantees. In addition,
Commercial Mortgage Loans tend to be fixed rate loans having shorter maturities
than Residential Mortgage Loans. Commercial Mortgage Loans may also not be fully
amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Moreover, commercial properties, particularly
industrial and warehouse properties, are generally subject to relatively greater
environmental risks than non-commercial properties, generally giving rise to
increased costs of compliance with environmental laws and regulations. See "Risk
Factors--Risks Associated with Mortgage Loans Generally" and "--Environmental
Considerations".
The credit quality of a Commercial Mortgage Loan may depend on, among other
factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been deferred),
the creditworthiness of tenants, the historical and anticipated level of
vacancies and rents on the property and on other comparable properties located
in the same region, potential or existing environmental risks, the availability
of credit to refinance the Commercial Mortgage Loan at or prior to maturity and
the local and regional economic climate in general. Foreclosures of defaulted
Commercial Mortgage Loans are generally subject to a number of complicating
factors, including environmental considerations, which are generally not present
in foreclosures of Residential Mortgage Loans. See "Risk Factors--Risks
Associated with Mortgage Loans Generally--Special Risks Relating to Commercial
Mortgage Loans" and "--Environmental Considerations".
MORTGAGE-BACKED SECURITIES
The Company may from time to time acquire Mortgage-Backed Securities
representing interests in or obligations backed by pools of Mortgage Loans. The
Mortgage Loans underlying the
21
<PAGE>
Mortgage-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States. It is not currently anticipated that the Company will hold a significant
amount of Mortgage-Backed Securities. The Company intends to acquire
Mortgage-Backed Securities only in connection with the temporary investment of
funds prior to the distribution of dividends and the acquisition of additional
Mortgage Loans. The Company intends to acquire Mortgage-Backed Securities only
if they are investment grade. The Company does not intend to acquire any
interest-only, principal-only or high-risk Mortgage-Backed Securities. The
Company will not be precluded from investing in Mortgage-Backed Securities where
the Bank or one of its affiliates is the sponsor or issuer.
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Initial Portfolio pursuant to the terms of two mortgage purchase
agreements with the Bank: the Residential Mortgage Loan Purchase and Warranties
Agreement (the "Residential Mortgage Purchase Agreement") and the Commercial
Mortgage Loan Purchase and Warranties Agreement (the "Commercial Mortgage
Purchase Agreement", and, together with the Residential Mortgage Purchase
Agreement, the "Mortgage Purchase Agreements"), each to be entered into
simultaneously with the consummation of the Offering. The Residential Mortgage
Loans in the Initial Portfolio will be assigned to the Company pursuant to the
Residential Mortgage Purchase Agreement. The Commercial Mortgage Loans in the
Initial Portfolio will be assigned to the Company pursuant to the Commercial
Mortgage Purchase Agreement. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to its respective mortgage purchase agreement (each, a
"Mortgage Loan Schedule"). Each Mortgage Loan Schedule will specify, among other
things, with respect to each Mortgage Loan: the interest rate or interest rate
formula applicable to each Mortgage Loan, the original principal amount and the
unpaid principal balance as of the purchase date, the monthly payment, maturity
date, mortgagor, type of mortgaged property, location of the mortgaged property
and current interest rate.
In addition, the Bank will deliver or cause to be delivered to the Company
the mortgage note with respect to each Mortgage Loan (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
Such documents will initially be held by the Bank, as Advisor, acting as
custodian for the Company. Although the Company will have the right to record
the assignments of mortgage at any time, it does not currently anticipate doing
so. The Company believes that maintaining record title of the Mortgage Loans in
the name of the Servicer will facilitate the servicing of the Mortgage Loans.
Once the assignments of mortgage are recorded, the Company's lien on the
mortgaged properties will date back to the date of the original mortgages and
rank ahead of any intervening mortgage granted by the borrowers. However, if
the Bank, in violation of the Advisory Agreement and the Servicing Agreements,
sells any of the Company's Mortgage Loans to a third party who records its
assignment of mortgage before the Company records its assignment of mortgage
with respect to such Mortgage Loan, the Company may lose its ownership interest
in such Mortgage Loan. See "--Servicing" and "--Description of Initial
Portfolio--General".
The Bank will make certain representations and warranties with respect to
the Mortgage Loans in the Initial Portfolio for the benefit of the Company and
will be obligated to repurchase any Mortgage Loan sold by it to the Company as
to which there is a material breach of any such representation or warranty,
unless the Bank elects to substitute a qualified Mortgage Loan for such Mortgage
Loan. The Bank will also indemnify the Company for damages or costs resulting
from any such breach. The repurchase price for any such Mortgage Loan will be
its outstanding principal amount plus accrued and unpaid interest on the date of
repurchase. In addition, under the terms of the Mortgage Purchase Agreements,
the Company will acquire, in addition to the Mortgage Loans included in the
Initial Portfolio, (i) all amounts, including payments of principal and interest
(other than payments of principal and interest due on or before September 1,
1996 with respect to the
22
<PAGE>
Residential Mortgage Loans and August 31, 1996 with respect to the Commercial
Mortgage Loans) held in one or more accounts maintained for the benefit of or in
the name of the Company pursuant to the Servicing Agreements and (ii) all
insurance policies relating to the Mortgage Properties and the proceeds thereof.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect to
the acquisition and disposition of assets, use of capital and leverage, credit
risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of a
majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also
"--Dividends".
ASSET ACQUISITION AND DISPOSITION POLICIES
Subsequent to the acquisition of the Initial Portfolio, the Company
anticipates that it will from time to time purchase additional Mortgage Loans
from the Bank or its affiliates, although Mortgage Loans may be acquired from
unaffiliated third parties, out of proceeds received in connection with the
repayment or disposition of Mortgage Loans or the issuance of additional shares
of Common Stock and Preferred Stock. The Company anticipates that additional
Mortgage Loans purchased from the Bank or its affiliates will be purchased on
terms that are substantially identical to those that could be obtained by the
Company if such additional Mortgage Loans were purchased from third parties
unaffiliated with the Company. No arrangements or procedures are currently in
place regarding the purchase of additional Mortgage Loans from unaffiliated
third parties. The Company currently anticipates that additional Mortgage Loans
acquired by the Company will be of the types described in "--Description of
Initial Portfolio", although if the Bank or its affiliates develop additional
Mortgage Loan products, the Company may purchase such additional types of
Mortgage Loans. In addition, the Company may from time to time acquire
Mortgage-Backed Securities representing interests in or obligations backed by
pools of Mortgage Loans that will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States. The Company currently anticipates that it will not acquire the right to
service any Mortgage Loan it acquires in the future and that the Bank or an
affiliate of the Bank will act as servicer of any such additional Mortgage
Loans. The Company anticipates that any servicing arrangement that it enters
into in the future with the Bank will contain fees and other terms that would be
substantially identical to those that would be contained in servicing
arrangements entered into with third parties unaffiliated with the Company.
The Company currently intends to maintain approximately 90% of its portfolio
of Mortgage Assets in Residential Mortgage Loans and approximately 10% of the
Company's portfolio of Mortgage Assets in Commercial Mortgage Loans (in each
case measured by aggregate outstanding principal balances). The Company's
current policy is not to acquire any Commercial Mortgage Loan that constitutes
more than 5% of the total book value of the Mortgage Assets of the Company at
the time of its acquisition. In addition, the Company's current policy prohibits
the acquisition of any Mortgage Loan or any interest in a Mortgage Loan (other
than an interest resulting from the acquisition of Mortgage-Backed Securities),
which Mortgage Loan (i) is delinquent in the payment of principal or interest at
the time of proposed acquisition; (ii) is or was at any time during the
preceding 12 months (a) Classified, (b) in Nonaccrual Status, or
(c) renegotiated due to financial deterioration of the borrower; or (iii) has
been, more than once during the preceding 12 months, more than 30 days past due
in the payment of principal or interest.
23
<PAGE>
The Company may choose, at any time subsequent to its acquisition of any
Mortgage Loan, to require the Servicer of the Mortgage Loan to dispose of any
Mortgage Loan, for any reason, including as a result of such mortgage loan
becoming Classified or being placed in Nonaccrual Status or having been, more
than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest. The Bank has indicated to the Company that it
will not purchase any Mortgage Loan of the Company that the Company chooses to
dispose of for the foregoing reasons; accordingly, the Company currently
anticipates that any such Mortgage Loan would be sold at its then current fair
value by the Company only to CMC, a non-bank subsidiary of CMC or an unrelated
third party.
CAPITAL AND LEVERAGE POLICIES
To the extent that the Board of Directors determines that additional funding
is required, the Company may raise such funds through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Code requiring the distribution by a REIT of at least 95% of
its "REIT taxable income" and taking into account taxes that would be imposed on
undistributed taxable income), or a combination of these methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the Company
might incur. Notwithstanding the foregoing, the Company may not, without the
approval of a majority of the Independent Directors, incur debt for borrowed
money other than debt not in excess of 20% of the aggregate amount of net
proceeds received in connection with the issuance of all outstanding Preferred
Stock and Common Stock of the Company. Any such debt incurred may include
intercompany advances made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without the consent of holders of at least 66 2/3% of
the outstanding shares of Preferred Stock at that time, including the Series A
Preferred Shares, and the Company may not issue additional shares of Preferred
Stock on a parity with the Series A Preferred Shares without the approval of a
majority of the Company's Independent Directors. The Company does not currently
intend to issue any additional series of Preferred Stock unless it
simultaneously issues additional Common Stock to the Bank and the proceeds to be
received from the issuance of the Common Stock are approximately equal to the
aggregate offering price of such additional Preferred Stock plus the Company's
expenses (including underwriting discounts or placement fees) in connection with
the issuance of such additional shares of Preferred Stock. It is currently
anticipated that the Company will issue additional shares of Preferred Stock if
such issuance would provide the Bank and CMC with the most cost-effective means
of raising capital for bank regulatory purposes at the time. See "Certain
Transactions Constituting the Formation--Benefits to the Bank and Its
Affiliates".
CREDIT RISK MANAGEMENT POLICIES
The Company expects that each Mortgage Loan acquired from the Bank or one of
its affiliates in the future will be a whole loan, will represent a first lien
position and will be originated by the Bank or such affiliate in the ordinary
course of its real estate lending activities based on the underwriting standards
generally applied (at the time of origination) for its own account by the Bank
or the affiliate of the Bank which originated the Mortgage Loan. See
"--Description of Initial Portfolio-- Underwriting Standards". The Company also
expects that all Mortgage Loans held by the Company will be serviced pursuant to
the Servicing Agreements, which require servicing in conformity with accepted
secondary market standards, with any servicing guidelines promulgated by the
Company and, in the case of Residential Mortgage Loans, with FNMA and FHLMC
guidelines and procedures.
24
<PAGE>
The Company may also choose, at any time subsequent to its acquisition of any
Mortgage Loan, to require the Servicer of such Mortgage Loans to dispose of any
Mortgage Loan for any reason, including as a result of such Mortgage Loan
becoming Classified or being placed in Nonaccrual Status or having been, more
than once during the preceding 12 months, more than 30 days past due in the
payment of principal and interest.
CONFLICT OF INTEREST POLICIES
Because of the nature of the Company's relationship with the Bank and its
affiliates, it is likely that conflicts of interest will arise with respect to
certain transactions, including, without limitation, the Company's acquisition
of Mortgage Loans from, or disposition of Mortgage Loans to, the Bank, CMC or
their respective affiliates, foreclosure on defaulted Commercial Mortgage Loans
and the modification of the Advisory Agreement or either of the Servicing
Agreements. It is the Company's policy that the terms of any financial dealings
with the Bank, CMC and their respective affiliates will be consistent with those
available from third parties in the mortgage lending industry. In addition,
neither the Advisory Agreement nor either of the Servicing Agreements may be
modified or terminated without the approval of a majority of the Independent
Directors.
Conflicts of interest between the Company and the Bank and its affiliates
may also arise in connection with making decisions that bear upon the credit
arrangements that the Bank or one of its affiliates may have with a mortgagor
under a Mortgage Loan. Conflicts could also arise in connection with actions
taken by the Bank as a controlling person in the Company. It is the intention of
the Company, the Bank and CMC that any agreements and transactions between the
Company, on the one hand, and CMC, the Bank or their affiliates, on the other
hand, including without limitation the Mortgage Purchase Agreements and
Servicing Agreements, are fair to all parties and are consistent with market
terms for such types of transactions. The Servicing Agreements provide that (i)
foreclosures and dispositions of the Mortgage Loans are to be performed with a
view to maximizing the recovery by the Company as owner of the Mortgage Loans
and (ii) the Servicer shall service the Mortgage Loans solely with a view toward
the interests of the Company, and without regard to the interests of the Bank or
its affiliates. The requirement in the Certificate of Designation establishing
the Series A Preferred Shares that certain actions of the Company be approved by
a majority of the Independent Directors is also intended to ensure fair dealings
between the Company and CMC, the Bank and their respective affiliates. However,
there can be no assurance that any such agreement or transaction will be on
terms as favorable to the Company as would have been obtained from unaffiliated
third parties.
There are no provisions in the Company's Certificate of Incorporation
limiting any officer, director, security holder or affiliate of the Company from
having any direct or indirect pecuniary interest in any Mortgage Asset to be
acquired or disposed of by the Company or in any transaction in which the
Company has an interest or from engaging in acquiring, holding and managing
Mortgage Assets. As described herein, it is expected that the Bank and its
affiliates will have direct interests in transactions with the Company
(including without limitation the sale of Mortgage Assets to the Company);
however, it is not currently anticipated that any of the officers or directors
of the Company will have any interests in such Mortgage Assets.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
to (i) invest in the securities of other issuers for the purpose of exercising
control over such issuers, (ii) underwrite securities of other issuers,
(iii) actively trade in loans or other investments, (iv) offer securities in
exchange for property or (v) make loans to third parties, including, without
limitation, officers, directors or other affiliates of the Company. The Company
may, under certain circumstances, purchase the Series A
25
<PAGE>
Preferred Shares and other shares of its capital stock in the open market or
otherwise, provided, however, that the Company will not redeem or repurchase any
shares of its Common Stock for so long as any Series A Preferred Shares are
outstanding without the approval of a majority of the Independent Directors. The
Company has no present intention of causing the Company to repurchase any shares
of its capital stock, and any such action would be taken only in conformity with
applicable federal and state laws and regulations and the requirements for
qualifying as a REIT.
The Company intends to publish and distribute to stockholders, in accordance
with New York Stock Exchange rules, annual reports containing financial
statements prepared in accordance with generally accepted accounting principles
and certified by the Company's independent public accountants. The Certificate
of Designation establishing the Series A Preferred Shares provides that the
Company shall maintain its status as a reporting company under the Exchange Act
for so long as any of the Series A Preferred Shares are outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or other
considerations may cause the Board of Directors, subject to approval by a
majority of Independent Directors, to determine that it is in the best interests
of the Company and its stockholders to revoke its REIT status.
DESCRIPTION OF INITIAL PORTFOLIO
Information with respect to the Residential Mortgage Loans in the Initial
Portfolio is presented as of September 1, 1996. Information with respect to the
Commercial Mortgage Loans in the Initial Portfolio is presented as of August 31,
1996. The composition of the Initial Portfolio actually purchased by the Company
contemporaneously with the consummation of the Offering will differ from the
Initial Portfolio as described in this Prospectus only to the extent it is
discovered prior to the consummation of the Offering that a Mortgage Loan
included in the Initial Portfolio described herein (i) is delinquent in the
payment of principal or interest; (ii) is or was at any time during the
preceding 12 months (a) Classified, (b) in Nonaccrual Status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest. In such event a Mortgage Loan similar in
aggregate outstanding principal balance and product type will be substituted for
such non-purchased Mortgage Loan.
References herein to percentages of Mortgage Loans included in the Initial
Portfolio refer in each case to the percentage of the aggregate outstanding
principal balance of the Mortgage Loans in the Initial Portfolio as of September
1, 1996, based on the outstanding principal balances of such Mortgage Loans as
of such date, after giving effect to scheduled monthly payments due on or prior
to such date, whether or not received.
The detailed information set forth in this Prospectus with respect to the
Mortgage Loans applies only to the Initial Portfolio and the Company's portfolio
of Mortgage Assets in the future may or may not have the characteristics
described below.
GENERAL
The Initial Portfolio contains 2,091 Residential Mortgage Loans,
representing approximately 89% of the unpaid principal balance of the Mortgage
Loans contained in the Initial Portfolio, and 54 Commercial Mortgage Loans,
representing approximately 11% of the unpaid principal balance of the Mortgage
Loans contained in the Initial Portfolio. On September 1, 1996, the Mortgage
Loans included in the Initial Portfolio had an aggregate outstanding principal
balance of $1,011,114,000.
26
<PAGE>
Substantially all of the Residential Mortgage Loans included in the Initial
Portfolio were originated by either Chase Mortgage Services, Inc., an indirect
wholly-owned subsidiary of the Bank ("CMSI"), or one of its predecessors in
interest in the ordinary course of their respective real estate lending
activities. Certain of the Residential Mortgage Loans included in the Initial
Portfolio may have been originated by mortgagees approved by the Secretary of
Housing and Urban Development or institutions (such as banks, credit unions and
insurance companies) subject to supervision and examination by federal and state
authorities and then sold to CMSI or one of its predecessors in interest. All of
the Residential Mortgage Loans included in the Initial Portfolio were originated
generally in accordance with the underwriting standards customarily employed by
CMSI or its predecessors in interest at the time at which such Mortgage Loans
were originated.
Each Commercial Mortgage Loan included in the Initial Portfolio was
originated by the Bank in the ordinary course of its middle market commercial
real estate lending activities.
All of the Residential Mortgage Loans included in the Initial Portfolio were
originated between 1986 and 1996, and have original terms to stated maturity of
either 15, 20, 25 or 30 years. Substantially all of the Residential Mortgage
Loans in the Initial Portfolio have original principal balances in excess of
$207,000. As of September 1, 1996, the average outstanding principal balance of
a Residential Mortgage Loan is $431,835. The weighted average number of months
since origination of the Residential Mortgage Loans included in the Initial
Portfolio (calculated as of September 1, 1996) was approximately 18 months. The
weighted average Loan-to-Value Ratio (defined below) of the Residential Mortgage
Loans included in the Initial Portfolio is 70.92%; however, 9.2% of the
Residential Mortgage Loans have Loan-to-Value Ratios of greater than 80%. Of the
Residential Mortgage Loans with Loan-to-Value Ratios of greater than 80%,
approximately 21% were originated in 1996 and approximately 57% were originated
in 1995. "Loan-to-Value Ratio" means the ratio (expressed as a percentage) of
the original principal amount of such Mortgage Loan to the lesser of (i) the
appraised value at origination of the underlying mortgaged property and (ii) if
the Mortgage Loan was made to finance the acquisition of property, the purchase
price of the mortgaged property.
All of the Commercial Mortgage Loans included in the Initial Portfolio were
originated between September 1984 and May 1996, and had original terms to stated
maturity of between two and 20 years.
Upon transfer of the residential mortgaged property underlying a Residential
Mortgage Loan included in the Initial Portfolio that is an adjustable rate
Mortgage Loan, the mortgage note generally will not preclude assumption of the
related Residential Mortgage Loan by the proposed transferee if the proposed
transferee satisfies certain criteria with respect to its ability to repay the
Residential Mortgage Loan. Certain mortgage notes with respect to certain of the
Residential Mortgage Loans included in the Initial Portfolio contain
"due-on-sale" provisions, which prevent the assumption of the Residential
Mortgage Loan by a proposed transferee and accelerate the payment of the
outstanding principal balance of the Residential Mortgage Loan. "Due-on-sale"
provisions in mortgage notes with respect to adjustable rate Residential
Mortgage Loans may be applicable in the period prior to the first Rate
Adjustment Date (as defined herein) or following the exercise of a conversion
option fixing the interest rate. All fixed rate Residential Mortgage Loans
included in the Initial Portfolio have mortgage notes which contain
"due-on-sale" provisions. Most of the Commercial Mortgage Loans in the Initial
Portfolio also have "due-on-sale" provisions, although certain Commercial
Mortgage Loans in the Initial Portfolio may permit assumption thereof by a
proposed transferee upon the satisfaction of certain criteria with respect to
the ability of such transferee to repay such Commercial Mortgage Loan.
None of the Mortgage Loans included in the Initial Portfolio (i) is
currently delinquent in the payment of principal or interest; (ii) is or was at
any time during the preceding 12 months
27
<PAGE>
(a) Classified, (b) in Nonaccrual Status, or (c) renegotiated due to financial
deterioration of the borrower; or (iii) was, more than once during the preceding
12 months, more than 30 days past due in the payment of principal or interest.
If, prior to the acquisition of the Initial Portfolio, any Mortgage Loan
included in the description of the Initial Portfolio herein falls within any of
the foregoing categories, the Company will not purchase such Mortgage Loan but
will instead purchase a Mortgage Loan similar in aggregate outstanding principal
balance and product type which does not fall into any of these categories.
RESIDENTIAL MORTGAGE LOANS
The following types of Residential Mortgage Loan products, each of which is
more fully described below, will be included in the Initial Portfolio: Six-Month
Prime Rate ARM, Six-Month Treasury Rate ARM, One-Year ARM, 3/1 ARM, 5/1 ARM, 7/1
ARM, 10/1 ARM and 30-year fixed rate Residential Mortgage Loan.
The following table sets forth certain information with respect to each type
of Residential Mortgage Loan included in the Initial Portfolio:
TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF INITIAL WEIGHTED AVERAGE
PRINCIPAL PORTFOLIO BY WEIGHTED AVERAGE EXPECTED MONTHS
BALANCE AGGREGATE PRINCIPAL INITIAL LOAN TO REMAINING TO
TYPE (IN THOUSANDS) BALANCE VALUE RATIO MATURITY
- ---------------------------- -------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Six-Month Prime Rate ARM.... $ 44,152 4.37% 63.14% 338.12
Six-Month Treasury Rate
ARM......................... 19,344 1.91 69.21 339.54
One-Year ARM................ 132,908 13.14 68.42 323.51
3/1 ARM..................... 120,493 11.92 68.11 341.46
5/1 ARM..................... 410,542 40.60 73.31 341.07
7/1 ARM..................... 84,254 8.33 71.45 335.01
10/1 ARM.................... 50,938 5.04 67.69 336.78
30-Year Fixed Rate.......... 40,337 3.99 75.54 341.13
-------------- ------
Total................... $902,968 89.30% 70.92% 337.55
-------------- ------
-------------- ------
</TABLE>
Of the Residential Mortgage Loans included in the Initial Portfolio, 4.5%
bear interest at fixed rates. The interest rates of the fixed rate Residential
Mortgage Loans included in the Initial Portfolio range from 7.375% per annum to
9.125% per annum. The weighted average interest rate of the fixed rate
Residential Mortgage Loans included in the Initial Portfolio is approximately
8.206% per annum. The following table contains certain additional data with
respect to the interest rates of the fixed rate Residential Mortgage Loans
included in the Initial Portfolio (including adjustable rate Residential
Mortgage Loans that have been converted, pursuant to their terms, to fixed
rates):
INTEREST RATE OF FIXED RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL PORTFOLIO
BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL
INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) BALANCE
- ------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
7.250%-7.499%............................. 1 $ 318 .03%
7.500%-7.749%............................. 3 1,848 .18
7.750%-7.999%............................. 13 5,734 .57
8.000%-8.249%............................. 24 12,743 1.26
8.250%-8.499%............................. 22 10,875 1.07
8.500%-8.749%............................. 23 6,833 .68
8.750%-8.999%............................. 12 1,490 .15
9.000%-9.249%............................. 5 497 .05
----- -------- ---
Total............................. 103 $40,338 3.99%
----- -------- ---
----- -------- ---
</TABLE>
28
<PAGE>
Of the Residential Mortgage Loans included in the Initial Portfolio, 95.5%
bear interest at adjustable rates. The interest rate on an "adjustable rate
mortgage" or an "ARM" is typically tied to an index (such as the interest rate
on United States Treasury Bills), and is adjustable periodically. ARMs are
typically subject to limitations on lifetime interest rates as well as periodic
interest rate adjustments. The current interest rates of the Residential
Mortgage Loans included in the Initial Portfolio that are ARMs ranged from
5.500% per annum to 9.625% per annum as of September 1, 1996. As of September 1,
1996, the weighted average current interest rate of the Residential Mortgage
Loans included in the Initial Portfolio that are ARMs was approximately 7.594%
per annum. The following table contains certain additional data as of September
1, 1996 with respect to the interest rates of the Residential Mortgage Loans
included in the Initial Portfolio that are ARMs:
CURRENT INTEREST RATE OF ADJUSTABLE RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL PORTFOLIO
BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL
CURRENT INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) BALANCE
- --------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.500%-5.749%.......................... 4 $ 1,090 .11%
5.750%-5.999%.......................... 11 3,262 .32
6.000%-6.249%.......................... 13 8,819 .87
6.250%-6.499%.......................... 36 14,143 1.40
6.500%-6.749%.......................... 100 45,635 4.51
6.750%-6.999%.......................... 89 33,651 3.33
7.000%-7.249%.......................... 214 78,227 7.74
7.250%-7.499%.......................... 348 126,323 12.49
7.500%-7.749%.......................... 445 179,231 17.73
7.750%-7.999%.......................... 327 160,477 15.87
8.000%-8.249%.......................... 152 70,974 7.02
8.250%-8.499%.......................... 144 85,905 8.50
8.500%-8.749%.......................... 81 41,522 4.11
8.750%-8.999%.......................... 15 9,836 .97
9.000%-9.249%.......................... 3 1,661 .16
9.250%-9.449%.......................... 4 1,279 .12
9.500%-9.749%.......................... 2 595 .06
------- ----------------- ------
Total.......................... 1,988 $ 862,630 85.31%
------- ----------------- ------
------- ----------------- ------
</TABLE>
"Gross Margin", with respect to a Residential Mortgage Loan that is an ARM,
means the applicable fixed percentage which, when added to the applicable index,
results in the current interest rate paid by the borrower of such Residential
Mortgage Loan (without taking into account any interest rate caps or minimum
interest rates). Gross Margin is inapplicable to fixed rate Residential Mortgage
Loans. As of September 1, 1996, the weighted average Gross Margin of the
Residential Mortgage Loans included in the Initial Portfolio that are ARMs was
approximately 2.652%.
The following table sets forth certain additional data as of September 1,
1996 with respect to the Gross Margins of the Residential Mortgage Loans
included in the Initial Portfolio that are ARMs:
29
<PAGE>
GROSS MARGIN
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL PORTFOLIO
BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL
GROSS MARGIN MORTGAGE LOANS (IN THOUSANDS) BALANCE
- --------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
- -0.375%-0.124%......................... 21 $ 28,250 2.80%
0.125%-0.624%.......................... 13 15,628 1.55
1.625%-2.124%.......................... 1 1,028 .10
2.125%-2.624%.......................... 1 946 .09
2.625%-3.124%.......................... 1,931 805,235 79.63
3.125%-3.624%.......................... 21 11,543 1.14
------ ----------------- ------
Total.......................... 1,988 $ 862,630 85.31%
------ ----------------- ------
------ ----------------- ------
</TABLE>
DESCRIPTION OF TYPES OF RESIDENTIAL MORTGAGE LOANS
The interest rate of each type of ARM product included in the Initial
Portfolio adjusts at the times (each, a "Rate Adjustment Date") and in the
manner described below subject to lifetime interest rate caps, to minimum
interest rates and, in the case of most ARMs in the Initial Portfolio, to
maximum annual or semi-annual interest rate increases or decreases, each as
specified in the mortgage note relating to the ARM. Information set forth below
regarding interest rate caps and minimum interest rates applies to the Initial
Portfolio only. Mortgage Loans purchased by the Company after consummation of
the Offering may be subject to different interest rate caps and minimum interest
rates.
Each ARM bears interest at its initial interest rate until its first Rate
Adjustment Date. Effective with each Rate Adjustment Date, the monthly principal
and interest payment on most of the adjustable rate Mortgage Loans included in
the Initial Portfolio will be adjusted to an amount that will fully amortize the
then-outstanding principal balance of such Residential Mortgage Loan over its
remaining term to stated maturity and that will be sufficient to pay interest at
the adjusted interest rate. However, 97%, or approximately $43 million aggregate
principal amount, of the Six-Month Prime Rate ARMs included in the Initial
Portfolio will bear interest only for the ten years following their date of
origination after which time the mortgagors will be required to make monthly
interest and principal payments in an amount that will fully amortize the loan.
Certain of the types of Residential Mortgage Loan products that are ARMs contain
an option, which may be exercised by the mortgagor, to convert the ARM into a
fixed rate loan for the remainder of the mortgage term. If a Residential
Mortgage Loan that is an ARM is converted into a fixed rate loan, the interest
rate will be determined at the time of conversion as specified in the mortgage
note relating to such Mortgage Loan and will remain fixed at such rate until the
stated maturity of such Residential Mortgage Loan. All of the Mortgage Loans
included in the Initial Portfolio allow the mortgagor to prepay at any time some
or all of the outstanding principal balance of the Mortgage Loan without fee or
penalty.
Six-Month Prime Rate ARM. The interest rate with respect to each Six-Month
Prime Rate ARM is fixed at an initial rate for the first six monthly payments
and adjusts semi-annually thereafter on the dates specified in the related
mortgage note to a rate equal to the Prime Rate (defined below) on such date
plus the Gross Margin (if any) set forth in such mortgage note, subject to a
lifetime interest rate cap equal to the higher of 12.00% or the initial interest
rate plus 6% and to a minimum interest rate no less than the Gross Margin.
"Prime Rate" for any date means the lowest prime rate as published in the "Money
Rates" table of The Wall Street Journal for that date.
Subject to conditions specified in the mortgage note related to a Six-Month
Prime Rate ARM, a mortgagor may have the option to convert the Six-Month Prime
Rate ARM to a fixed rate loan typically beginning with the second Rate
Adjustment Date and on the first day of each month
30
<PAGE>
thereafter until and including the tenth Rate Adjustment Date. If the conversion
option is exercised, the interest rate will be fixed for the remainder of the
term of the mortgage and will equal the FNMA Required Net Yield (defined below)
plus a conversion margin (the "Six-Month Conversion Margin"), which will vary
from loan to loan depending on the amount of the original loan and the
Loan-to-Value Ratio and which is set forth in the related mortgage note. The
mortgagor must pay a conversion fee at the time the option is exercised. The
mortgagor may also pay an amount equal to 1% of the outstanding principal
balance on the loan to reduce the Six-Month Conversion Margin. "FNMA Required
Net Yield" means (i) with respect to any Mortgage Loan with an original term of
20, 25 or 30 years, FNMA's required net yield for 30-year fixed rate mortgages
(covered by 60-day mandatory commitments) that was in effect 45 days prior to
the effective date of any conversion of such Mortgage Loan and (ii) with respect
to any Mortgage Loan with an original term of 15 years, FNMA's required net
yield for 15-year fixed rate mortgages (covered by 60-day mandatory commitments)
that was in effect 45 days prior to the effective date of any conversion of such
Mortgage Loan.
Six-Month Treasury Rate ARM. The interest rate with respect to each
Six-Month Treasury Rate ARM is fixed at an initial rate for the first six
monthly payments and adjusts semi-annually thereafter on the dates specified in
the related mortgage note to a rate equal to the then-current Six-Month Treasury
Index (defined below) plus the Gross Margin as set forth in such mortgage note,
subject to a maximum semi-annual interest rate increase or decrease of 1.00%, a
lifetime interest rate cap equal to the initial interest rate with respect to
such Residential Mortgage Loan plus 6% and to a minimum interest rate no less
than the Gross Margin. The sum of the Six-Month Treasury Index and the Gross
Margin is generally rounded to the nearest 0.125%; however, certain mortgage
notes provide for the sum to be rounded upwards to the nearest 0.125%. The
"Six-Month Treasury Index" with respect to each Six-Month Treasury Rate ARM is
the weekly average investment yield of auction rates on six-month U.S. Treasury
securities as published by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") in Statistical Release H.15(519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank or
by any U.S. Government department or agency and made available to the Advisor.
Should the Six-Month Treasury Index not be published or become otherwise
unavailable, the Advisor will select a comparable alternative index over which
it has no control and which is readily available.
Certain Six-Month Treasury Rate ARMs contain a conversion option similar to
the conversion option described above with respect to the Six-Month Prime Rate
ARMs.
One-Year ARM. The interest rate with respect to each One-Year ARM is fixed
at an initial rate for the first twelve monthly payments and adjusts annually
thereafter on the date specified in the related mortgage note to a rate equal to
the then-current Treasury Index (defined below) plus the Gross Margin set forth
in such mortgage note, subject to a maximum annual interest rate increase or
decrease of 2.00%, a lifetime interest rate cap equal to the initial interest
rate with respect to such Residential Mortgage Loan plus 5% or 6% as specified
in the related mortgage note and to a minimum interest rate no less than the
Gross Margin. The sum of the Treasury Index and the Gross Margin is generally
rounded to the nearest 0.125%; however, certain mortgage notes provide for the
sum to be rounded upwards to the nearest 0.125%. The "Treasury Index" with
respect to each One-Year ARM is the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank or
by any U.S. Government department or agency and made available to the Advisor.
Should the Treasury Index not be published or become otherwise unavailable, the
Advisor will select a comparable alternative index over which it has no control
and which is readily available.
Certain One-Year ARMs contain a conversion option which, if exercised, would
convert the One-Year ARM into a fixed rate loan for the remainder of the term of
the mortgage. Subject to
31
<PAGE>
conditions specified in the mortgage note related to a One-Year ARM, a mortgagor
may have the right to convert the One-Year ARM to a fixed rate loan beginning
with the first Rate Adjustment Date and on the first day of each month
thereafter until and including the fifth Rate Adjustment Date. If the conversion
option is exercised, the interest rate will be fixed for the remainder of the
term of the mortgage and will equal the sum of a percentage equal to at least
0.625% and the FNMA Required Net Yield. The mortgagor must pay a conversion fee
at the time the option is exercised.
Three-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each three-year fixed rate loan with automatic
conversion to a One-Year ARM (a "3/1 ARM") is fixed at an initial rate for the
first 36 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM. Certain 3/1 ARMs contain a conversion option
that is substantially the same as the conversion option for the One-Year ARM
except that the option may be exercised during the period beginning with the
24th payment due date and on the first day of each month thereafter until and
including the 60th payment due date.
Five-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each five-year fixed rate loan with automatic
conversion to a One-Year ARM (a "5/1 ARM") is fixed at an initial rate for the
first 60 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM with a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 4% or
5%, provided that, with respect to certain 5/1 ARMs, on the first Rate
Adjustment Date the interest rate may be increased by 4% or 5%. There is no
option to convert a 5/1 ARM back to a fixed rate loan after the first Rate
Adjustment Date.
Seven-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each seven-year fixed rate loan with automatic
conversion to a One-Year ARM (a "7/1 ARM") is fixed at an initial rate for the
first 84 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM with a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 4% or
5%, provided that, with respect to certain 7/1 ARMs, on the first Rate
Adjustment Date the interest rate may be increased by 4% or 5%. There is no
option to convert a 7/1 ARM back to a fixed rate loan after the first Rate
Adjustment Date.
Ten-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each ten-year fixed rate loan with automatic
conversion to a One-Year ARM (a "10/1 ARM") is fixed at an initial rate for the
first 120 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM with a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 4% or
5%, provided that, with respect to certain 10/1 ARMs, on the first Rate
Adjustment Date the interest rate may be increased by 4% or 5%. There is no
option to convert a 10/1 ARM back to a fixed rate loan after the first Rate
Adjustment Date.
Fixed Rate Loans. The fixed rate Residential Mortgage Loans which are
included in the Initial Portfolio or may be purchased by the Company will
generally have original terms to stated maturity of 30 years. The interest rates
of these Residential Mortgage Loans are fixed prior to origination or have been
converted, pursuant to the terms of a mortgage note, to a fixed rate. The
monthly principal and interest payment is calculated to fully amortize the
initial outstanding principal balance of such Residential Mortgage Loan to its
stated maturity.
COMMERCIAL MORTGAGE LOANS
The Company currently anticipates that the Commercial Mortgage Loans
included in the Initial Portfolio will consist primarily of offices, industrial
warehouses and manufacturing facilities in the New York metropolitan tri-state
area. Substantially all of these commercial real estate properties
32
<PAGE>
were at origination at least 70% occupied by the borrowers or their affiliates.
The borrowers of the Commercial Mortgage Loans included in the Initial Portfolio
are primarily customers of the Bank to which the Bank has extended such
Commercial Mortgage Loans in the ordinary course of its middle market commercial
real estate lending activities. Unlike most Commercial Mortgage Loans,
substantially all of the Commercial Mortgage Loans included in the Initial
Portfolio are either recourse to the borrower or guaranteed as to the payment of
principal and interest by an affiliate of the borrower. The outstanding
principal balances of the Commercial Mortgage Loans included in the Initial
Portfolio ranged from $304,000 to $9.7 million as of August 31, 1996.
The following table sets forth certain information with respect to each type
of commercial property underlying each Commercial Mortgage Loan included in the
Initial Portfolio:
TYPE OF COMMERCIAL MORTGAGE LOAN
<TABLE>
<CAPTION>
PERCENTAGE
OF INITIAL WEIGHTED AVERAGE WEIGHTED AVERAGE
TYPE OF AGGREGATE PORTFOLIO BY ORIGINAL WEIGHTED AVERAGE EXPECTED MONTHS
MORTGAGED PRINCIPAL BALANCE AGGREGATE PRINCIPAL LOAN-TO- CURRENT LOAN-TO- REMAINING TO
PROPERTY1 (IN THOUSANDS) BALANCE VALUE RATIO2 VALUE RATIO3 MATURITY
- ---------------- ----------------- ------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Office.......... $ 23,323 2.31% 73.08 60.12 59.03
Industrial...... 42,120 4.17 71.00 59.59 87.71
Recreational.... 13,070 1.29 48.45 43.60 101.40
Retail.......... 13,651 1.35 75.80 58.64 55.21
Other........... 15,982 1.58 48.22 44.84 88.78
-------- -----
Total........ $ 108,146 10.70% 65.75 55.36 79.23
-------- -----
-------- -----
</TABLE>
- ------------
1 The categorization of the type of property securing each Commercial Mortgage
Loan is based upon the primary use of such property upon origination of such
Commercial Mortgage Loan. An industrial mortgaged property may include some
office space, but its primary use is as an industrial warehouse or
manufacturing facility.
2 Represents the ratio of the outstanding principal amount of each Commercial
Mortgage Loan at the time of loan origination or modification, if any, to the
value of the property securing such Commercial Mortgage Loan at the time of
loan origination or modification, if any.
3. Represents the ratio of the outstanding principal amount of the Commercial
Mortgage Loan at August 31, 1996 to the value of the property securing such
Commercial Mortgage Loan at the time of loan origination or modification, if
any.
Of the Commercial Mortgage Loans included in the Initial Portfolio, 75% are
not fully amortizing and will have significant principal balances or "balloon"
payments due upon maturity. These balloon payments range from $100,000.00 to
$8.9 million. The following table sets forth certain information with respect to
Commercial Mortgage Loans included in the Initial Portfolio that are not fully
amortizing as of August 31, 1996:
COMMERCIAL MORTGAGE LOANS WITH BALLOON PAYMENTS
<TABLE>
<CAPTION>
PERCENTAGE
OF INITIAL WEIGHTED AVERAGE WEIGHTED AVERAGE
AGGREGATE PORTFOLIO BY EXPECTED MONTHS BALLOON PAYMENT
TYPE OF MORTGAGED PRINCIPAL BALANCE AGGREGATE PRINCIPAL REMAINING TO UPON MATURITY
PROPERTY1 (IN THOUSANDS) BALANCE MATURITY (IN THOUSANDS)
- ----------------------- ----------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Office................. $20,632 2.04% 53.83 $3,932
Industrial............. 25,228 2.50 68.40 2,132
Recreational........... 9,548 .94 100.34 1,701
Retail................. 10,688 1.06 35.52 1,751
Other.................. 15,043 1.49 90.88 6,588
-------- -----
Total.......... $81,139 8.03% 68.29 $3,315
-------- -----
-------- -----
</TABLE>
- ------------
1 The categorization of the type of property securing each Commercial Mortgage
Loan is based upon the primary use of such property upon origination of such
Commercial Mortgage Loan. An industrial mortgaged property may include some
office space, but its primary use is as an industrial warehouse or
manufacturing facility.
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<PAGE>
Of the Commercial Mortgage Loans included in the Initial Portfolio, 64% bear
interest at fixed rates. The interest rates of the fixed rate Commercial
Mortgage Loans included in the Initial Portfolio range from 7.31% per annum to
12.02% per annum. The following table contains certain additional data with
respect to the interest rates of the fixed rate Commercial Mortgage Loans
included in the Initial Portfolio (including those variable rate Commercial
Mortgage Loans that have been converted, pursuant to their terms, to fixed
rates):
INTEREST RATE OF FIXED RATE COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL PORTFOLIO
AGGREGATE BY
NUMBER OF PRINCIPAL BALANCE AGGREGATE PRINCIPAL
INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) BALANCE
- ------------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
7% - 9%.............................. 12 $ 17,716 1.75%
9% - 11%............................. 18 40,457 4.00
11% and above........................ 7 10,764 1.07
-------------- ----------------- -------------------
Total............................ 37 $ 68,937 6.82%
-------------- ----------------- -------------------
-------------- ----------------- -------------------
</TABLE>
Of the Commercial Mortgage Loans included in the Initial Portfolio, 36% bear
interest at variable rates which are typically tied to an index (such as the
Prime Rate or LIBOR) and are adjustable periodically. Some of these variable
rate Commercial Mortgage Loans contain an option exercisable by the borrower to
convert the variable rate loan into a fixed rate loan. The current interest
rates borne by the variable rate Commercial Mortgage Loans included in the
Initial Portfolio ranged from 7.186% per annum to 10.25% per annum as of August
31, 1996. The following table contains certain additional data as of August 31,
1996 with respect to the interest rates of the variable rate Commercial Mortgage
Loans included in the Initial Portfolio:
CURRENT INTEREST RATE OF VARIABLE RATE COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL PORTFOLIO
AGGREGATE BY
NUMBER OF PRINCIPAL BALANCE AGGREGATE PRINCIPAL
CURRENT INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) BALANCE
- ------------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
7% - 8%............................. 1 $ 3,080 0.31%
8]% - 9%............................ 10 29,847 2.95
9% - 10%............................. 5 5,890 0.58
10% - 11%............................ 1 392 0.04
-------------- ----------------- -------------------
Total............................ 17 $ 39,209 3.88%
-------------- ----------------- -------------------
-------------- ----------------- -------------------
</TABLE>
UNDERWRITING STANDARDS
The Bank has represented to the Company that all of the Residential Mortgage
Loans included in the Initial Portfolio (including those which were not actually
originated by CMSI or one of its predecessors in interest) were originated
generally in accordance with the underwriting policy customarily employed by
CMSI or one of its predecessors in interest at the time at which the Residential
Mortgage Loan in the Initial Portfolio was originated. The Bank has represented
to the Company that all of the Commercial Mortgage Loans included in the Initial
Portfolio were originated generally in accordance with the underwriting policies
customarily employed by the Bank at the time at which the Commercial Mortgage
Loans in the Initial Portfolio were originated.
Residential Mortgage Loans. The underwriting standards applied at
origination of the Residential Mortgage Loans were intended to evaluate the
borrower's credit standing and repayment ability, and the value and adequacy of
the underlying mortgaged property as collateral. Initially, each prospective
borrower was required to provide a current balance sheet describing assets and
34
<PAGE>
liabilities and a statement of income and expenses, as well as, to the extent
required by applicable state law, an authorization to apply for a credit report
which summarized the borrower's credit history with merchants and lenders and
any record of bankruptcy. While a credit report was always required for a
prospective borrower, the extent of the report and other documentation requested
varied among different origination programs.
Except for certain Residential Mortgage Loans originated under a "no income
verification" program, for any prospective borrower, an employment verification
was obtained from the borrower's employer wherein the employer reported the
length of employment with the employer, the employee's current salary, and
whether it was expected that the borrower would continue such employment in
the future or, the borrower submitted such other evidence of employment (such
as pay stubs) satisfactory to the Bank (or its predecessor). For a
self-employed prospective borrower, the borrower was generally required to
submit copies of personal and business federal income tax returns for the
previous two years. For certain prospective borrowers, the borrower authorized
verification of all deposits at financial institutions at which the borrower
had demand or savings accounts. Less than 3% of the Residential Mortgage
Loans included in the Initial Portfolio were originated under a "no income
verification" program.
Once the credit report and the employment and deposit verifications were
received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed Residential Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(such as property taxes and hazard insurance) and (ii) to meet other financial
obligations and monthly living expenses. In all instances, the Bank's and its
predecessors' underwriting policies (including those applied in originating the
Mortgage Loans in the Initial Portfolio) may be varied in cases deemed
appropriate by its underwriting officers.
In determining the adequacy of the property as collateral, an independent
appraisal was made of each property considered for financing. Each appraiser was
selected in accordance with predetermined guidelines established for appraisers.
The appraiser was required to inspect the property and verify that it was in
good condition and that construction, if new, had been completed. If the
appraiser reported any exceptions to the verification, the Bank (or its
predecessor) or its agent determined that such property had been substantially
completed to its satisfaction. The appraisal was based on the appraiser's
judgment of value giving appropriate weight to both the market value of
comparable properties and the cost of replacing the property and other factors
as appropriate. The Bank's or its predecessors' underwriting standards also
required a search of the public records relating to a mortgaged property for
liens and judgments against such mortgaged property, as well as customary title
insurance, except that title insurance was not required in connection with co-op
loans. In connection with co-op loans, a recognition agreement in customary form
was generally required from the related cooperative corporation.
Commercial Mortgage Loans. The loan underwriting procedures and guidelines
utilized by the Bank in connection with the origination of the Commercial
Mortgage Loans included in the Initial Portfolio were intended to assess the
value of the related mortgaged property, the ability of such mortgaged property
to be used by the borrower or its agents and the financial condition of the
borrower, including its ability to service the Commercial Mortgage Loan. The
underwriting guidelines included an internal system for rating the quality of
the mortgaged property. The interest rate for the Commercial Mortgage Loans was
determined, in part, upon this rating system.
The underwriting guidelines took into account such factors as location of
the mortgaged property; its suitability for the proposed use; the availability,
rental rates and relative value of comparable properties in the relevant market
area and the anticipated growth or decline in both the immediate and broader
geographic areas in which the mortgaged property is located; the current or
projected occupancy or leasing ratios, if relevant; the condition and age of the
mortgaged property; the management ability of the borrower, including its
business experience and financial soundness; and such other economic,
demographic or other factors as in the judgment of the Bank might affect the
value of the mortgaged property and the ability of the borrower to service the
35
<PAGE>
Commercial Mortgage Loan. Each proposal for a Commercial Mortgage Loan was
presented to the appropriate middle market commercial lending units of the Bank,
which analyzed the proposed transaction focusing on economic assumptions and the
feasibility of the loan, identified and evaluated potential risks, and made a
recommendation to approve or disapprove the loan. The proposed transaction was
then presented to appropriate credit officers of the Bank for approval.
Once a loan proposal was approved, a loan commitment was issued by the Bank
to the proposed borrower, subject to, among other things, receipt of acceptable
environmental (including Phase I) and appraisal reports and, if deemed
appropriate, engineering reports. The Bank contracted with approved firms to
prepare these reports for the account of the Bank. Any environmental exceptions
were approved by appropriate officers of the Bank before the loan was funded.
All Commercial Mortgage Loans were closed using a standardized set of loan
documents to ensure consistency in the portfolio, subject to approved
transaction specific requirements.
GEOGRAPHIC DISTRIBUTION
Approximately 57% of the residential real estate properties underlying the
Company's Residential Mortgage Loans included in the Initial Portfolio are
located in California. Consequently, these Residential Mortgage Loans may be
subject to a greater risk of default than other comparable Residential Mortgage
Loans in the event of adverse economic, political or business developments and
natural hazards (earthquakes, for example) in California that may affect the
ability of residential property owners in California to make payments of
principal and interest on the underlying mortgages. Standard hazard insurance
required to be maintained with respect to Residential Mortgage Loans held by the
Company does not protect the Company against losses occurring from earthquakes
and other natural disasters. Consequently, in the event of an earthquake or
other natural disaster, the Company's ability to pay dividends on the Series A
Preferred Shares could be adversely affected as the Company will not maintain
special hazard insurance to protect against such losses.
Substantially all of the commercial mortgaged properties underlying its
Commercial Mortgage Loans will be located in the New York metropolitan tri-state
area. Substantially all of these mortgaged properties were at origination at
least 70% occupied by the borrowers or their affiliates. Consequently, these
Commercial Mortgage Loans may be subject to a greater risk of default than other
comparable Commercial Mortgage Loans in the event of adverse economic, political
or business developments in the New York metropolitan tri-state area that may
affect the ability of businesses in that area to make payments of principal and
interest on the underlying mortgages.
LOAN-TO-VALUE RATIOS; INSURANCE
All of the Residential Mortgage Loans having Loan-to-Value Ratios of greater
than 85%, and approximately 22.2% of the Residential Mortgage Loans having
Loan-to-Value Ratios of greater than 80% but less than 85%, are insured under
primary mortgage guaranty insurance policies. Not more than approximately 3% of
the Residential Mortgage Loans are insured by any one primary mortgage insurance
policy issuer. At the time of origination of the Residential Mortgage Loans,
each of the primary mortgage insurance policy insurers was approved by FNMA or
FHLMC. A standard hazard insurance policy is required to be maintained by the
mortgagor with respect to each Residential Mortgage Loan in an amount equal to
the maximum insurable value of the improvements securing such Residential
Mortgage Loan or the principal balance of such Residential Mortgage Loan,
whichever is less. If the residential real estate property underlying a
Residential Mortgage Loan is located in a flood zone, such Residential Mortgage
Loan may also be covered by a flood insurance policy as required by law. No
mortgagor bankruptcy insurance will be maintained by the Company with respect to
the Residential Mortgage Loans in the Initial Portfolio, nor will any
Residential Mortgage Loan be insured by the Federal Housing Administration or
guaranteed by the Veterans Administration. The Company will not maintain any
special hazard
36
<PAGE>
insurance policy with respect to any Residential Mortgage Loan which could
mitigate damages caused by any earthquake or other natural disaster. In
addition, the standard hazard insurance required to be maintained with respect
to Residential Mortgage Loans does not protect the Company against losses
occurring from earthquakes and other natural disasters. In the event of any such
natural disaster, the Company's ability to pay dividends on the Series A
Preferred Shares could be adversely affected.
A standard hazard insurance policy is also required to be maintained by the
mortgagor with respect to each of the Commercial Mortgage Loans included in the
Initial Portfolio. If the commercial real estate property securing a Commercial
Mortgage Loan is located in a flood zone, such Commercial Mortgage Loan may be
covered by a flood insurance policy as required by law. However, as with the
Residential Mortgage Loans in the Initial Portfolio, no special hazard insurance
or mortgagor bankruptcy insurance will be maintained by the Company with respect
to the Commercial Mortgage Loans in the Initial Portfolio.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be sold to the
Company by the Bank on a servicing retained basis. The Bank will service the
Mortgage Loans included in the Initial Portfolio pursuant to the terms of the
Servicing Agreements. The Bank in its role as servicer under the terms of the
Servicing Agreements is herein referred to as the "Servicer". The Servicer will
receive an annual servicing fee with respect to each Mortgage Loan serviced for
the Company which shall (i) for each Residential Mortgage Loan included in the
Initial Portfolio, equal the outstanding principal balance of such Residential
Mortgage Loan multiplied by a fee of .25% and (ii) for each Commercial Mortgage
Loan included in the Initial Portfolio, equal the outstanding principal balance
of such Commercial Mortgage Loan multiplied by a fee ranging from .08% to .30%,
depending upon the outstanding principal amount of such Commercial Mortgage
Loan.
Each Servicing Agreement requires the Servicer to service the Company's
Mortgage Loans in a manner generally consistent with accepted secondary market
practices, with any servicing guidelines promulgated by the Company and, in the
case of Residential Mortgage Loans, with FNMA and FHLMC guidelines and
procedures. The Servicing Agreements require the Servicer to service the
Mortgage Loans solely with a view toward the interests of the Company, and
without regard to the interests of the Bank or its affiliates. The Servicer will
collect and remit principal and interest payments, administer mortgage escrow
accounts, submit and pursue insurance claims and initiate and supervise
foreclosure proceedings on the Mortgage Loans it services. The Servicer will
also provide accounting and reporting services required by the Company for such
Mortgage Loans. Each Servicing Agreement requires the Servicer to follow such
collection procedures as are customary in the industry, including contacting
delinquent borrowers and supervising foreclosures and property dispositions in
the event of unremedied defaults in accordance with servicing guidelines
promulgated by the Company. The Servicer may, in its discretion, arrange with a
defaulting borrower a schedule for the liquidation of delinquencies, provided
that, in the case of Residential Mortgage Loans, no primary mortgage guarantee
insurance coverage is adversely affected. The Servicer may also be directed by
the Company, at any time during the servicing process, to dispose of any
Mortgage Loan which becomes Classified, placed in Nonaccrual Status or which has
been, more than once during the preceding 12 months, more than 30 days past due
in the payment of principal and interest.
The Servicer may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreements to one or more of its
affiliates. If none of its affiliates is engaged in the business of servicing
Mortgage Loans, the Servicer may subcontract all or a portion of its obligations
under the Servicing Agreements to an unrelated third party subject to approval
of a majority of the Independent Directors. The Servicer has indicated to the
Company that it will enter into subservicing arrangements with Chase Manhattan
Mortgage Corporation, an indirect
37
<PAGE>
wholly-owned subsidiary of CMC, pursuant to which Chase Manhattan Mortgage
Corporation will perform the actual servicing of the Mortgage Loans held by the
Company. At June 30, 1996, Chase Manhattan Mortgage Corporation serviced
residential mortgage loans having an aggregate principal balance of
approximately $133.3 billion. The Servicer will not, in connection with
subcontracting any of its obligations under the Servicing Agreements, be
discharged or relieved in any respect from its obligation to the Company to
perform its obligations under the Servicing Agreements.
Each Servicing Agreement requires the Servicer to pay all expenses related
to the performance of its duties under such Servicing Agreement. In addition,
the Servicer will be required to make advances of principal and interest and,
with respect to the Residential Mortgage Loans and certain Commercial Mortgage
Loans, taxes and required insurance premiums that are due from mortgagers,
unless (with respect to advances of principal and interest) it determines that
such advances are nonrecoverable. If such advances are made, the Servicer
generally will be reimbursed prior to the Company out of proceeds related to
such Mortgage Loan. The Servicer also will be entitled to reimbursement by the
Company for expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans serviced by it and in connection with the restoration
of mortgaged property. If claims are not made or paid under applicable insurance
policies or if coverage thereunder has ceased, the Company will suffer a loss to
the extent that the proceeds from liquidation of the mortgaged property, after
reimbursement of the Servicer's expenses in the sale, are less than the
outstanding principal balance of the related Mortgage Loan. The Servicer will be
responsible to the Company for any loss suffered as a result of its failure to
make and pursue timely claims or as a result of actions taken or omissions made
by it which cause the policies to be cancelled by the insurer.
In connection with any foreclosure proceedings that the Servicer may
institute, the Servicer may exercise any power of sale contained in any mortgage
or deed of trust, obtain a deed in lieu of foreclosure or otherwise acquire
title to a mortgaged property underlying a Mortgage Loan by operation of law or
otherwise in accordance with the terms of the relevant Servicing Agreement. The
Servicer will not be permitted under the terms of the Commercial Mortgage Loan
Servicing Agreement to acquire title to any commercial real estate property
underlying a Commercial Mortgage Loan or take any action that would cause the
Company to be an "owner" or an "operator" within the meaning of certain federal
environmental laws, unless it has also previously determined, subject to the
approval of the Advisor, based on a report prepared by an independent person who
regularly conducts environmental assessments, that (i) the mortgaged property is
in compliance with applicable environmental laws or that it would be in the best
interests of the Company to take such actions as are necessary to cause the
mortgaged property to comply therewith and (ii) there are no circumstances or
conditions present at the mortgaged property relating to the use, management or
disposal of any hazardous substances, hazardous materials, hazardous wastes or
petroleum-based materials for which investigation, testing, monitoring,
containment, clean-up or remediation could be required under any federal, state
or local law or regulation, or, if any such materials are present for which such
action could be required, that it would be in the best interest of the Company
to take such actions with respect to the mortgaged property.
The Company may terminate either Servicing Agreement upon the happening of
one or more events specified in the Servicing Agreement. Such events relate
generally to the Servicer's proper and timely performance of its duties and
obligations under the Servicing Agreement. In addition, the Company may also
terminate either Servicing Agreement without cause upon 30 days' notice and
payment of a termination fee that is competitive with that which is generally
payable in the industry. The termination fee will be equal to 2% of the
aggregate outstanding principal amount of the loans then serviced under the
applicable Servicing Agreement. As long as any Series A Preferred Shares remain
outstanding, the Company may not terminate, or elect not to renew, either
Servicing Agreement without the approval of a majority of the Independent
Directors.
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<PAGE>
As is customary in the mortgage loan servicing industry, the Servicer will
be entitled to retain any late payment charges, prepayment fees, penalties and
assumption fees collected in connection with the Mortgage Loans serviced by it.
In addition, the Servicer will receive any benefit derived from interest earned
on collected principal and interest payments between the date of collection and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds with respect to Mortgage Loans serviced by it. Each
Servicing Agreement requires the Servicer to remit to the Company no later than
the 20th day of each month all principal and interest due from borrowers of
Mortgage Loans serviced by it (unless deemed nonrecoverable by the Servicer) on
the first day of such month with respect to the Residential Mortgage Loans and
from the last remittance date with respect to the Commercial Mortgage Loans.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law and
governmental regulations. The terms of a particular Mortgage Loan or applicable
law, however, may provide that the exercise of the "due-on-sale" clause is
prohibited under certain circumstances related to the security underlying the
Mortgage Loan and the buyer's ability to fulfill the obligations under the
related mortgage note. Upon any assumption of a Mortgage Loan by a transferee, a
fee equal to a specified percentage of the outstanding principal balance of the
Mortgage Loan is typically required, which sum will be retained by the Servicer
as additional servicing compensation.
As a result of the relationship between the Servicer and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest".
EMPLOYEES
The Company has four officers, each of whom is described further below under
"Management". The Company does not anticipate that it will require any
additional employees because it has retained the Advisor to perform certain
functions pursuant to the Advisory Agreement described below under
"Management--The Advisor". It is currently anticipated that all of the officers
of the Company will also be officers or employees of CMC, the Bank or their
affiliates. The Company will maintain corporate records and audited financial
statements that are separate from those of the Bank or any of its affiliates.
None of the officers, employees or directors of the Company will have any direct
or indirect pecuniary interest in any Mortgage Asset to be acquired or disposed
of by the Company or in any transaction in which the Company has an interest or
will engage in acquiring, holding and managing Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and that all of these
Mortgage Loans will be purchased from the Bank or affiliates of the Bank. The
Company does not expect to compete with mortgage conduit programs, investment
banking firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers or insurance companies in
acquiring its Mortgage Loans.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, the Advisor, the Bank or any of its affiliates is currently involved in
nor, to the Company's knowledge, currently threatened with any material
litigation with respect to the Mortgage Loans to be included in the Initial
Portfolio, other than routine litigation arising in the ordinary course of
business, most of which is expected to be covered by liability insurance.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is composed of seven members, two of whom
are Independent Directors. These directors will serve until their successors are
duly elected and qualified. There is no current intention to alter the number of
directors comprising the Board of Directors. Pursuant to the Certificate of
Designation establishing the Series A Preferred Shares, the Independent
Directors are required to take into account the interests of the holders of both
the Series A Preferred Shares and the Common Stock in assessing the benefit to
the Company of any proposed action requiring their consent. In considering the
interests of the holders of the Series A Preferred Shares, the Independent
Directors shall owe the same duties which the Independent Directors owe to
holders of Common Stock. The Company currently has four officers. The Company
has no other employees and does not anticipate that it will require additional
employees. See "Business and Strategy--Employees."
The persons who are directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AGE POSITION AND OFFICES HELD
- ------------------------------------ --- -------------------------------
Richard J. Boyle.................... 52 Director
Deborah L. Duncan................... 41 President and Director
Thomas Jacob........................ 58 Director
William C. Langley.................. 57 Director
Neila B. Radin...................... 43 Secretary
Robert S. Strong.................... 47 Chairman and Director
Don B. Taggart...................... 49 Treasurer and Director
Peter J. Tobin...................... 52 Director
</TABLE>
The following is a summary of the experience of the executive officers and
directors of the Company:
RICHARD J. BOYLE retired as Vice Chairman of the Board of Old Chase and The
Chase Manhattan Bank, N.A. upon consummation of the merger of Old Chase into
Chemical Banking Corporation. Mr. Boyle served in such positions since 1987.
DEBORAH L. DUNCAN is an Executive Vice President of CMC and the Bank and
treasurer of CMC. Prior to the merger of Old Chase into Chemical Banking
Corporation, Ms. Duncan was co-head of Old Chase's Global Markets business, with
responsibility for trading activities worldwide. Ms. Duncan joined Old Chase's
Corporate Controller unit in 1979 and served in various positions at Old Chase,
including Corporate treasurer, Western Hemisphere treasurer, treasurer of
Individual Banking, treasurer of Chase Tokyo, manager of Derivative
Products-Asia, Asian treasury coordinator and financial analyst for the Europe
area and the Asia area.
THOMAS JACOB is the Chairman and Chief Executive Officer of Chase Manhattan
Mortgage Corporation, the mortgage subsidiary of CMC. Mr. Jacob is also the
Chairman of Chase Manhattan Bank USA, N.A., and a director of Chemical Insurance
Agency. For the six years prior to the merger of Old Chase and Chemical Banking
Corporation, Mr. Jacob was the executive responsible for the residential retail
mortgage business of Chemical Banking Corporation.
WILLIAM C. LANGLEY retired as an Executive Vice President and Chief Credit
and Risk Policy Officer of Chemical Banking Corporation and Chemical Bank,
effective July 31, 1996. Prior to becoming an Executive Vice President of
Chemical Banking Corporation and Chemical Bank in 1991, Mr. Langley had served
as an Executive Vice President since 1983, and the Chief Credit Officer since
1990, of Manufacturers Hanover Corporation. Mr. Langley is a director of Robert
Morris Associates.
40
<PAGE>
NEILA B. RADIN is a Senior Vice President and Associate General Counsel of
the Bank. Ms. Radin joined the Bank in 1987 and has been a member of its legal
department since 1988.
ROBERT S. STRONG is an Executive Vice President and the Chief Credit Officer
of CMC and the Bank. Mr. Strong joined Old Chase in 1971 and served in various
positions at Old Chase, including as executive in charge of the Global Portfolio
Management Group, the Real Estate Finance Group, the Transportation and Defense
Group, the Diversified Industries Group and the Public Utilities Group.
DON B. TAGGART is a Senior Vice President of CMC and the Bank. Mr. Taggart
joined Old Chase in 1989. Immediately prior to the merger of Old Chase into
Chemical Banking Corporation, Mr. Taggart was responsible for funding/liquidity,
short-term interest rate risk management and worldwide Treasury relationships
and products at Old Chase.
PETER J. TOBIN is Chief Financial Officer of CMC and the Bank. As a member
of CMC's Policy Council, Mr. Tobin has responsibility for corporate treasury,
controllership, corporate taxes, financial management information systems,
insurance, planning and investor relations. Prior to the merger of Old Chase
into Chemical Banking Corporation, Mr. Tobin held the same positions at Chemical
Banking Corporation and Chemical Bank, and had similar responsibilities at
Manufacturers Hanover Corporation before its merger with Chemical Banking
Corporation on December 31, 1991.
INDEPENDENT DIRECTORS
The Company's Certificate of Designation establishing the Series A Preferred
Shares requires that, so long as any Series A Preferred Shares are outstanding,
certain actions by the Company be approved by a majority of the Independent
Directors of the Company. See "Description of Series A Preferred
Shares--Independent Director Approval". Richard J. Boyle and William C. Langley
are the Company's initial Independent Directors. For so long as there are only
two Independent Directors, any action that requires the approval of a majority
of Independent Directors must be approved by both Independent Directors.
If at the time of any annual meeting of the Company's stockholders the
aggregate amount of accrued and unpaid dividends on the Series A Preferred
Shares equals or exceeds an amount equal to four quarterly dividend payments on
such Series A Preferred Shares, the number of directors then constituting the
Board of Directors of the Company will be increased by two (if not already
increased by two due to a default in preference dividends), and the holders of
Series A Preferred Shares, voting together with the holders of any other
outstanding series of Preferred Stock as a single class, will be entitled to
elect two additional directors to serve on the Company's Board of Directors. Any
member of the Board of Directors elected by holders of the Company's Preferred
Stock will be deemed to be an Independent Director for purposes of the actions
requiring the approval of a majority of the Independent Directors. See
"Description of Series A Preferred Shares--Voting Rights".
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement and independence of its auditors. The
audit committee will also review the adequacy of the Company's internal
accounting controls. The audit committee will initially be comprised of Mr.
Boyle, Ms. Duncan, Mr. Langley and Mr. Tobin.
CREDIT COMMITTEE
Upon consummation of the Offering, the Company will establish a credit
committee which will review and approve the acquisition of any additional
Mortgage Loans by the Company, will review
41
<PAGE>
the status of all Mortgage Loans which have become Classified or have been
placed in Nonaccrual Status, and will review the terms and conditions upon which
any such Loans are modified or disposed of by the Company. The credit committee
will initially be comprised of Mr. Boyle, Mr. Langley and Mr. Strong.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company fees for
their services as directors. The Independent Directors will receive annual
compensation of $10,000 plus a fee of $750 for attendance (in person or by
telephone) at each meeting of the Board of Directors.
The Company will not pay any compensation to its officers or employees or to
directors who are not Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation eliminates, to the fullest extent
permitted by the Delaware General Corporation Law, the personal liability of a
director to the Company or its stockholders for monetary damages for breach of
such director's fiduciary duty. The Company's Certificate of Incorporation
empowers the Company to indemnify, to the fullest extent permitted by the
Delaware General Corporation Law, any director or officer of the Company. The
Company's Certificate of Incorporation also empowers the Company to purchase and
maintain insurance to protect any director or officer against any liability
asserted against him or her, or incurred by him or her, arising out of his or
her status as such.
The by-laws of the Company (the "By-laws") require indemnification of the
Company's directors and officers and specify that the right to indemnification
is a contract right, setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the By-laws. The By-laws also
entitle any director or officer to be reimbursed for the expenses of prosecuting
any claim against him or her arising out of his or her status as such. The
By-laws of the Company also provide that the Company may enter into contracts
with any director or officer in furtherance of the indemnification provisions
contained in the By-laws and allow the Company to create a trust fund to ensure
payment of amounts indemnified.
THE ADVISOR
In connection with the consummation of the Offering and the formation of the
Company as described herein, the Company will enter into the Advisory Agreement
with the Bank to administer the day-to-day operations of the Company. The Bank
in its role as advisor under the terms of the Advisory Agreement is herein
referred to as the "Advisor". The Advisor will be responsible for (i) monitoring
the credit quality of the Mortgage Assets held by the Company, (ii) advising the
Company with respect to the acquisition, management, financing and disposition
of the Company's Mortgage Assets and (iii) maintaining custody of the documents
related to the Company's Mortgage Loans. The Advisor may from time to time
subcontract all or a portion of its obligations under the Advisory Agreement to
one or more of its affiliates involved in the business of managing Mortgage
Assets. If no affiliate of the Advisor is engaged in the business of managing
Mortgage Assets, the Advisor may, with the approval of a majority of the Board
of Directors as well as a majority of the Independent Directors, subcontract all
or a portion of its obligations under the Advisory Agreement to unrelated third
parties. The Advisor will not, in connection with the subcontracting of any of
its obligations under the Advisory Agreement, be discharged or relieved in any
respect from its obligations under the Advisory Agreement.
The Advisor and its affiliates have substantial experience in the mortgage
lending industry, both in the origination and in the servicing of mortgage
loans. At June 30, 1996, the Advisor and its affiliates held approximately $35.4
billion of residential mortgage loans and approximately $6.6 billion of
commercial mortgage loans. In their residential mortgage loan business, the
Advisor and its affiliates originate and purchase residential mortgage loans and
then sell such loans to
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investors, primarily in the secondary market, while generally retaining the
rights to service such loans. The Advisor and its affiliates also purchase
servicing rights on residential mortgage loans. In their commercial mortgage
loan business, the Advisor and its affiliates typically service the commercial
mortgage loans in their portfolio.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $250,000 with respect to the advisory
and management services provided by it to the Company.
As a result of the relationship between the Bank and the Company, certain
conflicts of interest may arise. See "Risk Factors--Relationship with the Bank
and its Affiliates; Conflicts of Interest".
The principal executive offices of the Advisor are located at 270 Park
Avenue, New York, New York 10017, telephone number (212) 270-6000.
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CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company,
CMC, the Bank and its affiliates will engage in the transactions described below
which are designed (i) to facilitate the Offering, (ii) to transfer the
ownership of the Initial Portfolio to the Company and (iii) to enable the
Company to qualify as a REIT for federal income tax purposes commencing with its
taxable year ending December 31, 1996.
The transactions constituting the formation of the Company will include the
following:
. The Certificate of Incorporation of the Company will be amended to
provide for 5,000,000 authorized shares of Common Stock and 50,000,000
authorized shares of Preferred Stock, and the Company will file a
Certificate of Designation with the Secretary of State of the State of
Delaware establishing the terms of the Series A Preferred Shares.
. The Company will sell to the public 20,000,000 Series A Preferred
Shares in the Offering (assuming the Underwriters' over-allotment
option is not exercised).
. The Bank will acquire 500,000 shares of Common Stock for a purchase
price equal to $500,000,000. In addition, the Bank will acquire
additional shares of Common Stock for a purchase price equal to the
aggregate amount of underwriting discounts and expenses of the Offering
and the formation of the Company.
. The Bank will sell the Initial Portfolio to the Company for an
aggregate purchase price equal to approximately $1 billion pursuant to
the terms of the Residential Mortgage Purchase Agreement and the
Commercial Mortgage Purchase Agreement.
. The Company will enter into the Advisory Agreement with the Bank
pursuant to which the Bank, as Advisor, will manage the Mortgage Assets
held by the Company and administer the day-to-day operations of the
Company. See "Management--The Advisor".
. The Company will enter into the Servicing Agreements with the Bank
pursuant to which the Bank, as Servicer, will service the Mortgage
Loans included in the Initial Portfolio. See "Business and
Strategy--Servicing".
The Bank currently owns, and following the completion of the Offering will
continue to own, all of the issued and outstanding shares of Common Stock of the
Company. CMC, which owns all of the issued and outstanding shares of capital
stock of the Bank, has indicated to the Company that, for so long as any Series
A Preferred Shares are outstanding, it intends to maintain direct or indirect
ownership of at least 80% of the outstanding Common Stock.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK OR CMC. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY
THE BANK OR CMC.
In addition to its ownership of 100% of the Common Stock of the Company, the
Bank will also have responsibility for the day-to-day management and custody of
the Company's assets, in its capacity as Advisor under the Advisory Agreement,
and will have responsibility for servicing the Mortgage Loans as Servicer under
the Servicing Agreements. See "Management--The Advisor" and "Risk
Factors--Relationship with the Bank and its Affiliates; Conflicts of Interest".
The Company and the Bank intend that the fair value of the Initial Portfolio
will approximately equal the amount (approximately $1 billion) that the Company
will pay for the Initial Portfolio. However, no third party valuations of the
Mortgage Loans constituting the Initial Portfolio have been or will be obtained
for purposes of the Offering, and there can be no assurance that the fair value
of the Initial Portfolio will not differ from the purchase price to be paid by
the Company. See "Risk
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Factors--No Third Party Valuation of the Mortgage Loans; No Arm's-Length
Negotiations with Affiliates" and "--Relationship with the Bank and its
Affiliates; Conflicts of Interest".
BENEFITS TO THE BANK AND ITS AFFILIATES
The Bank and its affiliates expect to realize the following benefits in
connection with the Offering and the formation of the Company:
. CMC and the Bank are required by the Board of Governors of the Federal
Reserve System to maintain certain levels of capital for bank
regulatory purposes. The Bank has informed the Company that the
Series A Preferred Shares will be treated as capital for both CMC and
the Bank for regulatory purposes. The Bank has indicated to the
Company that such treatment, together with the Company's ability to
deduct, for income tax purposes, the dividends payable on the Series A
Preferred Shares as a result of the Company's qualification as a REIT,
will provide each of CMC and the Bank with a more cost-effective means
of obtaining regulatory capital than if the Bank or CMC were to issue
preferred stock themselves. Neither the Bank nor CMC would be permitted
to treat any securities issued by a trust established by either the
Bank or CMC to securitize its mortgage assets as capital for bank
regulatory purposes.
. The Bank will receive approximately $1 billion at the consummation of
the Offering (assuming no exercise by the Underwriters of their
over-allotment option) in connection with the sale of the Initial
Portfolio to the Company (approximately $500 million of which
represents new funds after giving effect to the Bank's expense of
purchasing the Company's Common Stock).
. The Company will be entitled to receive annual advisory and servicing
fees and annual dividends in respect of the Common Stock. For the first
12 months following completion of the Offering, these annual fees and
dividends are anticipated to be as follows:
<TABLE>
<S> <C>
Advisory Fee....................................................... $ 250,000
Servicing Fee...................................................... 2,490,5201
----------
Common Stock Dividend.............................................. 2
----------
$
----------
----------
</TABLE>
--------------------
1 Assumes that for the first 12 months following completion of the
Offering, the Company holds Residential Mortgage Loans and Commercial
Mortgage Loans with the same outstanding principal balances as those
Mortgage Loans included in the Initial Portfolio. See "Business and
Strategy--Servicing" for a description of the basis upon which the
servicing fees will be calculated.
2 The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's "REIT taxable
income" (excluding capital gains) over the amount of dividends paid in
respect of Preferred Stock. The aggregate annual dividend amount of
the Series A Preferred Shares is $ . Assuming that (i) the
Mortgage Loans included in the Initial Portfolio are held for the
12-month period following completion of the Offering, (ii) principal
repayments are reinvested in additional Mortgage Loans with
characteristics similar to those of the Mortgage Loans included in the
Initial Portfolio and (iii) interest rates remain constant during such
12-month period, the Company anticipates that the Initial Portfolio
will generate "REIT taxable income" (excluding capital gains) of
approximately $72 million, after payment of servicing and advisory
fees, during such 12-month period.
. The Bank will also be entitled to retain any late payment charges,
prepayment fees, penalties and assumption fees collected in connection
with the Mortgage Loans serviced by it. In addition, the Bank, as
Servicer, will receive any benefit derived from interest earned on
collected principal and interest payments between the date of
collection and the date of remittance to the Company and from interest
earned on tax and insurance impound funds with respect to Mortgage
Loans serviced by it.
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DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Certificate of Designation establishing the Series A
Preferred Shares and the Company's Certificate of Incorporation, the forms of
which have been filed with the Securities and Exchange Commission (the
"Commission") as exhibits to the registration statement of which this Prospectus
forms a part. See "Description of Capital Stock" below.
GENERAL
The Series A Preferred Shares form a series of the Preferred Stock of the
Company, which Preferred Stock may be issued from time to time in one or more
series with such rights, preferences and limitations as are determined by the
Company's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Company to issue
the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the capital stock of the
Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
will not be convertible into shares of Common Stock or any other class or series
of capital stock of the Company and will not be subject to any sinking fund or
other obligation of the Company for its repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be ChaseMellon Shareholders Services, L.L.C. The registrar
for shares of Preferred Stock will send notices to shareholders of any meetings
at which holders of the Preferred Stock have the right to elect directors of the
Company or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to receive, when and
as declared by the Board of Directors of the Company out of assets of the
Company legally available therefor, cash dividends at the rate of % per annum
of the initial liquidation preference (equivalent to $ per share per
annum). Dividends on the Series A Preferred Shares will be payable quarterly on
March 31, June 30, September 30 and December 31 of each year, at such annual
rate, commencing on December 31, 1996. Each such dividend will be payable to
holders of record as they appear on the stock register of the Company on such
record dates, not exceeding 45 days preceding the payment dates thereof, as
shall be fixed by the Board of Directors of the Company or a duly authorized
committee thereof. Dividends will be cumulative from the date of original issue.
Dividends payable on the Series A Preferred Shares for any period greater or
less than a full dividend period shall be computed on the basis of twelve 30-day
months, a 360-day year and the actual number of days elapsed in the period.
Dividends payable on the Series A Preferred Shares for each full dividend period
shall be computed by dividing the rate per annum by four.
If any Series A Preferred Shares are outstanding, no full dividends shall be
declared or paid or set apart for payment on any series of capital stock of the
Company ranking, as to dividends, on a parity with or junior to the Series A
Preferred Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payments, on the Series A Preferred
Shares for all past dividend periods and the then current dividend period. When
dividends are not paid in full (or a sum sufficient for such full payment is not
set apart) upon the Series A Preferred Shares and the shares of any other series
of capital stock ranking on a parity as to dividends with the Series A Preferred
Shares, all dividends declared upon Series A Preferred Shares and any other
series of capital stock ranking on a parity as to dividends with the Series A
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on the Series A Preferred Shares and such other series of
capital stock shall in all cases bear to each other the same ratio that accrued
and
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unpaid dividends per share on the Series A Preferred Shares and such other
series of capital stock bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for all past dividend periods, no
dividends (other than in Common Stock or other capital stock ranking junior to
the Series A Preferred Shares as to dividends and upon liquidation) shall be
declared or paid or set aside for payment and no other distribution shall be
declared or made upon the Common Stock or any other capital stock of the Company
ranking junior to or on a parity with the Series A Preferred Shares as to
dividends or amounts upon liquidation, nor shall any Common Stock or any other
capital stock of the Company ranking junior to or on a parity with the Series A
Preferred Shares as to dividends or amounts upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any moneys to be paid
to or made available for a sinking fund for the redemption of any such stock) by
the Company (except by conversion into or exchange for other capital stock of
the Company ranking junior to the Series A Preferred Shares as to dividends and
amounts upon liquidation).
For a discussion of the tax treatment of distributions to stockholders, see
"Federal Income Tax Considerations--Taxation of United States Stockholders" and
"--Taxation of Foreign Stockholders".
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to vote
as indicated below, each Series A Preferred Share will be entitled to one vote
on matters on which holders of the Series A Preferred Shares are entitled to
vote.
If at the time of any annual meeting of the Company's stockholders for the
election of directors the aggregate amount of accrued and unpaid dividends on
any series of Preferred Stock of the Company, including the Series A Preferred
Shares, equals or exceeds an amount equal to four quarterly dividend payments on
such series of Preferred Stock, the number of directors then constituting the
Board of Directors of the Company will be increased by two (if not already
increased by two due to a default in preference dividends), and the holders of
the Series A Preferred Shares, voting together with the holders of all other
series of Preferred Stock as a single class, will be entitled to elect such two
additional directors to serve on the Company's Board of Directors at each such
annual meeting. Such right shall continue until there are no dividends in
arrears upon the Preferred Stock. Each director elected by the holders of shares
of the Preferred Stock shall continue to serve as such director for the full
term for which he or she shall have been elected, notwithstanding that prior to
the end of such term such default shall cease to exist.
The affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding shares of each series of Preferred Stock of the Company, including
the Series A Preferred Shares, voting as a single class without regard to
series, will be required (a) to create any class or series of stock which shall
have preference as to dividends or distribution of assets over any outstanding
series of Preferred Stock of the Company other than a series which shall not
have any right to object to such creation or (b) alter or change the provisions
of the Company's Certificate of Incorporation (including the Certificate of
Designation establishing the Series A Preferred Shares) so as to adversely
affect the voting powers, preferences or special rights of the holders of a
series of Preferred Stock of the Company; provided that if such amendment shall
not adversely affect all series of Preferred Stock of the Company, such
amendment need only be approved by at least 66 2/3% of the holders of shares of
all series of Preferred Stock adversely affected thereby.
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<PAGE>
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to , 2001
(except upon the occurrence of a Tax Event). On or after such date, the Series A
Preferred Shares will be redeemable at the option of the Company, in whole or in
part, at any time or from time to time on not less than 30 nor more than 60
days' notice by mail, at a redemption price of $25.00 per share, plus accrued
and unpaid dividends to the date of redemption, if any, thereon. Any such
redemption may only be effected with the prior approval of the Federal Reserve
Board and the New York State Banking Board (unless at such time such approvals
are not required). Under current policies of the Federal Reserve Board and the
New York State Banking Board, such approval would be granted only if the
redemption were to be made out of the proceeds of the issuance of another
capital instrument or if such regulators determine that the condition and
circumstances of CMC and the Bank warrant the reduction of a source of permanent
capital. If dividends on any Series A Preferred Shares are in arrears, no Series
A Preferred Shares shall be redeemed unless all outstanding Series A Preferred
Shares are redeemed and the Company shall not purchase or otherwise acquire any
Series A Preferred Shares, provided, however, that the Company may purchase or
acquire Series A Preferred Shares pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding Series A Preferred Shares.
The Company will also have the right at any time, upon the occurrence of a
Tax Event, to redeem the Series A Preferred Shares, in whole (but not in part)
at a redemption price of $25.00 per share, plus accrued and unpaid dividends to
the date of redemption, if any, thereon. "Tax Event" means the receipt by the
Company of an opinion of a nationally recognized law firm experienced in such
matters to the effect that, as a result of (i) any amendment to, clarification
of, or change (including any announced prospective change) in, the laws or
treaties (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein affecting taxation, (ii) any
judicial decision, official administrative pronouncement, published or private
ruling, regulatory procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or regulations) ("Administrative
Action") or (iii) any amendment to, clarification of, or change in the official
position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification, or change
is effective or such pronouncement or decision is announced on or after the date
of issuance of the Series A Preferred Shares, there is more than an
insubstantial risk that (a) dividends paid or to be paid by the Company with
respect to the capital stock of the Company are not, or will not be, fully
deductible by the Company for United States federal income tax purposes or (b)
the Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any distribution of assets is
made to holders of Common Stock or any other class of stock ranking junior to
the Series A Preferred Shares upon liquidation, liquidating distributions in the
amount of $25 per share, plus accrued and unpaid dividends thereon, if any, to
the date of liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the
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Series A Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Company, then the holders of the
Series A Preferred Shares and such other classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, the consolidation or merger of any other entity with or into
the Company or the sale of all or substantially all of the property or business
of the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Certificate of Designation establishing the Series A Preferred Shares
requires that, so long as any Series A Preferred Shares are outstanding, certain
actions by the Company be approved by a majority of the Independent Directors.
For so long as there are only two Independent Directors, any action that
requires the approval of a majority of Independent Directors must be approved by
both Independent Directors. Richard J. Boyle and William C. Langley are the
Company's initial Independent Directors. See "Management--Independent
Directors". In order to be considered "independent", a director must not be a
current officer or employee of the Company, CMC, the Bank or any affiliate of
the Bank or of any person or persons that, in the aggregate, own more than 50%
of the Common Stock of the Company. In addition, any members of the Board of
Directors of the Company elected by holders of Preferred Stock, including the
Series A Preferred Shares, will be deemed to be Independent Directors for
purposes of approving actions requiring the approval of a majority of the
Independent Directors.
The actions which may not be taken without the approval of a majority of the
Independent Directors include (i) the issuance of additional Preferred Stock
ranking on a parity with the Series A Preferred Shares, (ii) the incurrence of
debt for borrowed money in excess of 20% of the aggregate amount of net proceeds
received in connection with the issuance of Preferred Stock and Common Stock,
(iii) the modification of the general distribution policy or the declaration of
any distribution in respect of Common Stock for any year if, after taking into
account any such proposed distribution, total distributions on the Series A
Preferred Shares and the Common Stock would exceed an amount equal to the sum of
105% of the Company's "REIT taxable income" (excluding capital gains) for such
year plus net capital gains of the Company for that year, (iv) the acquisition
of real estate assets other than Mortgage Loans or Mortgage-Backed Securities
that (A) qualify as real estate assets under Section 856(c)(6)(B) of the Code,
(B) are rated investment grade or better by at least one nationally recognized
independent rating organization, (C) are not interest-only, principal-only or
high-risk securities and (D) represent interests in or obligations backed by
pools of mortgage loans, (v) the redemption of any shares of Common Stock, (vi)
the termination or modification of, or the election not to renew, the Advisory
Agreement or any Servicing Agreement or the subcontracting of any duties under
the Advisory Agreement or the Servicing Agreements to third parties unaffiliated
with the Bank, (vii) any dissolution, liquidation or termination of the Company
prior to , 2001, (viii) any material amendment to or modification of
either of the Mortgage Purchase Agreements, including without limitation any
amendment to the representations, warranties and covenants contained in such
agreements made in connection with the acquisition of additional Mortgage Loans
and (ix) the determination to revoke the Company's REIT status or the amendment
of any of the ownership limitations contained in the Certificate of
Incorporation. The Certificate of Designation requires that, in assessing the
benefits to the Company of any proposed action requiring their consent, the
Independent Directors take into account the interests of holders of both the
Common Stock and the Preferred Stock, including, without limitation, holders of
the Series A Preferred Shares. In considering the interests of the holders of
Preferred Stock, including without limitation the holders of the Series A
Preferred Shares, the Independent Directors shall owe the same duties which the
Independent Directors owe to the holders of Common Stock.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer".
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the capital stock of the Company does
not purport to be complete and is subject in all respects to the applicable
provisions of the Delaware General Corporation Law and the Certificate of
Incorporation of the Company.
COMMON STOCK
GENERAL
The Company is authorized to issue up to 5,000,000 shares of Common Stock.
Upon consummation of the Offering and the transactions described in
"Transactions Constituting the Formation", the Company will have outstanding
shares of Common Stock, all of which will be held by the Bank. In
addition, CMC intends that, so long as any Series A Preferred Shares are
outstanding, it will maintain direct or indirect ownership of at least 80% of
the outstanding Common Stock of the Company.
DIVIDENDS
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor,
provided that, so long as any shares of Preferred Stock are outstanding, no
dividends or other distributions (including redemptions and purchases) may be
made with respect to the Common Stock unless full dividends on the shares of all
series of Preferred Stock, including accumulations in the case of cumulative
Preferred Stock, have been paid. In order to remain qualified as a REIT, the
Company must distribute annually at least 95% of its annual "REIT taxable
income" (not including capital gains) to stockholders.
VOTING RIGHTS
Subject to the rights, if any, of the holders of any class or series of
Preferred Stock, all voting rights are vested in the Common Stock. The holders
of Common Stock are entitled to one vote per share. All of the issued and
outstanding shares of Common Stock are currently, and upon consummation of the
Offering will be, held by the Bank.
RIGHTS UPON LIQUIDATION
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been paid or set aside for
the holders of all series of Preferred Stock the full preferential amounts to
which such holders are entitled, the holders of Common Stock will be entitled to
share equally and ratably in any assets remaining after the payment of all debts
and liabilities.
PREFERRED STOCK
Subject to limitations prescribed by Delaware law and the Company's
Certificate of Incorporation, the Board of Directors or, if then constituted, a
duly authorized committee thereof is authorized to issue, from the authorized
but unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish, from
time to time, the number of shares of Preferred Stock to be included in any such
class or series and to fix the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of any such
class or series, and such other subjects or matters as may be fixed by
resolution of the Board of Directors.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Certificate of Designation relating to that class or series.
A Certificate of Designation relating to each class or series of Preferred
Stock will set forth the preferences and other terms of such class or series,
including without limitation the following: (1)
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the title and stated value of such class or series; (2) the number of shares of
such class or series offered and the liquidation preference per share of such
class or series; (3) the dividend rate(s), period(s), and/or payment date(s) or
method(s) of calculation thereof applicable to such class or series; (4) whether
such class or series of Preferred Stock is cumulative or not and, if cumulative,
the date from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the
provision for redemption, if applicable, of such class or series; (7) any
limitations on direct or beneficial ownership and restrictions on transfer, in
each case as may be appropriate to preserve the status of the Company as a REIT;
(8) any voting rights of such class or series; (9) the relative ranking and
preferences of such class or series as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; (10) any
limitations on issuance of any class or series of Preferred Stock ranking senior
to or on a parity with such class or series of Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company; and (11) any other specific terms, preferences, rights, limitations
or restrictions of such class or series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Certificate of Incorporation contains certain restrictions on
the number of shares of Common Stock and Preferred Stock that individual
stockholders may own. For the Company to qualify as a REIT under the Code, no
more than 50% in number or value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than the first year) or during a proportionate part of a shorter taxable
year (the "Five or Fewer Test"). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year (the "One Hundred
Persons Test"). The ownership by the Bank of 100% of the shares of Common Stock
of the REIT will not adversely affect the Company's REIT qualification because
each stockholder of CMC (the sole stockholder of the Bank) counts as a separate
beneficial owner for purposes of the Five or Fewer Test and the capital stock of
CMC is widely held. Further, the Certificate of Incorporation of the Company
contains restrictions on the acquisition of Preferred Stock intended to ensure
compliance with the One Hundred Persons Test. Such provisions include a
restriction that if any transfer of shares of capital stock of the Company would
cause the Company to be beneficially owned by fewer than 100 persons, such
transfer shall be null and void and the intended transferee will acquire no
rights to the stock.
Subject to certain exceptions specified in the Company's Certificate of
Incorporation, no holder of Preferred Stock is permitted to own (including
shares deemed to be owned by virtue of the attribution provisions of the Code),
more than 9.9% (the "Ownership Limit") of any issued and outstanding class or
series of Preferred Stock. The Board of Directors may (but in no event will be
required to), upon receipt of a ruling from the IRS or an opinion of counsel
satisfactory to it, waive the Ownership Limit with respect to a holder if such
holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
The Certificate of Incorporation provides that shares of any class or series
of Preferred Stock owned, or deemed to be owned, by or transferred to a
stockholder in excess of the Ownership Limit (the "Excess Shares") will
automatically be transferred, by operation of law, to a trustee as a trustee of
a trust for the exclusive benefit of a charity to be named by the Company as of
the day prior to the day the prohibited transfer took place. Any distributions
paid prior to the discovery of the prohibited transfer are to be repaid by the
original transferee to the Company and by the Company to the trustee; any vote
of the shares while the shares were held by the original transferee prior to the
Company's discovery thereof shall be void ab initio and the original transferee
shall be deemed to have given its proxy to the trustee. Any unpaid distributions
with respect to the original transferee will be rescinded as void ab initio. In
liquidation, the original transferee stockholder's ratable share of the
Company's assets would be limited to the price paid by the original transferee
for the Excess Shares or, if no value was given, the price per share equal
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to the closing market price on the date of the purported transfer. The trustee
of the trust shall promptly sell the shares to any person whose ownership is not
prohibited, whereupon the interest of the trust shall terminate. Proceeds of the
sale shall be paid to the original transferee up to its purchase price (or, if
the original transferee did not purchase the shares, the value on its date of
acquisition) and any remaining proceeds shall be paid to a charity to be named
by the Company.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of a class or series of
issued and outstanding Preferred Stock (or the acquisition of an interest in an
entity that owns shares of such series of Preferred Stock) by an individual or
entity could cause that individual or entity (or another individual or entity)
to own constructively in excess of 9.9% of such class or series of Preferred
Stock, and thus subject such stock to the Ownership Limit. Direct or
constructive ownership in excess of the Ownership Limit would cause ownership of
the shares in excess of the limit to be transferred to the trustee.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if the
REIT Provisions (as defined herein) are changed so as to eliminate any ownership
concentration limitation or if the ownership concentration limitation is
increased. The Certificate of Incorporation may not be amended to alter, change,
repeal or amend any of the Ownership Limit provisions without the prior approval
of a majority of the Independent Directors.
The Certificate of Incorporation requires that any person who beneficially
owns 1% (or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred Stock
of the Company must provide certain information to the Company within 30 days of
June 30 and December 31 of each year. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limit.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the extent that
it constitutes summaries of legal matters or legal conclusions, has been
reviewed by Milbank, Tweed, Hadley & McCloy, and it is their opinion that such
information is accurate in all material respects. The discussion below is based
on existing federal income tax law, which is subject to change, with possible
retroactive effect. The discussion below does not address all aspects of
taxation that may be relevant in the particular circumstances of each
stockholder or to certain types of stockholders (including insurance companies,
tax-exempt entities, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States,
except to the extent discussed) subject to special treatment under the federal
income tax laws.
EACH PROSPECTIVE INVESTOR IS URGED TO SEEK INDIVIDUAL ADVICE CONCERNING THE
EFFECT ON HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE SERIES A
PREFERRED SHARES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, INCLUDING THE
EFFECT OF POSSIBLE CHANGES IN TAX LAW.
TAXATION OF THE COMPANY
GENERAL
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code and the applicable Treasury Regulations (the "REIT Requirements" or
the "REIT Provisions"), which are the requirements for qualifying as a REIT,
commencing with its taxable year ending December 31, 1996. The Company believes
that, commencing with its taxable year ending December 31, 1996, it will be
owned and organized and will operate in such a manner as to qualify for taxation
as a REIT under the Code, and the Company intends to continue to operate in such
a manner, but no assurance can be given that it will operate in a manner so as
to qualify or remain qualified.
The REIT Requirements are technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Milbank, Tweed, Hadley & McCloy, commencing with the
Company's taxable year ending December 31, 1996, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on certain factual assumptions relating to the
organization and operation of the Company and is conditioned upon certain
representations made by the Company as to factual matters, such as the
organization and expected manner of operation of the Company. In addition, this
opinion is based upon factual assumptions and representations of the Company
concerning its business and Mortgage Assets. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet, through actual
annual operating results, distribution levels and diversity of stock ownership,
the various qualification tests imposed under the Code discussed below, the
results of which will not be reviewed by Milbank, Tweed, Hadley & McCloy on a
continuing basis. No assurance can be given that the actual results of the
Company's operation for any one taxable year will satisfy such requirements. See
"--Failure to Qualify".
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary income
or capital gain that is currently
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distributed to stockholders. Such treatment substantially eliminates the federal
"double taxation" on earnings (at the corporate and the stockholder levels) that
generally results from investment in a corporation.
Despite the REIT election, the Company may be subject to federal income and
excise tax as follows:
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences, if
any.
Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying net
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income.
Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other
than sales of foreclosure property and sales that qualify for a statutory
safe harbor), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75%
or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.
Sixth, if the Company should fail to distribute, or fail to be treated
as having distributed, with respect to each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
The Company does not now intend to acquire any appreciated assets from a
corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event of
such an acquisition, the Company could, under certain circumstances, be subject
to tax upon disposition of such assets.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for the REIT Requirements; (iv) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include private foundations
and certain pension trusts and other entities) at any time during the last half
of each taxable year; (vii) that is not a bank, an insurance company or certain
other specified types of financial institutions; and (viii) meets certain other
tests, described below, regarding the nature of its income and assets. The Code
provides that conditions (i) through (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months.
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Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT. For purposes of condition (vi),
certain tax-exempt entities are generally treated as individuals, and the
beneficiaries of a pension trust that qualifies under Section 401(a) of the Code
and that holds shares of a REIT will be treated as holding shares of the REIT in
proportion to their actuarial interests in the pension trust. See "--Taxation of
United States Stockholders-- Treatment of Tax-Exempt Stockholders".
Milbank, Tweed, Hadley & McCloy is of the opinion that, for purposes of
condition (v) above, beneficial owners of both common and preferred shares of a
corporation are counted toward the 100 holder requirement. The Company expects
that the Series A Preferred Shares will be held by not less than 100 beneficial
owners at all times such Shares are outstanding. Such ownership of the Series A
Preferred Shares would allow the Company to meet condition (v). Milbank, Tweed,
Hadley & McCloy is of the opinion that, in determining whether condition
(vi) above is met, shareholders of a corporation are treated as owning their
proportionate share of any stock held by that corporation. The Company expects
that the stock of the Company and of CMC will at no time be held directly or
indirectly by five or fewer shareholders who are individuals, private
foundations, pension trusts or other relevant entities that in the aggregate own
more than 50 percent by value of the stock of the Company or CMC, respectively.
Stock ownership of the Company and CMC in accordance with the Company's
expectation will satisfy condition (vi) with respect to the Company. In
addition, the Company's Certificate of Incorporation includes certain
restrictions regarding transfer of its shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such transfer and ownership restrictions are
described under "Description of Capital Stock--Restrictions on Ownership and
Transfer". Milbank, Tweed, Hadley & McCloy is also of the opinion that the
Company will not be treated as a bank for federal income tax purposes by
reason of the activities of any shareholder.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company satisfies this requirement.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership will retain the same character in the
hands of the REIT for purposes of the REIT Requirements, including satisfying
the gross income tests and the assets test.
INCOME TESTS
In order to maintain qualification as a REIT, the Company must annually
satisfy three gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (as interest on obligations secured
by mortgages on real property, certain "rents from real property" or as gain on
the sale or exchange of such property and certain fees with respect to
agreements to make or acquire mortgage loans), from certain types of temporary
investments or certain other types of gross income. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from such real property investments as
aforesaid and from dividends, interest, and gain from the sale or other
disposition of stock or securities and certain other types of gross income (or
from any combination of the foregoing). Third, short-term gain from the sale or
other disposition of stock or securities, gain from prohibited transactions, and
gain on the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
from the date of acquisition must represent less than 30% of the Company's gross
income (including gross income from prohibited transactions) for each taxable
year.
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For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation must be secured
by real property having a fair market value at the time of acquisition at least
equal to the principal amount of the loan. The term "interest" includes only an
amount that constitutes compensation for the use or forbearance of money. For
example, a fee received or accrued by a lender which is in fact a charge for
services performed for a borrower rather than a charge for the use of borrowed
money is not includible as interest; amounts earned as consideration for
entering into agreements to make loans secured by real property, although not
interest, are otherwise treated as within the 75% and 95% classes of gross
income so long as the determination of those amounts does not depend on the
income or profits of any person. By statute, the term interest does not include
any amount based on income or profits except that the Code provides that (i)
interest "based on a fixed percentage or percentages of receipts or sales" is
not excluded and (ii) when the REIT makes a loan that provides for interest
based on the borrower's receipts or sales and the borrower leases under one or
more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the event
that a REIT acquires by foreclosure property that generates income that does not
qualify as "rents from real property," such income may be treated as qualifying
for two years following foreclosure (which period may be extended by the IRS) so
long as (i) all leases entered into after foreclosure generate only qualifying
rent, (ii) only limited construction takes place and (iii) within 90 days of
foreclosure, any trade or business in which the property is used is conducted by
an independent contractor from which the REIT derives no income. In the event
the special foreclosure property rule applies to qualify otherwise unqualified
income, the net income that qualifies only under the special rule for
foreclosure property may be subject to tax, as described above.
RELIEF PROVISIONS
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed above in "--Taxation of the Company--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess net income.
ASSET TESTS
At the close of each quarter of its taxable year, the Company must satisfy
three tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by real estate assets
(including stock or debt instruments held for not more than one year that were
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company), cash, cash items, and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
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After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such action
within 30 days after the close of any quarter as may be required to cure any
noncompliance but no assurance can be given that such asset tests will be met.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to be treated as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the Company's net
capital gain) plus (ii) 95% of the net income, if any, from foreclosure property
in excess of the special tax on income from foreclosure property, minus (B) the
sum of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular dividend payment after such declaration. To the extent
that the Company does not distribute (or is not treated as having distributed)
all of its net capital gain or distributes (or is treated as having distributed)
at least 95%, but less than 100% of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gains corporate
tax rates. The Code permits a stockholder to elect to be treated for tax
purposes as having (i) received a distribution in the amount specified in the
election and (ii) contributed the amount thereof to the capital of the Company.
In the event the Company fails to distribute 100% of its income and capital
gains, the Bank may elect to be so treated. Furthermore, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company intends to make
timely distributions sufficient to satisfy the annual distribution requirement.
"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.
It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement the Company may find it necessary to arrange
for borrowings or to pay dividends in the form of taxable stock dividends if it
is practicable to do so.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
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FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions described above do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost, and will not be
permitted to requalify unless it distributes any earnings and profits
attributable to the period when it failed to qualify. In addition, it would be
subject to tax on any built-in gains on property held during the period during
which it did not qualify if it sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAXATION OF UNITED STATES STOCKHOLDERS
As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax purposes
(i) a citizen or resident or the United States, (ii) a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
DISTRIBUTIONS GENERALLY
As long as the Company qualifies as a REIT, distributions to a United States
Stockholder up to the amount of the Company's current or accumulated earnings
and profits (and not designated as capital gains dividends) will be taken into
account as ordinary income and will not be eligible for the dividends-received
deduction for corporations. Distributions that are designated by the Company as
capital gain dividends will be treated as long-term capital gain (to the extent
they do not exceed the Company's actual net capital gain) for the taxable year
without regard to the period for which the stockholder has held its stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gains dividends as ordinary income, pursuant to Section 291(d) of the
Code. A distribution in excess of current or accumulated earnings and profits
will first be treated as a tax-free return of capital, reducing the tax basis in
the United States Stockholder's Series A Preferred Shares, and a distribution in
excess of the United States Stockholder's tax basis in its Series A Preferred
Shares will be taxable gain realized from the sale of such shares. Dividends
declared by the Company in October, November or December of any year payable to
a stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company during
January of the following calendar year. Stockholders may not claim the benefit
of any tax losses of the Company on their own income tax returns.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed under
"--Taxation of the Company--General" and "--Taxation of the Company--Annual
Distribution Requirements" above. As a result, stockholders may be required to
treat as taxable dividends certain distributions that would otherwise result in
tax-free returns of capital. Moreover, any "deficiency dividend" will be treated
as a "dividend" (an ordinary dividend or a capital gain dividend, as the case
may be), regardless of the Company's earnings and profits.
Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock.
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TREATMENT OF TAX-EXEMPT STOCKHOLDERS
Distributions from the Company to a tax-exempt employee's pension trust or
other domestic tax-exempt stockholder will generally not constitute "unrelated
business taxable income" unless the stockholder has borrowed to acquire or carry
its shares of the Company. A tax-exempt employee's pension trust that holds more
than 10% of the shares of the capital stock of the Company may under certain
circumstances be required to treat a certain percentage of dividends as
unrelated business taxable income if the Company is "predominantly held" by
qualified trusts. For these purposes, a qualified trust is any trust defined
under Section 401(a) of the Code and exempt from tax under Section 501(a) of the
Code.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates holding Series A Preferred Shares (collectively, "Foreign Stockholders")
are complex, and no attempt will be made herein to provide more than a summary
of such rules. A Foreign Stockholder should consult with its own tax advisor to
determine the effect of federal, state, and local and country of tax residence
income tax laws on an investment in the Company, including any reporting
requirements.
In general, a Foreign Stockholder will be subject to regular United States
income tax to the same extent as a United States Stockholder with respect to
income or gain derived from its investment in the Company if under all facts and
circumstances such income or gain is "effectively connected" with such
stockholder's conduct of a trade or business in the United States. See "--
Taxation of United States Stockholders". A corporate Foreign Stockholder that
receives income that is effectively connected with a United States trade or
business may also be subject to the branch profits tax under Section 884 of the
Code, which is payable in addition to the regular United States corporate income
tax. The following discussion will apply to a Foreign Stockholder whose income
or gain derived from investment in the Company is not so effectively connected
in light of the facts and circumstances.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
significantly affects the federal income tax treatment of the sale or exchange
of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss
realized on the sale or exchange of a "United States real property interest"
("USRPI") by a foreign taxpayer is treated by statute as effectively connected
with a U.S. trade or business as a matter of law, without regard to the
particular facts and circumstances. Shares of a corporation generally are
treated as a USRPI only if the fair market value of USRPIs owned by the
corporation equals or exceeds 50% of the fair market value of its total assets.
If at no time within the five years preceding the sale or exchange of shares in
the Company the shares constituted a USRPI, gain or loss on the sale or exchange
will not be treated as effectively connected with a U.S. trade or business by
reason of FIRPTA. While ownership of real property within the U.S. (including
ownership of interests in certain entities) is always a USRPI, a loan secured by
a mortgage on U.S. real property constitutes a USRPI only if the amounts payable
by the borrower are contingent on the income or receipts of the borrower or the
property or otherwise based on the property. Because such contingent interest is
not likely to be present in the residential mortgage loans to be owned by the
Company that are expected to represent approximately 90% of the assets of the
Company (although such interest is fairly common in commercial loans) the
Company believes it is unlikely that its shares will be USRPIs or that it will
derive significant gain from the sale or exchange of USRPIs, although whether
its shares are a USRPI or it derives income from USRPIs will depend upon the
facts as they ultimately develop. A distribution of cash to a Foreign
Stockholder that is not attributable to gain from sales or exchanges by the
Company of USRPIs and not designated by the Company as a capital gain dividend
is not subject to FIRPTA but generally will be subject to the withholding of
United States federal income tax at a rate
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of 30%, unless (i) a lower treaty rate applies or (ii) the Foreign Stockholder
files an IRS Form 4224 with the withholding agent certifying that the investment
to which the distribution relates is effectively connected to a United States
trade or business of such Foreign Stockholder. A Foreign Stockholder who
receives a distribution that has been subject to such withholding tax may file a
claim for refund to the extent the withholding has been imposed on a portion of
such distributions representing amounts in excess of current and accumulated
earnings and profits. Under FIRPTA, distributions of proceeds attributable to
gain from the Company's sale or exchange of a USRPI are subject to income tax at
the normal capital gains rates applicable to United States stockholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of a nonresident alien individual). Also, these distributions may be
subject to a 30% branch profits tax in the hands of a corporate Foreign
Stockholder not entitled to a treaty exemption or reduced rate of tax. Treasury
Regulations require the withholding of 35% of any distribution that could be
designated by the Company as a capital gain dividend. This amount is creditable
against the Foreign Stockholder's tax liability. It should be noted that the 35%
withholding tax rate on capital gain dividends is higher than the 28% maximum
rate on capital gains of individuals. Capital gain dividends not attributable to
gain on the sale or exchange of USRPIs are not subject to United States taxation
if there is no requirement of withholding.
If the shares of the Company do constitute a USRPI (or did so constitute
within the previous five years), gain or loss on the sale or exchange of the
shares will be treated as effectively connected with the conduct of a U.S. trade
or business unless one or more special rules apply to preclude U.S. taxation.
If the Company is a "domestically-controlled REIT," a sale of Series A
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, under Code attribution rules, by Foreign
Stockholders. Because the Series A Preferred Shares will be publicly traded, no
assurance can be given that the Company will constitute a
domestically-controlled REIT or that it will be possible to ascertain whether or
not it is domestically-controlled.
If the Company is not a domestically-controlled REIT, a sale of Series A
Preferred Shares would be subject to tax under FIRPTA as a sale of a USRPI and
gain or loss would be effectively connected with a United States trade or
business if either (i) the Series A Preferred Shares were not "regularly traded"
(as defined by applicable Treasury Regulations) on an established securities
market (e.g., the New York Stock Exchange, on which the Series A Preferred
Shares will be listed) during the quarter in which the Series A Preferred Shares
were sold or (ii) even if the Series A Preferred Shares were "regularly traded",
the selling stockholder held, directly or indirectly, more than 5% of the Series
A Preferred Shares during the five-year period ending on the date of
disposition. The applicable Treasury Regulations that define "regularly traded"
for this purpose may be interpreted to provide that a security will not be
"regularly traded" for any calendar quarter during which 100 or fewer persons
(treating related persons as one person) in the aggregate own 50% or more of
such security or the quarterly trading volume is less than 7.5% of the average
number of the issued and outstanding shares of such security (2.5% if there are
2,500 or more stockholders of record). In the event that the Series A Preferred
Shares were not "regularly traded" and the Company did not at that time
constitute a domestically-controlled REIT, a Foreign Stockholder (without regard
to its ownership percentage of Series A Preferred Shares) must treat as
effectively connected with a United States trade or business any gain or loss on
any sale or other disposition of Series A Preferred Shares that occurs within a
calendar quarter during which the Series A Preferred Shares were not "regularly
traded" and the shares were a USRPI.
If the gain on the sale of the Company's Series A Preferred Shares were
subject to taxation under FIRPTA, the Foreign Stockholder would be subject to
the same treatment as a United States
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Stockholder with respect to such gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of a nonresident alien
individual). Notwithstanding the foregoing, capital gain from sale of shares of
a REIT not subject to FIRPTA will nonetheless be taxable to a Foreign
Stockholder who is an individual (under rules generally applicable to United
States Stockholders) if such person is in the United States for 183 days or more
during the taxable year of disposition and certain other conditions apply. In
any event, a purchaser of Series A Preferred Shares from a Foreign Stockholder
will not be required under FIRPTA to withhold on the purchase price if the
purchased Series A Preferred Shares are "regularly traded" on an established
securities market or if the Company is a domestically-controlled REIT.
Otherwise, under FIRPTA the purchaser of Series A Preferred Shares may be
required to withhold 10% of the purchase price and remit such amount to the IRS.
Shares of the Company owned by a nonresident alien decedent are subject to
United States federal estate tax (which is imposed at rates up to 55%) unless an
estate tax treaty binding upon the United States provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
UNITED STATES STOCKHOLDERS
Under certain circumstances, a United States Stockholder of Series A
Preferred Shares may be subject to backup withholding at a rate of 31% on
payments made with respect to, or cash proceeds of a sale or exchange of, Series
A Preferred Shares. Backup withholding will apply only if the holder (i) fails
to furnish the person required to withhold with its Taxpayer Identification
Number ("TIN") which, for an individual, would be his or her Social Security
Number, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it
has failed properly to report payments of interest and dividends, or (iv) under
certain circumstances, fails to certify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the IRS that it is subject
to backup withholding for failure to report interest and dividend payments.
Backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax-exempt organizations. A United
States Stockholder should consult with a tax advisor regarding qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. Backup withholding is not an additional tax. Rather, the amount of
any backup withholding with respect to a payment to a United States Stockholder
will be allowed as a credit against such United States Stockholder's United
States federal income tax liability and may entitle such United States
Stockholder to a refund, provided that the required information is furnished to
the IRS.
FOREIGN STOCKHOLDERS
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Foreign Stockholders, and a Foreign Stockholder
should consult with a tax advisor with respect to any such information reporting
and backup withholding requirements. Backup withholding with respect to a
Foreign Stockholder is not an additional tax. Rather, the amount of any backup
withholding with respect to a payment to a Foreign Stockholder will be allowed
as a credit against any United States federal income tax liability of such
Foreign Stockholder. If withholding results in an overpayment of taxes, a refund
may be obtained provided that the required information is furnished to the IRS.
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OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
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 Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the ownership of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and otherwise consistent with the
fiduciary's responsibilities and in compliance with the requirements of Part 4
of Title I of ERISA, including, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA and the prohibited transaction
provisions of Section 406 of ERISA and Section 4975 of the Code; (c) whether the
Company's assets are treated as assets of the Plan; and (d) the need to value
the assets of the Plan annually. In addition, the fiduciary of an individual
retirement arrangement under Section 408 of the Code (an "IRA") considering the
purchase of Series A Preferred Shares should consider whether the ownership of
Series A Preferred Shares would result in a non-exempt prohibited transaction
under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment considerations
relevant to Plans and, where indicated, IRAs. This summary is based on the
current provisions of ERISA and the Code and regulations and rulings thereunder,
and may be changed (perhaps adversely and with retroactive effect) by future
legislative, administrative or judicial actions. PLANS AND IRAS THAT ARE
PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD CONSULT WITH AND RELY
UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the assets
of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation", 29
C.F.R. Sec.Sec.2510.3-101), when a Plan or IRA makes an equity investment in
another entity, the underlying assets of the entity will not be considered Plan
Assets if the equity interest is a "publicly-offered security".
For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable", (b) part of a class of securities
that is "widely held," and (c) sold to the Plan or IRA as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and part of a class of securities that is registered under
the Exchange Act within 120 days (or such later time as may be allowed by the
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. The Series A Preferred
Shares will be registered under the Securities Act of 1933, as
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amended (the "Securities Act"), and the Exchange Act within the time periods
specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable". The Company believes that any restrictions
imposed on the transfer of the Series A Preferred Shares are limited to the
restrictions on transfer generally permitted under the Plan Asset Regulation and
are not likely to result in the failure of the Series A Preferred Shares to be
"freely transferable".
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan. However,
the Company believes that under the Plan Asset Regulation the Series A Preferred
Shares should be treated as "publicly-offered securities" and, accordingly, the
underlying assets of the Company should not be considered to be assets of any
Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and that
the trustee, or an investment manager (within the meaning of Section 3(38) of
ERISA), have exclusive authority and discretion to manage and control the assets
of the Plan. As discussed above, the assets of the Company under current law do
not appear likely to be assets of the Plans receiving Series A Preferred Shares
as a result of the Offering. However, if the assets of the Company were deemed
to be assets of the Plans under ERISA, certain directors and officers of the
Company might be deemed fiduciaries with respect to the Plans that invest in the
Company and the prudence and other fiduciary standards set forth in ERISA would
apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with respect
to the investing Plan or IRA could be prohibited transactions unless a statutory
or administrative exemption is available. In addition, investment authority
would also have been improperly delegated to such fiduciaries, and, under
certain circumstances, Plan fiduciaries who make the decision to invest in the
Series A Preferred Shares could be liable as co-fiduciaries for actions taken by
the Company that do not conform to the ERISA standards for investments under
Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in
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its own interest or for its own account, from acting in any capacity in any
transaction involving the Plan on behalf of a party (or representing a party)
whose interests are adverse to the interests of the Plan, and from receiving any
consideration for its own account from any party dealing with the Plan in
connection with a transaction involving Plan assets. Similar provisions in
Section 4975 of the Code apply to transactions between disqualified persons and
Plans and IRAs and result in the imposition of excise taxes on such disqualified
persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank, CMC
or any of their affiliates is a party in interest or disqualified person with
respect to the Plan. Any such prohibited transaction could be treated as exempt
under ERISA and the Code if the Series A Preferred Shares were acquired pursuant
to and in accordance with one or more "class exemptions" issued by the
Department of Labor, such as Prohibited Transaction Class Exemption ("PTCE")
75-1 (an exemption for certain transactions involving employee benefit plans and
broker-dealers (such as the Underwriters), reporting dealers, and banks), PTCE
84-14 (as exemption for certain transactions determined by an independent
qualified professional asset manager), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 91-38
(an exemption for certain transactions involving bank collective investment
funds), PTCE 95-60 (an exemption for certain transactions involving an insurance
company's general account) and PTCE 96-23 (an exemption for certain transactions
determined by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more than
10% of the Series A Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "Federal Income Tax Considerations--Taxation of United
States Stockholders--Treatment of Tax-Exempt Stockholders".
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EXPERTS
The financial statement as of July 11, 1996 included in this Prospectus has
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
RATINGS
It is expected that the Series A Preferred Shares will be rated A by Duff &
Phelps, Inc., A by Fitch Investors Service, L.P., a1 by Moody's Investors
Service, Inc. and A- by Standard and Poor's Ratings Services. A security rating
is not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. No
person is obligated to maintain any rating on the Series A Preferred Shares,
and, accordingly, there can be no assurance that the ratings assigned to the
Series A Preferred Shares upon initial issuance will not be lowered or withdrawn
by the assigning rating organization at any time thereafter.
CERTAIN LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby and certain tax
matters described under "Federal Income Tax Considerations" will be passed upon
for the Company by Milbank, Tweed, Hadley & McCloy, New York, New York. The
validity of the Series A Preferred Shares will be passed upon for the
Underwriters by Sullivan & Cromwell, New York, New York.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part) on Form S-11 (the "Registration Statement") under the
Securities Act, with respect to the Series A Preferred Shares offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information regarding the Company and the Series A Preferred Shares
offered hereby, reference is made to the Registration Statement and the exhibits
thereto.
The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the following regional offices of the Commission: 7
World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400, Chicago,
Illinois 60661 and at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005. Copies of such materials can be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
The Certificate of Designation establishing the rights, preferences and
limitations of the Series A Preferred Shares provides that the Company shall
maintain its status as a reporting company under the Exchange Act for so long as
any of the Series A Preferred Shares are outstanding.
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GLOSSARY
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the Company
pursuant to which the Bank will (i) administer the day-to-day operations of the
Company, (ii) monitor the credit quality of the Mortgage Assets held by the
Company, (iii) advise the Company with respect to the acquisition, management,
financing and disposition of the Company's Mortgage Assets and (iv) maintain
custody of the documents related to the Company's Mortgage Loans.
"ARM" or "adjustable rate mortgage" means a Mortgage Loan that features
adjustments of the underlying interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to periodic
interest rate and/or payment caps and a lifetime interest rate cap.
"Bank" means The Chase Manhattan Bank, a banking corporation organized under
the laws of the State of New York, and the parent of the Company.
"Board of Directors" means the board of directors of the Company.
"By-laws" means the by-laws of the Company.
"Certificate of Incorporation" means the Amended and Restated Certificate of
Incorporation of the Company.
"Classified" means a loan which, for bank regulatory purposes, is designated
as "substandard", "doubtful", or "loss". For such purposes, a substandard asset
is one that is deemed inadequately protected by the current sound worth and
paying capacity of the obligor or of the collateral pledged, if any, because the
asset has a well-defined weakness or weaknesses that jeopardize the liquidation
of the debt. An asset classified as doubtful has all the weaknesses inherent in
one classified substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and improbable. Assets
classified as loss are considered uncollectible.
"CMC" means The Chase Manhattan Corporation, a Delaware corporation and the
parent of the Bank.
"CMSI" means Chase Mortgage Services, Inc., an indirect wholly-owned
subsidiary of the Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loan" means a whole loan secured by a first mortgage or
deed of trust on a commercial real estate property.
"Commercial Mortgage Purchase Agreement" means the Commercial Mortgage Loan
Purchase and Warranties Agreement between the Company and the Bank.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock, par value $300.00 per share, of the
Company.
"Company" means Chase Preferred Capital Corporation, a Delaware corporation.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a stockholder in excess of
the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"5/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a one-year non-convertible ARM in the month in which the 60th
monthly payment is due.
"Five or Fewer Test" means the Code requirement that not more than 50% in
value of the Company's outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code).
"FNMA" means the Federal National Mortgage Association.
"FNMA Required Net Yield" means (i) with respect to any Mortgage Loan with
an original term of 20, 25 or 30 years, FNMA's required net yield for 30-year
fixed rate mortgages (covered by 60-day mandatory commitments) that was in
effect 45 days prior to the effective date of any conversion of such Mortgage
Loan and (ii) with respect to any Mortgage Loan with an original term of 15
years, FNMA's required net yield for 15-year fixed rate mortgages (covered by
60-day mandatory commitments) that was in effect 45 days prior to the effective
date of any conversion of such Mortgage Loan.
"Foreign Stockholders" means holders of Series A Preferred Shares that are
for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii) foreign
trusts and estates.
"Gross Margin" means, with respect to a Residential Mortgage Loan that is an
ARM, the applicable fixed percentage which, when added to the applicable index,
calculates to the current interest rate paid by the borrower of the adjustable
rate Mortgage Loan (without taking into account any interest rate caps or
minimum interest rates). Gross Margin is inapplicable to fixed rate loans.
"Independent Directors" means the members of the Board of Directors who are
not current officers or employees of the Company, CMC, the Bank or any affiliate
of the Bank or of any person or persons that, in the aggregate, own more than
50% of the Common Stock.
"Initial Portfolio" means the initial portfolio of Mortgage Loans purchased
by the Company from the Bank.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Inter-Bank Offered Rate.
"Lifetime interest rate cap" means, with respect to Mortgage Loans that are
ARMs, the maximum interest rate that may accrue during any period over the term
of such Mortgage Loan as stated in the governing instruments evidencing such
Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the mortgaged
property underlying such Mortgage Loan and (ii) if the Mortgage Loan was made to
finance the acquisition of property, the purchase price of the mortgaged
property.
"Mortgage Assets" means real estate mortgage assets.
"Mortgage-Backed Securities" means securities that qualify as real estate
assets under Section 856(c)(6)(B) of the Code, that are rated by at least one
nationally recognized independent rating organization and that represent
interests in or obligations backed by pools of Mortgage Loans.
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"Mortgage Loans" means whole loans secured by single-family (one- to
four-unit) residential real estate properties or by commercial real estate
properties.
"Nonaccrual Status" means a loan on which, in the opinion of management,
principal or interest is not likely to be paid in accordance with the terms of
the loan agreement or on which the principal or interest is past due 90 days or
more and collateral, if any, is insufficient to cover principal and interest.
"Offering" means the offering of Series A Preferred Shares pursuant to the
Prospectus.
"Old Chase" means The Chase Manhattan Corporation prior to its merger with
and into Chemical Banking Corporation.
"One Hundred Persons Test" means the Code requirement that the capital stock
of the Company be owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
"One-Year ARM" means an ARM that adjusts annually beginning in the month in
which the 12th monthly payment is due.
"Ownership Limit" means the provision in the Company's Certificate of
Incorporation limiting any person from owning (including shares deemed to be
owned by the attribution provisions of the Code) more than 9.9% of any issued
and outstanding class or series of Preferred Stock.
"Periodic interest rate cap" means, with respect to ARMs, the maximum change
in the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic interest rate caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.
"Plan" means a pension, profit-sharing, retirement or other employee benefit
plan.
"Plan Asset Regulation" means the DOL regulations determining the assets of
a Plan for purposes of ERISA and the related prohibited transaction excise tax
provisions of the Code.
"Preferred Stock" means preferred stock, par value $25.00 per share, of the
Company.
"Prime Rate" for any date means the lowest prime rate as published in the
"Money Rates" table of The Wall Street Journal for that date.
"Prospectus" means this prospectus, as the same may be amended.
"Rate Adjustment Date" means, with respect to any ARM, a date on which the
interest rate on such ARM adjusts.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.
"REIT taxable income" shall have the meaning set forth in "Federal Income
Tax Considerations--Taxation of the Company--Annual Distribution Requirements".
"Residential Mortgage Loan" means a whole loan secured by a first mortgage
or deed of trust on a single family (one-to four-unit) residential real estate
property.
"Residential Mortgage Purchase Agreement" means the Residential Mortgage
Loan Purchase and Warranties Agreement between the Company and the Bank.
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"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.
"Servicer" means that Bank in its role as servicer of the Mortgage Loans
under the Servicing Agreements.
"Servicing Agreements" means the servicing agreements entered into by the
Bank with respect to the Residential Mortgage Loans and the Commercial Mortgage
Loans.
"7/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a one-year non-convertible ARM in the month in which the 84th
monthly payment is due.
"Six-Month Conversion Margin" with respect to any Six-Month ARM, means the
conversion margin set forth in the mortgage note relating to such Six-Month ARM.
"Six-Month Prime Rate ARM" means an ARM the interest rate of which adjusts
semi-annually beginning in the month in which the sixth monthly payment is due
to equal the Prime Rate on each such Rate Adjustment Date.
"Six-Month Treasury Rate ARM" means an ARM the interest rate of which
adjusts semi-annually beginning in the month in which the sixth monthly payment
is due to equal the applicable Gross Margin plus the Six-Month Treasury Index on
such Rate Adjustment Date.
"Six-Month Treasury Index" means the weekly average investment yield of
auction rates on six-month U.S. Treasury securities as published by the Federal
Reserve Board in Statistical Release H.15 (519) or any similar publication or,
if not so published, as reported by any Federal Reserve Bank or by any U.S.
Government department or agency.
"Tax Event" means the receipt by the Company of an opinion of a nationally
recognized law firm experienced in such matters to the effect that, as a result
of (i) any amendment to, clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, (ii) any judicial decision, official administrative
pronouncement, ruling, regulatory procedure, notice or announcement (including
any notice or announcement of intent to adopt such procedures or regulations)
("Administrative Action") or (iii) any amendment to, clarification of, or change
in the official position or the interpretation of such Administrative Action or
judicial decision or any interpretation or pronouncement that provides for a
position with respect to such Administrative Action or judicial decision that
differs from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body, irrespective
of the manner in which such amendment, clarification or change is made known,
which amendment, clarification, or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Series A Preferred
Shares, there is more than an insubstantial risk that (a) dividends payable by
the Company with respect to the capital stock of the Company are not, or will
not be, fully deductible for United States federal income tax purposes or (b)
the Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"10/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a one-year non-convertible ARM in the month in which the 120th
monthly payment is due.
"3/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a One-Year ARM in the month in which the 36th monthly payment is
due.
"TIN" means Taxpayer Identification Number.
"Treasury Index" means the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release
69
<PAGE>
H.15 (519) or any similar publication or, if not so published, as reported by
any Federal Reserve Bank or by any U.S. Government department or agency.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means those underwriters to which the Company will sell the
Series A Preferred Shares pursuant to the terms of the Underwriting Agreement.
"Underwriting Agreement" means the underwriting agreement by and among the
Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) citizens or residents of
the United States, (ii) corporations, partnerships, or other entities created or
organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.
"USRPI" means United States real property interest.
70
<PAGE>
INDEX TO FINANCIAL STATEMENT
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants.................................................... F-2
Balance Sheet of Chase Preferred Capital Corporation as of July 11, 1996............. F-3
Note to Financial Statement.......................................................... F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Chase Preferred Capital Corporation
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Chase Preferred Capital Corporation
(the "Company") at July 11, 1996 in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
New York, New York
July 11, 1996
F-2
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
JULY 11, 1996
<TABLE>
<S> <C>
ASSETS
Cash......................................................................... $1,000
------------
STOCKHOLDER'S EQUITY
Common Stock, par value $1.00 per share, 1000 shares authorized; 1000 shares
issued and outstanding......................................................... $1,000
------------
</TABLE>
The Note to Financial Statement is an integral part of this Statement.
F-3
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
NOTE TO FINANCIAL STATEMENT
1. ORGANIZATION
Chase Preferred Capital Corporation (the "Company"), a wholly-owned
subsidiary of Chemical Bank, was incorporated on June 28, 1996 in the State of
Delaware. It is currently anticipated that on July 14, 1996, The Chase Manhattan
Bank, N.A. will merge into Chemical Bank and that Chemical Bank, as the
surviving corporation in the merger, will change its name to The Chase Manhattan
Bank (the "Bank").
The Company intends to invest in mortgage-related assets financed by common
and preferred stock offerings and expects to generate income for distribution to
its future preferred and common stockholders primarily from the net interest
income derived from its investments in mortgage-related assets. The Company
intends to purchase these mortgage-related assets from the Bank and its
affiliates at their estimated fair values. These assets will be recorded in the
Company's financial statements at the Bank's historical cost basis which will
approximate their estimated fair values. The Company intends to operate in a
manner that permits it to elect, and it intends to elect, to be subject to tax
as a real estate investment trust for federal income tax purposes. The Company
has not had any operations as of July 11, 1996.
The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
proceeds from a sale of common stock to the Bank. If the public offering is not
consummated, the Bank will pay any offering costs.
F-4
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
September , 1996 (the "Underwriting Agreement") among the Company, the Bank and
the underwriters named below (the "Underwriters"), the Company has agreed that
the Company will sell to each of the Underwriters, and each of such Underwriters
for which Goldman, Sachs & Co., Dean Witter Reynolds Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, PaineWebber Incorporated, Prudential
Securities Incorporated, Smith Barney Inc., Bear, Stearns & Co. Inc., Chase
Securities Inc., Lehman Brothers Inc., Morgan Stanley & Co. Incorporated, and
Salomon Brothers Inc are acting as representatives (the "Representatives") has
severally agreed to purchase from the Company, the respective number of Series A
Preferred Shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES A
UNDERWRITER PREFERRED STOCK
- ---------------------------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co.......................................
Dean Witter Reynolds Inc..................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated........
PaineWebber Incorporated..................................
Prudential Securities Incorporated........................
Smith Barney Inc..........................................
Bear, Stearns & Co. Inc...................................
Chase Securities Inc......................................
Lehman Brothers Inc.......................................
Morgan Stanley & Co. Incorporated.........................
Salomon Brothers Inc......................................
----------------
Total............................................. 20,000,000
----------------
----------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series A Preferred Shares
offered hereby, if any are taken.
The Underwriters propose to offer the Series A Preferred Shares in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $0. per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0. per share to
certain brokers and dealers. After the Series A Preferred Shares are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for five
business days after the date of this Prospectus to purchase up to an aggregate
of 2,000,000 additional Series A Preferred Shares solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of Series
A Preferred Shares to be purchased by each of them, as shown in the foregoing
table, bears to the 20,000,000 Series A Preferred Shares offered hereby. The
Underwriters have agreed to reimburse the Company for accrued dividends, if any,
on such additional Series A Preferred Shares purchased to cover over-allotments,
from the date of original issue of the Series A Preferred Shares to their time
of delivery.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially
U-1
<PAGE>
similar to the Series A Preferred Shares or which are convertible or
exchangeable into securities which are substantially similar to the Series A
Preferred Shares without the prior written consent of the Representatives,
except for the Series A Preferred Shares offered in connection with the
Offering.
The Representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Series A Preferred Shares offered by them.
Prior to the Offering, there has been no public market for the Series A
Preferred Shares.
The Series A Preferred Shares have been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange (the "Exchange"). In
order to meet one of the requirements for listing the Series A Preferred Shares
on the Exchange, the Underwriters have undertaken to sell the Series A Preferred
Shares to a minimum of 100 beneficial holders. Trading of the Series A Preferred
Shares on the Exchange is expected to commence within seven business days after
the initial delivery of the Series A Preferred Shares. The Representatives have
advised the Company that they intend to make a market in the Series A Preferred
Shares prior to commencement of trading on the Exchange, but are not obligated
to do so and may discontinue any such market making at any time without notice.
The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to affiliates of the Company, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
Chase Securities Inc. is an affiliate of the Company and the Bank.
U-2
<PAGE>
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON 20,000,000 SHARES
AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CHASE PREFERRED
CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE CAPITAL
DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CORPORATION
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT INFORMATION CONTAINED % CUMULATIVE
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. PREFERRED STOCK, SERIES A
-------------------
SUMMARY TABLE OF CONTENTS
PAGE
----
Table of Contents.................... 2 -------------------
Prospectus Summary................... 3
Risk Factors......................... 10 PROSPECTUS
The Company.......................... 16
Use of Proceeds...................... 17 -------------------
Capitalization....................... 18
Business and Strategy................ 19
Management........................... 40
Certain Transactions Constituting The
Formation............................ 44 GOLDMAN, SACHS & CO.
Description of Series A Preferred
Shares............................... 46 DEAN WITTER REYNOLDS INC.
Description of Capital Stock......... 50
Federal Income Tax Considerations.... 53 MERRILL LYNCH & CO.
ERISA Considerations................. 62
Experts.............................. 65 PAINEWEBBER INCORPORATED
Ratings.............................. 65
Certain Legal Matters................ 65 PRUDENTIAL SECURITIES INCORPORATED
Additional Information............... 65
Glossary............................. 66 SMITH BARNEY INC.
Index to Financial Statement.........F-1
Underwriting.........................U-1 BEAR, STEARNS & CO. INC.
CHASE SECURITIES INC.
THROUGH AND INCLUDING , 1996
(THE 25TH DAY AFTER THE COMMENCEMENT OF LEHMAN BROTHERS
THE OFFERING), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED MORGAN STANLEY & CO. INCORPORATED
SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO SALOMON BROTHERS INC
DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS REPRESENTATIVES OF THE UNDERWRITERS
UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See F-1 of the Prospectus for a list of the financial statements
included as part of the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------------------------------------------------------------------------
<S> <C>
1* --Form of Underwriting Agreement between the Company, the Bank and the
Underwriters
3(a)(i)* --Certificate of Incorporation of the Company
3(a)(ii)* --Form of Certificate of Designation establishing the Series A Preferred
Shares
3(a)(iii)* --Form of Amended and Restated Certificate of Incorporation of the Company
3(b)(i)* --By-laws of the Company
3(b)(ii)* --Form of Amended and Restated By-laws of the Company
4* --Specimen of certificate representing Series A Preferred Shares
5 --Opinion of Milbank, Tweed, Hadley & McCloy, counsel to the Company,
relating to Series A Preferred Shares
8 --Opinion of Milbank, Tweed, Hadley & McCloy, counsel to the Company,
relating to certain tax matters
10(a)* --Form of Residential Mortgage Loan Purchase and Warranties Agreement between
the Company and the Bank
10(b)* --Form of Commercial Mortgage Loan Purchase and Warranties Agreement between
the Company and the Bank
10(c)* --Form of Residential Mortgage Loan Servicing Agreement between the Company
and the Bank
10(d)* --Form of Commercial Mortgage Loan Servicing Agreement between the Company
and the Bank
10(e)* --Form of Advisory Agreement between the Company and the Bank
23(a) --Consent of Price Waterhouse LLP
23(b) --Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit 5)
24* --Powers of Attorney
</TABLE>
- ------------
* Previously filed
II-1
<PAGE>
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-11 and has duly caused this Amendment No. 4 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York, on the 12th day of September,
1996.
CHASE PREFERRED CAPITAL CORPORATION
By /s/ NEILA B. RADIN
...................................
Neila B. Radin
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- ---------------------------------- -------------------
<S> <C> <C>
* Chairman and Director September 12, 1996
.................................. (Principal Executive Officer)
Robert S. Strong
* President and Director September 12, 1996
..................................
Deborah L. Duncan
* Treasurer and Director September 12, 1996
.................................. (Principal financial and
Don B. Taggart accounting officer)
* Director September 12, 1996
..................................
Richard J. Boyle
* Director September 12, 1996
..................................
Thomas Jacob
* Director September 12, 1996
..................................
William C. Langley
* Director September 12, 1996
..................................
Peter J. Tobin
*By: /s/ NEILA B. RADIN
..............................
Neila B. Radin
(as attorney-in-fact)
</TABLE>
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ---------- ----------------------------------------------------------------------------------
<S> <C>
1* --Form of Underwriting Agreement between the Company, the Bank and the
Underwriters
3(a)(i)* --Certificate of Incorporation of the Company
3(a)(ii)* --Form of Certificate of Designation establishing the Series A Preferred Shares
3(a)(iii)* --Form of Amended and Restated Certificate of Incorporation of the Company
3(b)(i)* --By-laws of the Company
3(b)(ii)* --Form of Amended and Restated By-laws of the Company
4* --Specimen of certificate representing Series A Preferred Shares
5 --Opinion of Milbank, Tweed, Hadley & McCloy, counsel to the Company, relating to
Series A Preferred Shares
8 --Opinion of Milbank, Tweed, Hadley & McCloy, counsel to the Company, relating to
certain tax matters
10(a)* --Form of Residential Mortgage Loan Purchase and Warranties Agreement between the
Company and the Bank
10(b)* --Form of Commercial Mortgage Loan Purchase and Warranties Agreement between the
Company and the Bank
10(c)* --Form of Residential Mortgage Loan Servicing Agreement between the Company and
the Bank
10(d)* --Form of Commercial Mortgage Loan Servicing Agreement between the Company and the
Bank
10(e)* --Form of Advisory Agreement between the Company and the Bank
23(a) --Consent of Price Waterhouse LLP
23(b) --Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit 5)
24* --Powers of Attorney
</TABLE>
- ------------
* Previously filed.
EXHIBIT 5
MILBANK, TWEED, HADLEY & McCLOY
[LETTERHEAD]
September 12, 1996
Chase Preferred Capital Corporation
270 Park Avenue
New York, New York 10017
Re: Chase Preferred Capital Corporation - Public
Offering of 20,000,000 Shares of its
Cumulative Preferred Stock
Ladies and Gentlemen:
We are acting as special counsel for Chase Preferred Capital Corporation, a
Delaware corporation (the "Company"), in connection with the proposed public
offering of an aggregate of 22,000,000 shares (including 2,000,000 shares
subject to the Underwriters' over-allotment option) of the Cumulative Preferred
Stock, Series A, par value $25.00 per share, of the Company (the "Shares"). In
connection with the proposed offering, the Company has filed Registration
Statement No. 333-08001 on Form S-11 (the "Registration Statement"), with the
Securities and Exchange Commission for the purpose of registering the Shares
under the Securities Act of 1933, as amended.
As special counsel to the Company, we are familiar with the corporate
proceedings taken by the Company in connection with the authorization and sale
of the Shares and with the provisions of the proposed Underwriting Agreement
between the Company and Goldman, Sachs & Co., as representatives of the several
Underwriters, in accordance with which the sales of the Shares are to be made,
in the form filed as an exhibit to the Registration Statement (the "Underwriting
Agreement").
We have examined originals, or copies certified to our satisfaction, of such
corporate records of the Company, agreements and other instruments, certificates
of public officials, certificates of officers and representatives of the Company
and other documents as we have deemed it necessary to require as a basis for the
opinions hereinafter expressed. In such examination we have assumed (i) the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity with the originals of all documents submitted to us
as copies and the authenticity of the originals of such latter documents and
(ii) the filing with the Office of the Secretary of State of the State of
Delaware, prior to the issuance of the Shares, of the Amended and Restated
Certificate of Incorporation of the Company and the Certificate of Designation
establishing the Shares, each in the form filed as an exhibit to the
Registration Statement. As to various questions of fact material to such
opinions we have, when relevant facts were not independently established, relied
upon certifications by officers of the Company and other appropriate persons and
statements contained in the Registration Statement.
Based upon the foregoing, and having regard to legal considerations which we
deem relevant, we are of the opinion that the Shares have been duly authorized
and, when certificates representing the Shares shall have been executed by
proper officers of the Company, authenticated by the transfer agent and
registrar for the Shares, delivered to persons entitled thereto pursuant to the
Underwriting Agreement in accordance with the terms thereof and paid for at the
price specified therein, the Shares will have been legally and validly issued,
fully paid and nonassessable.
We hereby consent to the use of our name under the heading "Certain Legal
Matters" in the Prospectus constituting a part of the Registration Statement and
to the filing of this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
/s/ MILBANK, TWEED, HADLEY & McCLOY
CAF/MLW
EXHIBIT 8
MILBANK, TWEED, HADLEY & McCLOY
(LETTERHEAD)
Chase Preferred Capital Corporation
270 Park Avenue
New York, New York 10017
Re: Chase Preferred Capital Corporation - Public
Offering of 20,000,000 Shares of its
Cumulative Preferred Stock
Ladies and Gentlemen:
We are acting as special counsel for Chase Preferred Capital Corporation, a
Delaware corporation (the "Company"), in connection with the proposed public
offering of an aggregate of 22,000,000 shares (including 2,000,000 shares
subject to the Underwriters' over-allotment option) of the Cumulative Preferred
Stock, Series A, par value $25.00 per share, of the company. In connection with
the proposed offering, the Company has filed Registration Statement No. 333-
08001 on Form S-11 (the "Registration Statement"), with the Securities and
Exchange Commission for the purpose of registering the Shares under the
Securities Act of 1933, as amended. Capitalized terms used and not defined
herein have the meaning assigned to them in the Registration Statement.
We have examined originals, or copies certified to our satisfaction, of
such corporate records of the Company, agreements and other instruments,
certificates of public officials, certificates of officers and representatives
of the Company and other documents as we have deemed it necessary to require as
a basis for the opinions hereinafter expressed. In such examination we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity with the originals of all documents
submitted to us as copies and the authenticity of the originals of such latter
documents. As to various questions of fact material to such opinions we have,
when relevant facts were not independently established, relied upon
certifications by officers
<PAGE>
- 2 -
of the Company and other appropriate persons and statements contained in the
Registration Statement.
Based upon the foregoing, and having regard to legal considerations which
we deem relevant, we are of the opinion that the discussion under the heading
"Federal Income Tax Considerations" in the Prospectus insofar as it addresses
matters of law or legal conclusions is correct in all material respects.
We hereby consent to the use of our name under the heading "Federal Income
Tax Considerations" in the Prospectus and to the filing of this opinion as
Exhibit 8 to the Registration Statement.
Very truly yours,
/s/ MILBANK, TWEED, HADLEY & McCLOY
BK/HEW
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 4 to Form S-11 of our report dated July
11, 1996 relating to the financial statement of Chase Preferred Capital
Corporation, which appears in such Prospectus. We also consent to the reference
to be under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
September 12, 1996
