<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NO. 333-48745
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
to
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CAPITAL LEASE FUNDING, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
------------------------------
85 JOHN STREET, 12TH FLOOR
NEW YORK, NEW YORK 10038
TELEPHONE: (212) 587-7676
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
WILLIAM R. POLLERT, PRESIDENT,
PAUL H. MCDOWELL, ESQ., GENERAL COUNSEL
CAPITAL LEASE FUNDING, INC.
85 JOHN STREET, 12TH FLOOR
NEW YORK, NEW YORK 10038
TELEPHONE: (212) 587-7676
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agents for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
KARSTEN GIESECKE, ESQ. RICHARD F. KADLICK, ESQ.
ALLEN CURTIS GREER, II, ESQ. MARY SUE BUTCH, ESQ.
CADWALADER, WICKERSHAM & TAFT SKADDEN, ARPS, SLATE,
100 MAIDEN LANE MEAGHER & FLOM LLP
NEW YORK, NEW YORK 10038 919 THIRD AVENUE
TELEPHONE: (212) 504-6000 NEW YORK, NEW YORK 10022
FACSIMILE: (212) 504-6666 TELEPHONE: (212) 735-3000
FACSIMILE: (212) 735-2000
</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, 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock....................... par value $.01 8,441,000 $16.00 $135,056,000 $39,842
</TABLE>
(1) Includes shares of Common Stock which may be purchased by the Underwriters
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
CAPITAL LEASE FUNDING, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OR REGISTRATION STATEMENT OF INFORMATION
REQUIRED BY ITEMS 1-30
<TABLE>
<CAPTION>
FORM S-11 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS OR PAGE REFERENCE
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Forepart of Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors
4. Determination of Offering Price...................... Underwriting
5. Dilution............................................. Dilution
6. Selling Security Holders............................. *
7. Plan of Distribution................................. Underwriting
8. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
9. Selected Financial Information....................... Selected Financial Information
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant................. Prospectus Summary; The Company
12. Policy with Respect to Certain Activities............ The Company; Yield Considerations Related to the
Company's Investments; Description of Existing Real
Estate Interests; Targeted Investments
13. Investment Policies of Registrant.................... Yield Considerations Related to The Company's
Investments
14. Description of Real Estate........................... *
15. Operating Data....................................... *
16. Tax Treatment of Registrant and Its Security
Holders............................................ Prospectus Summary; Risk Factors; Federal Income Tax
Consequences
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters...... Risk Factors; Dividend and Distribution Policy;
Principal Stockholders
18. Description of Registrant's Securities............... Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Common Stock; Federal
Income Tax Consequences
19. Legal Proceedings.................................... The Company
20. Security Ownership of Certain Beneficial Owners and
Management......................................... Principal Stockholders
21. Directors and Executive Officers..................... Directors and Executive Officers
22. Executive Compensation............................... Directors and Executive Officers
23. Certain Relationships and Related Transactions....... Certain Relationships and Related Transactions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-11 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS OR PAGE REFERENCE
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
24. Selection, Management and Custody of Registrant's
Investments........................................ Risk Factors; Description of Existing Real Estate
Interests; Targeted Investments
25. Policies with Respect to Certain Transactions........ The Company
26. Limitations of Liability............................. The Company
27. Financial Statements and Information................. Index to Financial Statements
28. Interests of Named Experts and Counsel............... Experts
29. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
30. Quantitative and Qualitative Disclosures About Market
Risk............................................... *
</TABLE>
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* Not Applicable
<PAGE>
SUBJECT TO COMPLETION DATED , 1998
PROSPECTUS
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>
7,340,000 Shares
CAPITAL LEASE FUNDING, INC.
Common Stock
Capital Lease Funding, Inc. (the "Company") is a Maryland corporation created to
continue and expand the business of Capital Lease Funding, L.P. ("CLF") which,
since 1995, has been engaged in originating and securitizing mortgage loans
secured by first liens on commercial properties supported by long-term net
leases to tenants meeting established credit rating standards. The Company's
objective is to generate income for distribution to stockholders by continuing
and expanding such activities, and to extend them to related real estate lines
of business which the Company's management believes will generate attractive
risk-adjusted returns on invested capital.
All of the 7,340,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company offered hereby are being sold by the Company
(the "Offering"). Prior to the Offering, there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
for the Common Stock will be between $14 and $16 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for inclusion on The
Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the
symbol "CLFI" subject to official notice of issuance.
SEE "RISK FACTORS" ON PAGES TO FOR A DISCUSSION OF CERTAIN MATERIAL RISKS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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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>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share.................................
Total (3).................................
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $1,300,000.
(3) The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to 1,101,000 additional shares of Common Stock on the same
terms and conditions as set forth here. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be , the
total Underwriting Discounts and Commissions will be , and the total
Proceeds to the Company will be $ . See "Underwriting."
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The shares of Common Stock are being offered by the several Underwriters subject
to delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares of Common Stock to the Underwriters will be made through
the facilities of The Depository Trust Company in New York, New York on or about
, 1998.
PRUDENTIAL SECURITIES INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
STIFEL, NICOLAUS &
COMPANY
INCORPORATED
, 1998
<PAGE>
------------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF COMMON
STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY
THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY......................................................................................... 1
The Company.............................................................................................. 1
General................................................................................................ 1
Credit Tenant Loan Business............................................................................ 2
Related Businesses..................................................................................... 5
Business Strategy...................................................................................... 6
Existing Loans and Pipeline for Future Originations.................................................... 8
Loan Origination Capability and Correspondent Network.................................................. 9
Credit Facilities...................................................................................... 10
Formation Transactions................................................................................... 10
Investment Company Act Compliance........................................................................ 12
Summary Selected Historical and Pro Forma Financial Information.......................................... 12
The Offering............................................................................................. 14
RISK FACTORS............................................................................................... 15
Risks Related to Operations............................................................................ 15
Risks Related to Credit Tenant Loans................................................................... 16
Risks Related to Availability of Financing............................................................. 17
Risks Related to Borrowings............................................................................ 17
Risks Related to Mortgage Assets....................................................................... 18
Risks Related to Investments in Real Estate............................................................ 22
Risks Related to Lease Enhancement..................................................................... 24
Risks Related to Business Strategy and Policies........................................................ 25
Risks Related to Competition........................................................................... 27
Risks Related to Personnel............................................................................. 27
Risks Related to Ownership Concentration............................................................... 27
Risks Related to Accounting for Securitization......................................................... 27
Risks Related to Software Deficiencies................................................................. 28
Dilution, Legal and Other Risks........................................................................ 28
USE OF PROCEEDS............................................................................................ 31
DIVIDEND AND DISTRIBUTION POLICY........................................................................... 31
CAPITALIZATION............................................................................................. 32
DILUTION................................................................................................... 33
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION.................................................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 36
Overview............................................................................................... 36
Historical Results--January 1997 Securitization........................................................ 36
Current Loans.......................................................................................... 37
Certain Accounting Policies............................................................................ 37
Historical Results of Operations--Three Months Ended March 31, 1998 and 1997........................... 38
Historical Results of Operations--1997 to 1996......................................................... 39
Pro Forma Results of Operations--Three Months Ended March 31, 1998..................................... 40
Pro Forma Results of Operations--1997.................................................................. 40
Liquidity and Capital Resources........................................................................ 40
Leverage............................................................................................... 41
Hedging................................................................................................ 41
Interest Rates and Inflation........................................................................... 41
Year 2000 Issues....................................................................................... 41
THE COMPANY................................................................................................ 42
General................................................................................................ 42
Credit Tenant Loan Business............................................................................ 43
Related Businesses..................................................................................... 46
Competitive Advantages................................................................................. 47
Business Strategy...................................................................................... 48
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Existing Loans and Pipeline for Future Originations.................................................... 49
Management............................................................................................. 51
Loan Origination Capability and Correspondent Network.................................................. 51
Credit Facilities...................................................................................... 52
Loan Process........................................................................................... 53
Hedging Strategy....................................................................................... 53
Securitization......................................................................................... 53
Company Policies....................................................................................... 54
Industry Overview...................................................................................... 57
Employees.............................................................................................. 58
Competition............................................................................................ 58
Certain Key Relationships.............................................................................. 58
Facilities............................................................................................. 59
Legal Proceedings...................................................................................... 59
FORMATION TRANSACTIONS..................................................................................... 60
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS.................................................. 63
Credit Tenant Loans Held in Inventory.................................................................. 63
Other Mortgage Loans................................................................................... 64
Commercial Mortgage-Backed Securities.................................................................. 65
DESCRIPTION OF EXISTING REAL ESTATE INTERESTS.............................................................. 66
Credit Tenant and Other Mortgage Loans................................................................. 66
Initial Investments; Existing Loans, Commitments and Properties........................................ 67
TARGETED INVESTMENTS....................................................................................... 71
Net Leased Real Estate................................................................................. 71
Commercial Mortgage-Backed Securities.................................................................. 72
Other Investments...................................................................................... 72
Investment in Other Entities........................................................................... 73
Foreign Investments.................................................................................... 73
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 74
Board of Directors..................................................................................... 76
Indemnification of Officers and Directors.............................................................. 77
Committees of the Board................................................................................ 77
Compensation of Directors.............................................................................. 77
Employment Agreements.................................................................................. 77
Executive Compensation................................................................................. 78
Stock Options.......................................................................................... 78
Management Shareholders' Agreement..................................................................... 78
Expenses............................................................................................... 78
Limitation of Liability and Indemnification............................................................ 78
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 81
FEDERAL INCOME TAX CONSEQUENCES............................................................................ 82
Distributions.......................................................................................... 82
Dividends to Corporate Shareholders.................................................................... 82
Taxation of Stockholders on the Disposition or Redemption of the Common Stock.......................... 83
Capital Gains and Losses............................................................................... 83
Information Reporting Requirements and Backup Withholding.............................................. 83
Taxation of Non-U.S. Stockholders...................................................................... 84
Taxation of the Company................................................................................ 85
State and Local Taxes.................................................................................. 86
ERISA CONSIDERATIONS....................................................................................... 87
DESCRIPTION OF CAPITAL STOCK............................................................................... 87
General................................................................................................ 87
Registration Rights of Certain Holders................................................................. 88
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS................................. 88
Number of Directors; Classification of the Board of Directors.......................................... 88
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Removal; Filling Vacancies............................................................................. 89
Business Combinations.................................................................................. 89
Control Share Acquisition Statute...................................................................... 89
Amendment to the Charter............................................................................... 90
Dissolution of the Company............................................................................. 90
Advance Notice of Director Nominations and New Business................................................ 90
Meetings of Shareholders............................................................................... 91
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Charter
and Bylaws........................................................................................... 91
Transfer Agent and Registrar........................................................................... 91
Reports to Shareholders................................................................................ 91
Amendment to the Charter............................................................................... 91
SHARES ELIGIBLE FOR FUTURE SALE............................................................................ 91
UNDERWRITING............................................................................................... 92
LEGAL MATTERS.............................................................................................. 94
EXPERTS.................................................................................................... 94
ADDITIONAL INFORMATION..................................................................................... 95
GLOSSARY................................................................................................... 96
FINANCIAL STATEMENTS AND INFORMATION....................................................................... F-1
</TABLE>
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED
ELSEWHERE AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT (I) THE FORMATION
TRANSACTIONS ARE CONSUMMATED, (II) THE INITIAL PUBLIC OFFERING PRICE IS $15 PER
SHARE (THE MID-POINT OF THE ANTICIPATED RANGE OF THE INITIAL PUBLIC OFFERING
PRICES SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS), AND (III) THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. UNLESS THE CONTEXT
OTHERWISE REQUIRES, AS USED HEREIN THE TERM "COMPANY" INCLUDES (A) CAPITAL LEASE
FUNDING, INC., A MARYLAND CORPORATION ("CLF, INC."), AND ANY SUBSIDIARIES WHICH
IT MAY HAVE, FROM TIME TO TIME, AND (B) CAPITAL LEASE FUNDING, L.P., A DELAWARE
LIMITED PARTNERSHIP ("CLF"), THE PREDECESSOR ENTITY TO CLF, INC.
SEE "GLOSSARY" BEGINNING ON PAGE 96 FOR THE DEFINITIONS OF CERTAIN TERMS
USED IN THIS PROSPECTUS.
THE COMPANY
GENERAL
The Company was formed on March 6, 1998, to continue the growth of CLF as a
specialty lender. Since 1995, CLF has been primarily engaged in the business of
originating, underwriting and securitizing mortgage loans secured by first liens
on commercial properties which are long-term net leased to tenants ("Credit
Tenants") whose unsecured credit rating is equal to or greater than BB- or its
equivalent (such leases, "Credit Tenant Leases," and loans to owners of real
property subject to Credit Tenant Leases, "Credit Tenant Loans"). The Company's
financing strategy is to accumulate Credit Tenant Loans and periodically to
securitize them with the intention of matching the terms of its assets with the
terms of its long-term liabilities. The Company believes that its national
network of loan origination correspondents, underwriting and loan processing
systems, securitization experience and loan product innovations have established
the Company as a leading originator and securitizer of Credit Tenant Loans and
that continued innovation will permit the Company to expand into other related
real estate investment activities.
Since 1995, the Company has closed over 120 Credit Tenant Loans with an
aggregate original principal amount exceeding $480 million. The Company expects
to continue to fund all of its loans through warehouse and other lines of credit
which, upon closing of this Offering, will aggregate approximately $930 million
and will be provided by NationsBank, N.A. ("NationsBank"), and Prudential
Securities Credit Corporation ("Prudential Credit").
The Company's revenues are principally derived from the spread between
interest revenues from its loans and the cost it incurs on its borrowings. The
Company's business strategy is to grow its revenues both through increasing loan
origination volumes and increasing the net interest spread on its loans and
other investments. This increased spread may occur from the origination of
higher margin products and/or from decreasing the Company's cost of funding. The
Company's strategy is to securitize its Credit Tenant Loans in order to lower
its costs of funds, through securitizations or through the sale of whole loans.
CTL Securitizations involve the formation and utilization of a special
single-purpose entity into which is placed a pool of multiple borrower Credit
Tenant Loans involving multiple Credit Tenants. The Credit Tenant Loans in CTL
Securitization pools are either "bond" leases or enhanced to "bond" lease status
so that these loans are rated on the quality of the Credit Tenant rather than on
the value of the underlying real property. The ratings received for any pool
will be dependent, in part, on the size of the pool and the diversity of the
Credit Tenant Loans. A CTL Securitization, as structured in the past by CLF,
differs from other mortgage securitizations because of the reliance of a Credit
Tenant Loan on the credit rating of the underlying Credit Tenant and the
expected cash flow therefrom. This reliance upon the expected cash flow from the
applicable Credit Tenant, rather than the underlying value of the real property,
allows the Company to underwrite higher loan to value loans with prepayment
protection provisions that increase the proceeds available to the borrower.
1
<PAGE>
In 1997, CLF completed the first ever CTL Securitization, which involved a
variety of Credit Tenants and multiple enhanced net leased properties. This
transaction involved a private placement of approximately $130 million of
various classes of securities backed by a pool of 30 Credit Tenant Loans with 13
Credit Tenants. As of May 15, 1998, CLF held 93 Credit Tenant Loans with an
aggregate original principal balance exceeding $350 million (the "Existing
Loans"). In addition, as of May 15, 1998, CLF has issued 88 commitments to fund
further Credit Tenant Loans with an aggregate committed principal balance of
approximately $402 million (the "Committed Loans"). Furthermore, as of May 15,
1998, the Company has purchased or committed to purchase real property net
leased to tenants with an aggregate purchase price of approximately $12 million
(the "Purchase Commitments"). In connection with the Formation Transactions, the
Company will acquire all of the existing business of CLF, including the Existing
Loans, the Committed Loans and the Purchase Commitments, as well as its pipeline
of outstanding loan applications and term sheets (which, as of May 15, 1998,
totaled approximately $623 million), and the business which may be generated
therefrom. See "----Existing Loans and Pipeline for Future Originations." The
Company intends to engage in a transaction to securitize all or a portion of the
Existing Loans and certain of the Committed Loans following completion of the
Offering and expects to securitize the remaining Committed Loans in future
transactions.
The Company's objective is to maximize stockholder value by creating an
on-going and increasing cash flow stream available for distribution through
originating and securitizing Credit Tenant Loans and by investing in related net
leased real estate assets. Upon completion of the Offering, the Company intends
to continue to expand its Credit Tenant Loan business and to expand into related
real estate lines of business. The Company expects that its business expansion
will enhance the growth of its existing Credit Tenant Loan business. These
related lines of business include Mezzanine Construction Lending, the purchase
of real estate net leased to Credit Tenants (generally in conjunction with a
Credit Tenant Loan), investment in the Subordinate Interests in securitized
pools of the Company's Credit Tenant Loans, and selective investments in
Subordinate Interests in other CMBS (particularly those which include, as a
component thereof, Credit Tenant Loans).
The Company has sustained negative net income from operating and investing
activities in each year since its inception in 1995. The negative net income was
principally the result of factors such as the Company's historic cost of
borrowing and degree of leverage, expenses incurred in establishing a national
origination network, and investments in product development, marketing and loan
processing systems, a lack of historic loan origination volume, and the
completion of only a single CTL Securitization which was of limited size and
diversity, during the past three years. There is no assurance that the Company
will be profitable in the future, and it should be noted that the Company's
experience in CTL Securitization transactions is limited to the one CTL
Securitization accomplished in January 1997, and the Company's future business
plans call for it to expand into related real estate lines of business in which
it has no or limited experience. For certain of these new businesses, the
Company will require financing, the availability of which will be dependent upon
numerous factors, including, possibly, the Company's ability to attain positive
cash flow or net income.
The Company's principal executive offices are located at 85 John Street,
12th Floor, New York, New York 10038, telephone number (212) 587-7676. The
Company is a Maryland corporation.
CREDIT TENANT LOAN BUSINESS
The financing of Credit Tenant Loans through securitizations of pools of
diversified credits in the capital markets is a new financing technique and was
pioneered by the Company. Credit Tenant Loans are mortgage loans made by the
Company to owners of commercial properties net leased to Credit Tenants under
Credit Tenant Leases. Each Credit Tenant Loan is secured by a first mortgage on
a commercial real property subject to a long-term net lease to a Credit Tenant,
and by a collateral assignment of the Credit Tenant Lease and all rents due
under the lease.
2
<PAGE>
The Company primarily focuses on making loans on properties net leased to
Credit Tenants. This focus differentiates the Company from conventional real
estate lenders. The typical Credit Tenant Loan (other than the Company's
Extended Term Loans) made by the Company is fully amortized by scheduled rent
payments under the Credit Tenant Lease (or payments under insurance policies and
other mechanisms designed to protect against defaults in certain events where
sufficient rent might not otherwise be payable or to replace other required
payments under the applicable loan). Furthermore, under the Company's Credit
Tenant Loans, prepayments are available only after a period of time (generally
eight years) and then only with a yield maintenance premium or a suitable
defeasance mechanism. As a result, the Credit Tenant Loans originated by the
Company are analyzed principally on the basis of the credit of the applicable
Credit Tenant and whether the stream of rental payments under the applicable
Credit Tenant Lease and such insurance policies and other mechanisms (rather
than liquidation value of the property) will be sufficient to pay all amounts
due under the loan. Consequently, the Company's Credit Tenant Loans tend to have
debt service coverage ratios lower than conventional mortgage loans (approaching
a ratio of scheduled rent payments to debt service under the loan of 1.0) and
higher loan-to-value ratios (95-100%).
The credit underwriting analysis for conventional real estate lending relies
heavily on the liquidation value of collateral securing the loan and therefore
loan proceeds are generally limited to amounts significantly lower than the
appraised value of the applicable real property. Even where the mortgaged
property is net leased to a Credit Tenant, the underwriting of such Mortgage
Loans has nevertheless typically been done largely on the basis of an assessment
of the liquidation value of the mortgaged property (taking into account the
anticipated cash flows from the lease as appropriate) so long as (i) the lease
payments are insufficient to pay interest on and fully amortize the loan (if,
for example, a portion of the loan balance remains outstanding at the end of the
lease term) or (ii) the tenant has significant rights to terminate the lease or
abate rent. Consequently, the original principal balance of such loans is
limited by a requirement to maintain a property liquidation value significantly
in excess of the loan balance.
Historically, Credit Tenant Loans of the type made by the Company were only
available when the applicable Credit Tenant Lease was a "bond" lease. In a
"bond" lease the Credit Tenant is responsible for every monetary obligation
associated with managing, owning, developing and operating the leased premises
including, but not limited to the costs associated with utilities, taxes,
insurance, maintenance, repairs and losses due to casualty and condemnation. As
a result, the Credit Tenant's ability to terminate a lease or abate rent on a
"bond" lease (other than as a result of bankruptcy) is non-existent or available
under extremely limited circumstances. Consequently, loans secured by a "bond"
lease are analyzed as if they were a direct obligation of the applicable tenant
and can be expected to receive credit ratings equivalent to the unsecured debt
rating of the applicable Credit Tenants.
A net lease (often referred to as a double- or triple-net lease) generally
is a lease on a long-term basis (ten years or more) to tenants who are
responsible for paying all or many of the costs of owning, operating, and
maintaining the leased property during the term of the lease, in addition to the
payment of a monthly net rent to the landlord for the use and occupancy of the
premises. Under many net leases, in contrast to a "bond" lease, a tenant has the
right to terminate the applicable lease or abate rent in certain circumstances,
such as the occurrence of significant casualty loss or condemnation, or failure
by the landlord to maintain or repair the property, provide adequate parking,
maintain common areas or comply with affirmative covenants of the lease, or if
the landlord engages in or promotes a competing property within a specified
radius of the property or otherwise violates negative covenants in the lease.
Properties subject to net leases which do not qualify as "bond" leases have
been traditionally financed as conventional real estate loans. The use of the
Company's specialized Lease Enhancement mechanisms substantially mitigates the
risk of a potential interruption in the rental stream so that such Credit Tenant
Leases can be evaluated as if they were "bond" leases. Upon securitization, a
properly structured Credit Tenant Loan and Credit Tenant Lease with the
appropriate Lease Enhancements can be expected to receive a rating from one or
more of the Rating Agencies equivalent to the unsecured debt rating of the
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<PAGE>
applicable Credit Tenant. The expected receipt of such a rating increases the
amount which may be borrowed against the collateral of the Credit Tenant Loan
and Lease (as compared to a conventional real estate loan), enabling the Company
to compete successfully for loan originations, while preserving the profits
available to the Company in the securitization of Credit Tenant Loans.
The Company's Lease Enhancement mechanisms consist primarily of an
integrated set of specialized insurance policies, servicer advancing mechanisms,
loan documents, and various borrower and expense reserve accounts. The
specialized insurance policies are non-cancellable during the term of the Credit
Tenant Loan and have been designed to protect the holder of the mortgage from
(i) rent abatement or lease termination under the associated Credit Tenant Lease
as a result of a casualty or condemnation event, (ii) under the Company's
Extended Term Loans, failure of the borrower to pay the balance of the mortgage
outstanding, if any, at the expiration of the initial term of the Credit Tenant
Lease, or (iii) under the Company's Consumer Price Indexed Loans, increases in
rent. The servicer advancing mechanisms and reserve funds (combined with
specialized borrower recourse provisions where appropriate) have been
established to support the landlord's maintenance and other obligations under a
Credit Lease in order to mitigate the risk of rent abatement or lease
termination by the Credit Tenant due to the failure of a landlord to perform his
obligations.
The Company pioneered the development of many of these Lease Enhancement
mechanisms. In addition, the Company continues to design creative and new
financing programs which enable the Company to offer borrowers a wide array of
Credit Tenant Loan programs to best meet their needs. The Company believes that
by offering these financing programs in addition to increasing the number of
currently available programs, it will continue to be a leader in the Credit
Tenant Loan business and increase its market penetration. The Company expects
that proceeds from the Offering will enable the Company to continue to develop
and aggressively to promote these programs.
CONSTRUCTION/PERMANENT LOANS. The Company has developed a
"Construction/Permanent" program with loans made thereunder
("Construction/Permanent Loans"), under which a developer/borrower may obtain
both a construction loan from a commercial bank and a permanent loan from the
Company with one set of documents in one integrated closing process. The program
has been marketed with NationsBank under the name "1TC" for "One Time Close."
This program enables a borrower (provided that a pre-construction Credit Tenant
Lease is in place) to enter into a commitment and final documentation for
permanent financing at an early stage without additional transaction costs, and
also allows the borrower to "lock in" an interest rate for the permanent loan at
the time the construction loan is made. The 1TC program (introduced in August
1997) enables the Company to build and manage its loan pipeline by arranging for
permanent financing earlier in the borrowing cycle. As of May 15, 1998, the
Company had committed to fund approximately $168 million in the aggregate of
Construction/Permanent Loans, including approximately $64 million for which
NationsBank has commenced advances under the construction loan portion under the
1TC portion. In addition, in March 1998, the first 1TC loan completed the
construction phase and the permanent loan was funded by the Company. The Company
is developing similar programs with other selected banks that make construction
loans on net leased properties.
EXTENDED-TERM LOANS. Although Credit Tenant Loans depend on Credit Tenant
Lease payments and generally are fully amortized over the initial term of the
Credit Tenant Lease, the Company's "Extended-Term Loan" program (introduced in
May 1997) allows a borrower to extend the amortization period of the Credit
Tenant Loan beyond the initial term of the associated Credit Tenant Lease. As a
result of extending the amortization period, loan proceeds can be increased or
periodic debt service can be reduced (making more cash flow available to the
borrower), enhancing certain tax benefits that may be made available to
borrowers. As of May 15, 1998, the Company had funded approximately $54 million
in additional aggregate principal amount of extended-term loans and has
committed to fund approximately $98 million in aggregate principal of
extended-term loans. This program has been marketed under the name the "Extended
Amortization Program."
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CONSUMER PRICE INDEXED LOANS. The Company is a discounted cash flow lender
and its Credit Tenant Loans typically depend upon repayment from the fixed
rental stream under the Credit Tenant Lease. The Company's consumer price index
("CPI") program (loans made thereunder, "CPI Loans") (introduced in March 1998)
makes available additional loan proceeds based upon a portion of expected Credit
Tenant Lease rental increases as a result of contractual CPI adjustments
(typically up to two percent per annum) as if they were fixed and determinable
at the time of execution of the Credit Tenant Lease. As of May 15, 1998, the
Company has committed to fund one CPI Loan with an estimated principal balance
of approximately $22 million.
RELATED BUSINESSES
As part of the Company's growth plans, the Company intends to expand into
real estate lines of business which are related to, but do not consist solely
of, Credit Tenant Loans. These additional activities are an outgrowth of the
Credit Tenant Loan business, and their development uses many of the same product
innovations and personnel skills that have permitted the Company to develop and
grow its Credit Tenant Loan business. The related real estate lines of business
to which the Company has devoted management attention and development efforts to
date are:
MEZZANINE CONSTRUCTION LOANS. Under the Company's "Mezzanine Construction"
Loan program, the Company will lend to a developer (provided that an executed
Credit Tenant Lease is in place) up to the difference between a developer's
project costs and the proceeds (generally 75% to 90% of the project costs) of
the available construction loan. The Company will only make Mezzanine
Construction Loans to developers who will qualify for a permanent Credit Tenant
Loan with the Company (based on the level of rent payments under the Credit
Tenant Lease) in an amount significantly in excess of the amounts required to
pay the senior construction loan and Mezzanine Construction Loan and return the
borrower's invested capital. The Company expects these transactions to generate
yields superior to conventional bank construction loan yields and significantly
better than Credit Tenant Loans. Furthermore, one of the design features of this
product is to enable the Company to develop relationships with borrowers earlier
in the construction and borrowing cycle. The Company has a dedicated credit
facility with one of its lenders for making Mezzanine Construction Loans. These
loans will be secured by second mortgages and/or pledges of ownership interests
in the borrower. In addition, based upon an analysis of the creditworthiness of
the borrower, these loans will be full recourse to a creditworthy borrower or
personally guaranteed by the principals of the borrower during the construction
period.
EQUITY INVESTMENTS IN REAL ESTATE. In connection with its Credit Tenant
Loan business, the Company frequently is presented with opportunities to
purchase net leased properties from developers, other owners or tenants of such
properties. From time to time, the Company intends to purchase such a property,
make its usual Credit Tenant Loan upon such property (to be securitized later)
and retain ownership of the property. Because net leased properties are
generally required to be maintained by tenants, the Company does not expect to
incur significant management costs with respect to such properties.
COMMERCIAL MORTGAGE-BACKED SECURITIES. In its Credit Tenant Loan business,
the Company will issue collateralized CTL Securitizations backed by pools of
Credit Tenant Loans. The Company anticipates that it will retain the Subordinate
Interests of its Credit Tenant Loans depending upon the then current market
condition and its business needs. Management believes that the Company is in a
unique position to analyze whether the Subordinate Interests of its CTL
Securitizations provide an attractive investment on an adjusted risk/return
basis because the Company originates and underwrites each Credit Tenant Loan and
is familiar with the applicable Lease Enhancements. Having developed the
specialized skills to analyze the risks associated with investing in the
Subordinate Interests in its own pools, management believes that the Company is
well-positioned to analyze and invest in interests in CMBS issued by unrelated
third parties (particularly those which include, as a component thereof, Credit
Tenant Loans). The Company intends to invest primarily in (i) Subordinate
Interests in CMBS pools originated by the Company and others, including
Investment Grade, Non-Investment Grade and, in the case of those originated by
the Company,
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<PAGE>
unrated interests, and (ii) interest-only classes in some of such CMBS pools.
Subordinate Interests and interest-only classes generally afford a higher yield
and entail greater risk than more senior investment grade securities.
OTHER INVESTMENTS. The Company intends to engage in other real estate
related businesses from time to time, which management believes are
complementary to its Credit Tenant Loan business. These investments may include
making equity investments in, and/or Credit Tenant Loans on, real properties net
leased to Credit Tenants in selected international markets. The Company may also
invest in interests in REITs, registered investment companies, partnerships and
other investment funds and real estate operating companies involved in the
ownership of real estate interests or the rendering of real estate-related
services.
BUSINESS STRATEGY
The Company's principal business objective is to continue to focus on and
expand its lending and securitization business while at the same time
selectively expanding into related, value-added real estate lines of business in
a manner that generates attractive investment returns on a risk adjusted basis.
The Company has a specialized and experienced staff (a number of whom have
been previously employed by the real estate departments of major financial
institutions and law firms) which is focused principally on structuring,
underwriting and making Credit Tenant Loans which meet Rating Agency criteria
for such loans and on making the transactional and credit judgments required to
make Credit Tenant Loans. CLF's entire staff is expected to be employed by the
Company upon completion of the Offering. The Company has continuously engineered
its loan underwriting and closing process with the intention of eliminating
redundant procedures and speedily approving loans to prospective borrowers. The
Company believes that its current process is one of the most streamlined and
comprehensive in the commercial mortgage lending industry.
Management believes that the real estate industry has been undergoing a
significant restructuring which has, to some degree, been led by the increased
prominence of publicly held real estate companies (such as REITs) and the
increasing importance of capital markets in real estate financing. The Company
believes that this industry restructuring offers the Company significant
opportunities to expand its existing business, offer new products and expand
into related businesses.
The Company plans to build on its streamlined underwriting and processing
organization, national correspondent origination network, expertise in Credit
Tenant Leases and Credit Tenant Loans, product innovations and increased capital
as a result of the Offering to achieve its growth and profit objectives, through
the following:
- EXPANDING EXISTING BUSINESS. The Company intends to continue to build on
its growing market presence and increasing borrower base to expand
origination volume in existing business lines.
- INTRODUCING VALUE-ADDED, INNOVATIVE PRODUCTS. Over the past twelve months
the Company has introduced a number of value-added products that it
expects will enhance its returns. These products include
Construction/Permanent Loans, Extended-Term Loans, CPI Loans and Mezzanine
Construction Loans. The Company continuously works to develop new
financing products and investment opportunities and expects to commit to
invest in such products or investments from time to time. The Company
believes that its strategy of continuing product innovation will permit it
to differentiate itself and anticipate opportunities to provide greater
services and to remain efficient and competitive in its areas of focus and
expertise. As part of its product development strategy, the Company
designs these products to develop relationships with borrowers and Credit
Tenants earlier in the construction and borrowing cycle as a means of
expanding and better controlling loan origination.
- EXPANDING THE COMPANY'S MARKET REACH. In the past, the Company's strategy
has been to finance properties net leased to Investment Grade tenants. The
Company believes that it can utilize its
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<PAGE>
existing credit tenant financing programs to make and securitize Credit
Tenant Loans on favorable terms on properties net leased to BB Grade
tenants. Management believes that the market for financing properties net
leased to tenants with BB Grade ratings represents a large and attractive
business opportunity. In addition, the Company plans to continue to build
on its relationships with Credit Tenants to develop innovative financing
alternatives directly with Credit Tenants.
- ACQUIRING SELECTED PROPERTY LEASED TO A CREDIT TENANT. From time to time,
the Company is presented with the opportunity to purchase real property
net leased to a Credit Tenant. The Company intends to purchase selected
properties and generally will simultaneously finance such properties with
Credit Tenant Loans. The Company would then seek to securitize the Credit
Tenant Loans, while retaining the ownership of the properties.
Although the Company presently outsources servicing, the Company may explore
acting as a primary servicer, subservicer or special servicer.
In addition, the Company believes that many of the technologies that have
supported the growth of the capital markets in U.S. commercial real estate are
readily exportable to offshore markets. As these offshore markets continue to
develop, the Company believes that U.S. firms will play an important role
(primarily in the early stages of development of such markets). Management
believes that the Company will be well positioned to expand into selected
international markets as a result of its position as a market innovator and its
expertise in Credit Tenant Loans. For example, the Company has established a
relationship with a leading United Kingdom real estate law firm and real estate
services companies who could act as advisors and have the ability to direct the
Company to sources of origination. The Company may explore such opportunities as
they arise.
The Company believes that its standardized procedures and integrated systems
enable the Company and its employees efficiently to manage a large and
increasing volume of transactions while maintaining underwriting quality and
high levels of service to borrowers. In addition, by coordinating the Company's
automated loan tracking and document production systems with those of its
outside legal counsel, the Company has been able to improve efficiency and
reduce the legal costs associated with closing loans.
As its loan volume grows, the Company expects to continue to improve cost
efficiency by modestly expanding its internal loan closing support staff and
relying less on outside service providers. The Company also plans to continue to
refine and upgrade its systems and loan processing infrastructure to reduce
costs and improve efficiency and to support its growth strategy by selectively
adding employees and expanding its marketing and sales effort.
In 1997, the Company completed the first securitization of a pool of Credit
Tenant Loans with a variety of Credit Tenants and multiple properties backed by
enhanced leases with the sale of approximately $130 million of mortgage-backed
pass-through certificates. This securitization was rated by Duff & Phelps Credit
Rating Co. ("DCR") and Fitch IBCA, Inc. ("Fitch"). The effectiveness of the
Company's underwriting practices is reflected in the fact that of approximately
$345 million of Company-underwritten Credit Tenant Loans reviewed to date
(including those included in the Company's securitization and certain Credit
Tenant Loans since made by the Company) by DCR, Fitch or S&P, none were rejected
as not meeting Rating Agency requirements for Credit Tenant Loans. Furthermore,
at May 15, 1998, of the 93 outstanding loans owned by the Company, none were
delinquent more than 30 days or are otherwise nonperforming.
Exposure to changes in underlying interest rates can have a great effect on
the value and profitability of the Company's Credit Tenant Loans, prior to
securitization. The Company has accordingly employed a hedging strategy designed
to mitigate the effect that movements in market rates have on its Credit Tenant
Loans prior to securitization. See "The Company--Hedging Strategy."
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EXISTING LOANS AND PIPELINE FOR FUTURE ORIGINATIONS
In the Formation Transactions, the Company will acquire CLF's portfolio of
Existing Loans having an aggregate outstanding principal balance at May 15,
1998, of approximately $342 million. In addition, the Company will assume
commitments made by CLF to fund approximately $402 million of Credit Tenant
Loans (subject to completion of the Company's underwriting process). These
commitments generally are expected to fund within the next twelve months.
Management believes that the Credit Tenants underlying approximately 92% in
aggregate principal amount of the Existing Loans are rated Investment Grade
(with the remaining 8% being rated BB Grade) and the Credit Tenants underlying
approximately 98%, of the expected aggregate principal amount of the Committed
Loans are rated Investment Grade. The Company expects to securitize all or part
of these loans in 1998. The Company's current loan pool is larger and more
diversified than the pool for the Company's previous securitization.
Consequently, the post-Offering securitization (based upon a preliminary review
by the Rating Agencies of a large portion of this loan pool) is expected by
management to result in subordination levels more favorable to the Company than
were obtained in the first securitization. In addition, the Company will assume
commitments by CLF to purchase Net Leased Real Estate in the amount of
approximately $12 million. In each case, the amount of the loans and commitments
listed above are as of May 15, 1998 and are expected to increase between such
date and the closing of the Offering.
The Company's pipeline includes potential loans in various stages of
development. The Company receives requests for Credit Tenant Lease financing on
a daily basis. At any given time, the Company may have hundreds of potential
transactions in different stages in the Company's loan qualification, pricing
and due diligence process. Once a lease has been reviewed by the Company and is
determined to be financeable under the Company's Credit Tenant Loan program, the
Company will, at a borrower's request, issue a term sheet (a "Term Sheet") which
briefly outlines the pricing and terms under which the Company proposes to
finance the property (such potential loan, after delivery of the Term Sheet,
being at the "Term Sheet Stage"). Upon acceptance of the Term Sheet by a
borrower, the Company issues a form of application which sets forth the detailed
terms of the transaction (the potential loan then being at the "Application
Stage"). Once a borrower signs an application and delivers it to the Company
with a deposit and the application is accepted, subject to the underwriting
process by the Company's loan committee, the Company considers such loans to be
Committed Loans, and the formal due diligence process begins. The Company
generally closes a Committed Loan in four to eight weeks. At any time from the
date of acceptance of the application until closing, the borrower may lock in
the interest rate on the loan by payment of an additional fee. While an
application may be declined by the Company upon completion of the Company's
underwriting process, or the prospective borrower may forfeit its deposit and
withdraw the application prior to closing, management believes, based on the
Company's historical operating experience, that the substantial majority of
these Committed Loans result in closed loans. Furthermore, it has been the
Company's experience, that once the Company has committed to make a Credit
Tenant Loan and has locked in an interest rate (receiving a rate-lock fee),
closing of that loan is relatively assured ("Rate-Locked Loans"). Management
believes, based on the Company's operating experience, that a significant
portion of loans in the Application Stage and a lesser percentage of loans in
the Term Sheet Stage, respectively, will move into the category of Committed
Loans. Since the Company receives requests for loan financing daily, the
Company's loan pipeline frequently changes as new transactions are added and
others are removed.
Since commencing operations in 1995, the volume of closed and Rate-Locked
Loans increased from $22.7 million in calendar year 1995 to $145.7 million in
calendar year 1996 to $351.1 million in calendar year 1997. In the first quarter
(historically the slowest quarter of the year) of 1998, the Company generated
closed and Rate-Locked Loans totaling approximately $115 million, as compared
with $49 million during the same period in 1997.
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Management believes that loan originations will continue to grow throughout
1998 as a result of the following factors:
- As of May 15, 1998, the Company's total pipeline of 265 loans either under
various stages of negotiation or under due diligence totaled approximately
$1.3 billion, the largest such loan having a principal amount of $36
million. Of this pipeline, the Company had 88 Committed Loans (potential
loans as to which the Company had accepted signed loan applications and
commenced due diligence) with respect to approximately $402 million in
Credit Tenant Loans. In addition, at such date the Company had potential
loans in the Application Stage and Term Sheet Stage in the amount of $239
million, and $383 million, respectively.
- The Company believes that its Extended-Term Loans and the
Construction/Permanent Loan programs, which were introduced between May
and July of 1997, are gaining greater market awareness and acceptance,
resulting in increased year-over-year loan origination. Furthermore, the
Company expects to increase its volume of these loans through the year. As
of May 15, 1998, the Company had funded approximately $54 million in
Extended-Term Loans and had committed to make an additional $98 million of
Extended-Term Loans. Furthermore, as of May 15, 1998, the Company had
committed to fund approximately $168 million in aggregate principal amount
of Construction/Permanent Loans.
- New financing and property acquisition programs introduced in the first
quarter of 1998 are expected to generate additional loans throughout 1998.
These programs include expanding the Company's loan programs to include BB
Grade Tenants (which management believes is a large potential market for
its programs), Mezzanine Construction Loans and Consumer Product Index
financing. In addition, the Company anticipates acquiring properties net
leased to Credit Tenants on which it expects to place its Credit Tenant
Loans.
Management believes, based on the foregoing factors, the volume of Credit
Tenant Loans closed since January 1, 1998 and management's current expectation
of additional loans it expects to originate and close through the remainder of
1998 (based on a review of the daily flow of leases received by the Company,
outstanding term sheets and applications, discussions with correspondents about
market conditions and future potential transactions, expected completion of
construction projects in which the Company is providing a permanent loan
takeout, and other factors), that, if current market conditions continue and if
historical percentages of potential loans in the Term Sheet Stage, Application
Stage, Committed Loans and Rate-Locked converting to closed loans continue, the
Company's loan originations will continue to grow during calendar year 1998.
There can be no assurance, however, that the Company's growth will continue.
LOAN ORIGINATION CAPABILITY AND CORRESPONDENT NETWORK
The principal source of origination for the Company's business is its
national network of independent correspondent mortgage brokers. The Company has
established relationships with over 500 individual mortgage brokers at over 60
correspondent mortgage brokerage companies. These correspondents operate offices
in more than 100 locations throughout the United States and maintain close
working relationships with the borrowers they represent. The Company has entered
into a written or oral arrangement with each of its correspondent brokers, who
are compensated by the applicable borrower.
Credit Tenant Lease financing demands of mortgage brokers specialized
knowledge and skills not generally required for traditional real estate
financing activities. The Company dedicates significant resources to training
correspondent mortgage brokers in all aspects of Credit Tenant Lease financing
and routinely presents on-site training seminars throughout the United States.
Training seminars are supplemented with bimonthly newsletters, brochures and
other written material intended to keep correspondents up to date on the latest
underwriting requirements for Credit Tenant Loans and Credit Tenant Leases,
Lease Enhancements, and changes in tenant credit ratings, as well as providing
up-to-date information on the Company's latest innovative financing programs.
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A comprehensive marketing, advertising and public relations program supports
correspondent loan origination efforts. The objective of the program has been to
establish and build the Company's name recognition and credibility as a
specialty lender and to promote the Company's specialized Credit Tenant
financing programs. The Company believes it has been successful in achieving its
objectives of market awareness and prominence in the Credit Tenant Loan market.
In addition to the Company's training and marketing support to
correspondents, the Company's executives and staff periodically assist
correspondents in originating loans by meeting with potential borrowers to
explain various aspects of the Credit Tenant Loan program, and by assisting in
structuring transactions to best meet the borrower's requirements.
The Company believes that its ongoing marketing efforts combined with
comprehensive training programs are key factors not only in attracting and
retaining productive correspondent mortgage brokers but also in improving their
productivity. Furthermore, the Company believes that it has streamlined its loan
approval processes and centralized loan underwriting as well as many
transactional and structuring matters to make the origination of Credit Tenant
Loans with the Company efficient for its correspondents. As a result, the
Company believes its correspondents can focus on identifying possible additional
borrowers for Credit Tenant Loans and facilitating the loan closing process,
rather than focusing solely on underwriting each loan. The Company constantly
reviews correspondent performance and has been able to attract experienced
mortgage brokers in a correspondent relationship to replace correspondents with
whom the Company is not satisfied.
In addition to its ability to originate loans for its principal business
lines, the Company believes that its correspondent network can be utilized
without significant further training to find opportunities that will be eligible
for the related business lines described above.
CREDIT FACILITIES
The Company has warehouse credit facilities provided by NationsBank (the
"NationsBank Warehouse") and Prudential Credit (the "Prudential Warehouse"). CLF
entered into the NationsBank Warehouse in the initial amount of $350 million in
July 1996. In April 1998, the facility was temporarily increased to $550 million
for a limited period ending on September 1, 1998, and the Company may not choose
to seek a continuation of this increase. The NationsBank Warehouse scheduled
expiration is on April 1, 2000. The NationsBank Warehouse is used primarily to
fund and hold the Company's Credit Tenant Loans prior to securitization. The
Company pledges its Credit Tenant Loans as collateral under the NationsBank
Warehouse.
The Company has entered into the Prudential Warehouse in the initial amount
of $100 million in May 1998 which will increase to $350 million upon closing of
the Offering. The Prudential Warehouse will expire one year from the date of
closing of the Offering. As with the NationsBank Warehouse, the Company intends
to utilize the Prudential Warehouse for purposes of funding and holding the
Company's Credit Tenant Loans prior to securitization. In addition, the Company
has entered into a Mezzanine Construction Loan financing facility (the
"Mezzanine Construction Facility") with Prudential Credit in the initial amount
of $30 million in May 1998. The Mezzanine Construction Facility will be used by
the Company to fund its Mezzanine Construction Loans.
The availability of financing to the Company under the Warehouse Credit
Facilities will be subject to compliance by the Company with the terms and
conditions established for each such facility.
FORMATION TRANSACTIONS
The assets, liabilities and equity of CLF will be contributed to CLF, Inc.,
on the date of issuance of the shares offered hereby. The assets of the Company
will include the Existing Loans and Committed Loans
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(which, as of May 15, 1998, were in the aggregate amount of approximately $342
million and $402 million, respectively), subject to the existing indebtedness,
as well as all of the operating assets of CLF.
A series of integrated transactions (the "Formation Transactions") will be
entered into initially to establish the structure of CLF, Inc. and its business.
The Formation Transactions include the following transactions, which will have
occurred or will occur prior to or upon closing of the Offering:
A. The limited partners of CLF will transfer their limited partnership
interests to CLF, Inc. in exchange for Common Stock of CLF, Inc. and cash.
More specifically, Hyperion Partners II L.P., South Ferry #2, L.P., CLF
Investors LLC, and the Class C limited partners will transfer their limited
partnership interests in CLF for shares of Common Stock of CLF, Inc.
Hyperion Partners II L.P. and South Ferry #2, L.P. will transfer their
preferred limited partnership interests in CLF to CLF, Inc. for an amount
projected to be approximately $21.4 million.
B. CLF Holdings, Inc., one of the two general partners of CLF, will
transfer its general partnership interest in CLF for Common Stock of CLF,
Inc. CLFC HPII Inc. (the other general partner of CLF), will transfer its
general partnership interest in CLF to CLF, Inc. in exchange for Common
Stock of CLF, Inc. and cash of approximately $500,000.
C. Upon the completion of these transfers, CLF, Inc. will own all of
the interests in CLF and CLF will automatically liquidate in accordance with
applicable law.
The number of shares of the Company and the cash that each equity ownership
class of CLF will receive in conjunction with this transaction, in accordance
with the Partnership agreement, is as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES CASH
---------- -------------
<S> <C> <C>
General partners:
CLF Holdings, Inc. ............................................. 275,308 --
CLFC HP II, Inc. ............................................... 39,225 $ 215,862
Limited partners:
Preferred....................................................... -- 21,370,295
Class A......................................................... 1,922,007 290,000
Class B......................................................... 1,250,094 --
Class C......................................................... 1,053,366 --
---------- -------------
4,540,000 $ 21,876,157
---------- -------------
---------- -------------
</TABLE>
The Company will record the predecessor historical balance sheet as of March
31, 1998, including the assets, assumption of liabilities and deficits at their
historical amounts in accordance with purchase accounting.
As a result of the Formation Transactions, upon completion of the Offering,
CLF, Inc. will succeed to all of the assets and liabilities of CLF. See
"Formation Transactions."
The Company expects that it will originate all of its future loans through a
newly-formed subsidiary limited partnership (a Delaware limited partnership
which, upon conclusion of the Formation Transactions will be renamed "Capital
Lease Funding, L.P.") of which the Company directly owns 100% of the limited
partnership interests and, indirectly through a wholly owned subsidiary, 100% of
the general partnership interests. In addition, the Company expects that it will
purchase real estate through individual Delaware business trusts of which it
will be the sole beneficiary.
As a result of the Formation Transactions, including the Offering, the
existing investors in CLF, as a group (including substantially all of the
Company's employees), and purchasers in the Offering, as a group, will own 38%
and 62%, respectively, of the then outstanding Common Stock of CLF, Inc.
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INVESTMENT COMPANY ACT COMPLIANCE
The Company will regularly monitor its portfolio of assets and the income
from such assets, including income from its hedging strategies, to maintain its
exclusion from regulation under the Investment Company Act.
SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The summary selected historical financial information set forth below as of
and for the years ended December 31, 1997 and 1996, and for the period September
29 (commencement of operations) through December 31, 1995, have been derived
from the consolidated financial statements of Capital Lease Funding, L.P.
included elsewhere herein, which have been audited by Ernst & Young LLP,
independent auditors, and should be read in conjunction with those consolidated
financial statements (including the notes thereto) and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
appearing elsewhere in this Prospectus.
The results shown below reflect significant investments in the future growth
of its business, including the development of its lending and securitization
programs, from which the Company expects to reap an ongoing benefit. For
example, the Company's operating losses to date reflect the substantial
investments the Company has made to enable the Company to achieve its growth
plans, including investments in personnel, product development, securitization
related documents and the development and training of a national correspondent
network. As a result of these investments, management believes that its staff is
largely sufficient in terms of size, expertise and training to achieve the
Company's projected growth, and that its innovative programs provide it with
competitive advantages.
The Company made a strategic decision to securitize a small developmental
pool of Credit Tenant Loans in January 1997. This initial pool's smaller size
and characteristics, as well as associated non-recurring expenses of
approximately $0.7 million, resulted in an economically inefficient transaction.
However, this initial securitization resulted in a number of benefits for the
Company. The Company received preliminary subordination levels from the Rating
Agencies in connection with a proposed second securitization during the fourth
quarter of 1997. These preliminary subordination levels were significantly more
favorable than those obtained in the first securitization, reflecting the
increased size and diversity of the proposed pool. Management believes that
pools of Credit Tenant Loans greater than $200 million and involving more than
10 Credit Tenants can be efficiently and profitably securitized. Management
estimates that the value of the Company's loans exceeded their carrying value by
$10 million at December 31, 1997, and by $13 million at May 15, 1998, after
giving effect to the value of associated hedge positions.
The summary selected unaudited pro forma balance sheet as of March 31, 1998
set forth below is presented as if the transactions contemplated by this
Prospectus, including the Offering and the application of the proceeds
therefrom, had occurred on March 31, 1998. The summary selected unaudited pro
forma statements of operations data for the three months ended March 31, 1998
and the year ended December 31, 1997 are presented as if the transactions
contemplated by this Prospectus, including the Offering and the application of
the estimated net proceeds therefrom, had occurred on January 1, 1997. See "Use
of Proceeds." The pro forma financial information set forth below is not
necessarily indicative of what the actual results of operations or financial
position of the Company would have been, nor do they purport to represent the
Company's results of operations or financial position for future periods. The
pro forma financial information should be read in conjunction with the Company's
pro forma financial statements and related notes and historical financial
statements and related notes included elsewhere in
12
<PAGE>
this Prospectus. See "Selected Historical and Pro Forma Financial Information"
and "Financial Statements and Information."
<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT
OF OPERATIONS)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, TO
--------------------------------------- --------------------------------------- DECEMBER 31,
HISTORICAL HISTORICAL CLF, L.P. --------------
PRO FORMA ------------------------- PRO FORMA -------------------------
----------- 1998 1997 COMPANY 1997 1996 HISTORICAL
1998 ----------- ----------- ----------- ----------- ----------- CLF, L.P.
----------- 1997 --------------
(UNAUDITED) (UNAUDITED) ----------- 1995
(UNAUDITED) (UNAUDITED) --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
REVENUE:
Interest income from
mortgage loans....... $5,279,888 $5,279,888 $ 1,498,770 $9,859,768 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of
mortgage loans....... -- -- (160,782) (160,782) (160,782) (923,611) --
Other revenue from
mortgage loans....... 20,787 20,787 8,081 43,326 43,326 16,520 --
----------- ----------- ----------- ----------- ----------- ----------- --------------
Total Revenues......... 5,300,675 5,300,675 1,346,069 9,742,312 9,742,312 4,153,585 224,313
----------- ----------- ----------- ----------- ----------- ----------- --------------
LOAN EXPENSES:
Interest on repurchase
agreements........... 3,288,281 4,899,369 1,146,617 3,662,631 8,829,548 4,048,601 221,400
Loss on loan in
default.............. -- -- -- -- -- -- 717,359
Servicer fees.......... 40,721 40,721 13,341 76,328 76,328 50,320 --
----------- ----------- ----------- ----------- ----------- ----------- --------------
Total Loan Expenses.... 3,329,002 4,940,090 1,159,958 3,738,959 8,905,876 4,098,921 938,759
----------- ----------- ----------- ----------- ----------- ----------- --------------
OPERATING EXPENSES....... 1,192,907 1,105,407 752,811 4,459,040 4,109,040 3,805,230 1,087,320
----------- ----------- ----------- ----------- ----------- ----------- --------------
OPERATING INCOME (LOSS).. 778,766 (744,822) (566,700) 1,544,313 (3,272,604) (3,750,566) (1,801,766)
OTHER INCOME (EXPENSE)... 38,956 (885,359) 61,581 169,889 (122,938) 86,900 136,789
----------- ----------- ----------- ----------- ----------- ----------- --------------
INCOME (LOSS) BEFORE
PROVISION FOR FEDERAL AND
STATE INCOME TAX......... 817,722 (1,630,181) (505,119) 1,714,202 (3,395,542) (3,663,666) (1,664,977)
PROVISION FOR FEDERAL AND
STATE INCOME TAX....... (327,100) -- -- (685,700) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- --------------
NET INCOME (LOSS)........ $ 490,622 $(1,630,181) $ (505,119) $1,028,502 $(3,395,542) $(3,663,666) $ (1,664,977)
----------- ----------- ----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- ----------- ----------- --------------
PRO FORMA NET INCOME PER
SHARE.................... $ 0.04 $ -- $ -- $ 0.09 $ -- $ -- $ --
----------- ----------- ----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- ----------- ----------- --------------
OTHER DATA:
Cash flows from
operating
activities........... $ -- $(4,060,275) $ 4,684,622 $ -- $(2,704,304) $(13,630,639) $ (4,411,903)
Cash flows from
investing
activities........... $ -- $ (1,198) $ (12,968) $ -- $ (60,612) $ (77,581) $ --
Cash flows from
financing
activities........... $ -- $6,232,704 $ (487,559) $ -- $ 5,032,880 $ 7,546,214 $ 12,714,139
Number of loans
funded............... -- 23 12 -- 60 26 6
Original principal
amount of loans
funded............... $ -- $62,475,112 $50,963,285 $ -- $224,866,628 $137,940,791 $ 22,735,140
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF DECEMBER 31,
-------------------------- ---------------------------------
PRO FORMA HISTORICAL HISTORICAL CLF, L.P.
------------ ------------ ---------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996
------------ -------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 11,964,425 $ 6,579,425 $ 4,408,194 $ 2,140,230
Mortgage loans held for sale..................................... 323,509,279 323,509,279 263,473,373 157,719,912
Total assets..................................................... 342,423,635 337,423,635 274,378,058 168,349,353
Notes payable.................................................... -- 18,507,023 12,274,318 487,559
Total liabilities................................................ 263,274,799 337,491,642 272,815,884 154,671,846
Total partners' capital (deficit)/ stockholders' equity.......... 79,148,836 (68,007) 1,562,174 13,677,507
</TABLE>
13
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby................................. 7,340,000 shares (1)
Common Stock to be Outstanding After the Offering........... 11,880,000 shares (1)(2)
Use of Proceeds............................................. To repay a portion of the
outstanding balance under the
NationsBank Warehouse, retire
preferred interest issued by
CLF, repay notes payable to
one of its limited partners,
and for general working
capital purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol...................... CLFI
</TABLE>
- ------------------------
(1) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 1,101,000 shares will not be exercised. See "Underwriting."
(2) Includes 4,540,000 shares of Common Stock issued to the general and limited
partners of CLF, in connection with the Formation Transactions (assuming an
initial public offering price of $15.00). Excludes 1,425,600 shares of
Common Stock reserved for issuance under the Company's 1998 Stock Option
Plans. As of the closing of the Offering, the Company expects to grant
options to acquire 712,800 shares of Common Stock pursuant to such plan on
terms to be determined. See "Directors and Executive Officers--Stock
Options."
14
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO
THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS, IN CONNECTION WITH AN
INVESTMENT IN THE SHARES OF THE COMMON STOCK OFFERED HEREBY. WHEN USED IN THIS
PROSPECTUS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE,"
"ESTIMATE," "PROJECT," "INTEND" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS REGARDING AMONG OTHER THINGS: CHANGES IN INTEREST
RATES; DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL OR LEGAL CONDITIONS;
DIFFERENCES IN THE ACTUAL ALLOCATION OF THE ASSETS OF THE COMPANY FROM THOSE
ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE HEDGED AND THE EFFECTIVENESS OF THE
HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE OF RISK WILL BE INCREASED BY THE
COMPANY'S LEVERAGING OF ITS ASSETS. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT
ANY ESTIMATED RETURNS OR PROJECTIONS CAN BE REALIZED OR THAT ACTUAL RETURNS OR
RESULTS WILL NOT BE MATERIALLY LOWER THAN THOSE THAT MAY BE ESTIMATED.
Prospective investors are cautioned that any forward-looking statements are
not assurances or guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, and under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Prospectus.
RISKS RELATED TO OPERATIONS
THE LACK OF OPERATING HISTORY DOES NOT PROVIDE A LONG-TERM BASIS ON WHICH TO
PROJECT FUTURE RESULTS. The Company has been recently organized and its
predecessor, CLF, has been in operation only since 1995. There can be no
assurance that the Company will be able to generate positive earnings from
operations. The Company also will be subject to the risks generally associated
with the formation of any new business.
HISTORICALLY, THE COMPANY HAS EXPERIENCED SIGNIFICANT LOSSES AND MAY NOT
ACHIEVE PROFITABLE RESULTS. As a start-up company, the Company has incurred
significant losses and has had substantial negative cash flow since its
inception. The Company has been, and expects to continue to be, subject to the
risks customarily associated with any new business. In addition, the Company's
ability to achieve profitability is dependent in large part on the expansion of
its business of originating and securitizing Credit Tenant Loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The ability of the Company to expand its operations, and the
success of the Company's business strategy in general are subject to
uncertainties and contingencies beyond the Company's control, and there can be
no assurance that the Company's results of operations will improve or that its
business strategy will be successful. The Company expects to continue to have
operating losses through the closing of this Offering and the application of the
net proceeds therefrom as provided under "Use of Proceeds" and may continue to
have operating losses at least through the first securitization of loans
following the Offering.
THE COMPANY'S OPERATIONS ARE DEPENDENT UPON THE CREDIT TENANT LOAN AND
SECURITIZATION BUSINESS. The Company is highly dependent for its revenues and
profitability on its ability to continue to originate and securitize Credit
Tenant Loans. There can be no assurance that the Company will be able to
continue to originate and securitize such loans, or that it will be able to do
so on acceptable terms. The Company may not be able successfully to execute its
business plan and its planned expansion into related real estate lines of
business. The Company's failure to continue originating and securitizing such
loans would likely have a material adverse effect on the Company's business,
financial condition and results of operations, and its ability to satisfy either
short or long-term capital requirements, and such failure could cause the
Company to limit its operations significantly. The Company intends to hold
significant amounts of Mortgage Loans pending securitization, which are subject
to risk of loss of principal and credit downgrades that could hinder the ability
of the Company to securitize its loans on favorable terms.
15
<PAGE>
The value of the Company's Credit Tenant Loans and CMBS, while held in
portfolio, and the value of any interest retained following a securitization, is
dependent upon various market factors including changes in CMBS yields and
interest rates.
RISKS RELATED TO CREDIT TENANT LOANS
THE LIMITED HISTORY OF SECURITIZATION OF CREDIT TENANT LOANS PROVIDES
UNCERTAINTY AS TO WHETHER THE COMPANY WILL BE ABLE TO EXECUTE ITS BUSINESS
PLAN. The Company is aware of only two securitizations of pools containing a
significant number of Credit Tenant Loans with a variety of Credit Tenants and
multiple properties. There can be no assurance that securitizations of this type
of assets will achieve broad market acceptance. The inability of the Company to
securitize its Credit Tenant Loans on acceptable terms would adversely effect
the Company's business, financial condition, results of operations and
prospects. The securitization of Credit Tenant Loans is a fairly new component
of the overall securitization market. The Rating Agencies have only recently
developed the models and other ratings methodologies that permit them to analyze
and rate pools of Credit Tenant Loans. A material change in the modeling
techniques or ratings methodologies by the Rating Agencies, a failure of the
portion of the market that is made up of pools of Credit Tenant Loans to further
develop, or a downturn in the securitization market for corporate credit
generally could have a material adverse impact on the Company's ability to
securitize its Credit Tenant Loans.
A DOWNTURN IN INDUSTRIES IN WHICH THE COMPANY HAS A HIGH LOAN CONCENTRATION
COULD ADVERSELY AFFECT THE COMPANY'S RESULTS AND INVESTMENTS. Of the Company's
93 Credit Tenant Loans with an aggregate balance of approximately $342 million
on May 15, 1998, 55 loans, with an aggregate balance of approximately $120
million, or 35% of the aggregate balance of Credit Tenant Loans are secured by
leases with tenants in the Retail Drug industry, 3 loans, with an aggregate
balance of approximately $38 million, or 11.1% of the aggregate balance of
Credit Tenant Loans are secured by leases with tenants in the Healthcare
Services industry, and 5 loans, with an aggregate balance of approximately $37
million, or 11.0% of the aggregate balance of Credit Tenant Loans are secured by
leases with tenants in the Grocery industry. In addition, the Company holds
Credit Tenant Loans secured by leases with Credit Tenants in each of the
following industries which each exceed 5% (but are less than 10%) of the
aggregated balance of the Company's Existing Loans: Retail Electronics;
Insurance; Retail Building Materials; Retail Discount and General Merchandise;
and Banking. A downturn in any of these industries, particularly the industries
in which the Company has its highest number and amount of loans, could have a
material adverse effect on the Company's ability profitably to sell or
securitize loans it holds in portfolio or to orginate loans in the future and
consequently on the Company's results. In addition, such an event could have a
material adverse effect on the value of the Company's investments.
TENANT CONCENTRATION COULD SUBJECT THE COMPANY TO RISKS ASSOCIATED WITH
CERTAIN TENANTS. Of the Company's total of 93 Credit Tenant Loans with an
aggregate balance of approximately $342 million as of May 15, 1998, 22 Credit
Tenant Loans, with an aggregate balance of approximately $51 million or 14.9% of
the aggregate balance of Credit Tenant Loans are upon properties leased to, or
which leases are guaranteed by, CVS Corporation or a subsidiary thereof, and 20
Credit Tenant Loans, with an aggregate balance of approximately $38 million, or
11.2% of the aggregate balance of Credit Tenant Loans are upon properties leased
to, or which leases are guaranteed by, Rite Aid Corporation. In addition
approximately six other corporations each lease or guarantee properties which
represent over 5% (but are less than 10%) of the aggregate outstanding balance
of the Company's Credit Tenant Loans as of May 15, 1998. A change in the credit
rating of the Credit Tenants and/or the Guarantors may have a related positive
or adverse effect on the rating of the related Credit Tenant Loans. In addition,
any financial difficulty or bankruptcy of one or more of such Tenants or
Guarantors resulting in nonpayment or delay in payment of rental payments and
other amounts due under such Credit Tenant Leases could, as a result of this
concentration, have a greater adverse effect on the Company than a similar
problem at a less significant tenant. Such events could also have a material
adverse effect on the Company's ability profitably to sell or securitize
16
<PAGE>
loans it holds in portfolio or to originate loans in the future and consequently
on the Company's results. In addition, such an event could have a material
adverse effect on the value of the Company's investments.
GEOGRAPHIC CONCENTRATION COULD SUBJECT THE COMPANY TO RISKS ASSOCIATED WITH
CERTAIN GEOGRAPHIC AREAS. Of the Company's 93 Credit Tenant Loans with an
aggregate balance of approximately $342 million on May 15, 1998, 22 loans with
an aggregate balance of approximately $65 million or 19% of the aggregate
balance are located in New York, 10 loans with an aggregate balance of
approximately $54 million, or 15.7% of the aggregate balance of the Existing
Loans are located in Massachusetts, and 5 loans with an aggregate balance of
approximately $45 million, or 13.3% of the aggregate balance are located in
Texas. In the event of a tenant default, the ability of the Company to recover
upon its loans will be dependent upon the value of the underlying real estate.
The economy of the relevant state may be adversely affected by certain
developments to a greater degree than that of other areas of the country.
Moreover, in recent periods, several regions of the United States have
experienced significant downturns in the market value of real estate. Regional
economic downturns, particularly in areas where a number of Credit Tenant Loans
have been made, may result in elevated levels of Credit Tenant Lease defaults
and subsequent foreclosures. In addition, such an event would have a material
adverse effect on the value of the Company's investments.
LIMITED ASSETS AND OBLIGATIONS OF THE BORROWERS COULD SUBJECT THE COMPANY TO
INCREASED RISK THAT LOANS WILL NOT BE REPAID. The borrowers under all of the
Company's Credit Tenant Loans are entities created solely to own, lease or
purchase the applicable underlying property, in part to isolate such properties
from the other debts and liabilities, if any, of the owners or affiliates of
such borrowers. Except with respect to the consequences of any breach of
covenants restricting use of nearby properties owned by the borrower or its
affiliates and with respect to other limited circumstances, each Credit Tenant
Loan represents a nonrecourse obligation of the related borrower. The borrowers
will not have any significant assets other than the applicable underlying
property, the applicable Credit Tenant Lease, including any related guaranty,
and the right to receive payments thereon. Payment of amounts due on the Credit
Tenant Loans will depend significantly on the payments by the tenants on the
Credit Tenant Leases.
A DECREASE IN THE CREDIT QUALITY OF TENANTS COULD ADVERSELY AFFECT THE VALUE
OF THE COMPANY'S INVESTMENTS AND ITS EARNINGS. The credit of each tenant or, if
applicable, the related guarantor, will generally be rated Investment Grade or
BB Grade. A decline in the credit rating of the tenants or, the assignment by
the Company in its underwriting process of too high of a credit rating or any
related mispricing of a Credit Tenant Loan may have a related adverse effect on
the rating of the Credit Tenant Loan and the ability to securitize the loan on
terms favorable to the Company.
RISKS RELATED TO AVAILABILITY OF FINANCING
A LACK OF AVAILABILITY OF FINANCING COULD ADVERSELY AFFECT THE COMPANY'S
RESULTS. The Company expects to rely upon its ability to borrow money to fund
its origination of loans and investments. The inability of the Company to obtain
such financing or to borrow money on advantageous terms could materially
adversely affect the Company's business, operations and results.
RISKS RELATED TO BORROWINGS
THE COMPANY EXPECTS TO BE HIGHLY LEVERAGED WHICH MAY SUBJECT THE COMPANY TO
INCREASED RISK OF LOSS. The Company expects to employ significant leverage
consistent with the type of assets acquired and the desired level of interest
rate risk in various investment environments (in particular under the Company's
warehouse lines of credit).
Required debt service will reduce cash and net income available for
operations. If the interest income on the assets financed with borrowed funds
fails to cover the cost of the borrowings, the Company will
17
<PAGE>
experience net interest losses and may experience less profits or net losses and
erosion or elimination of its equity.
The ability of the Company to achieve its investment objectives depends to a
significant extent on its ability to borrow money in sufficient amounts and on
sufficiently favorable terms to earn incremental returns. The Company may not be
able to achieve the degree of leverage it believes to be optimal due to
decreases in the proportion of the value of its assets that it can borrow
against, decreases in the market value of the Company's assets, increases in
interest rates, changes in the availability of financing in the market,
conditions in the lending market and other factors. This may cause the Company
to experience losses or less profits than would otherwise be the case.
A substantial portion of the Company's borrowings are expected to be in the
form of collateralized borrowings, in particular the Warehouse Credit
Facilities. If the value of the assets pledged to secure such borrowings were to
decline, the Company may be required to post additional collateral, to reduce
the amount borrowed or to suffer forced sales of the collateral.
To create yields commensurate with its investment objectives and to reduce
the risks set forth above, the Company may leverage its assets through various
borrowing arrangements, pledging its assets as collateral security for its
repayment obligations on a non-recourse basis. The Company intends to use the
proceeds from securitizations and other borrowings to originate and invest in
additional Mortgage Loans, CMBS and other assets and, in turn, to borrow against
such assets and to repeat this process of borrowing and investing until it has
significantly leveraged its portfolio of assets.
The Charter and Bylaws of the Company do not limit the level of debt the
Company may incur. However, the Board of Directors has adopted certain policies
to which the Company must adhere before increasing its level of indebtedness
above those available under the Warehouse Credit Facilities, although such
policies may be altered by the Board of Directors in its sole discretion. The
Company could become highly leveraged, which could increase the risk of default
under its indebtedness. After application of the net proceeds of the Offering,
the Company expects to have outstanding indebtedness of approximately $259.6
million under its Warehouse Credit Facilities (calculated based upon the
outstanding balance under such facilities as of March 31, 1998). The Company
may, from time to time, seek to reduce the size of its Warehouse Credit
Facilities in order to reduce the cost of maintaining the availability of the
entire amounts of such facilities. There can be no assurance that the Company
will be able to increase the amount of availability under such facilities, if
necessary, once so reduced.
The Company will rely on its repurchase agreement with NationsBank and its
commitment with Prudential Securities Credit Corp. to provide a warehouse credit
facilty to provide the majority of its cash for loan fundings. If the Company
could not enter into alternative funding arrangements, a deterioration in the
financial condition of NationsBank or Prudential Securities Credit Corp. could
have a negative impact on the Company's ability to fund its loans.
RISKS RELATED TO MORTGAGE ASSETS
CREDIT AND MARKET EVENTS COULD ADVERSELY AFFECT THE VALUE OF THE COMPANY'S
INVESTMENTS AND EARNINGS. As of May 15, 1998 the Company had significant amounts
of Mortgage Loans pending securitization ($342 million), the market value of
which could be adversely affected by adverse CMBS market or tenant credit
events. The results of the Company's operations will depend on various factors,
many of which are beyond the control of the Company, which may adversely affect
the profitability of the Company's business of originating, holding in inventory
and securitizing Credit Tenant Loans, and the profitability of the Company's
holding of Mortgage Assets for longer-term investment.
The Company's profitability in originating and securitizing Credit Tenant
Loans is principally dependent on its ability to generate loans and to finance
such loans during the holding period pending securitization, the level of
interest rates payable on such financing during such holding period, and the
18
<PAGE>
proceeds of any securitization as compared with the cost of generating the
related loans and the loss or gain on any investments made to hedge against
changes in interest rates. The price at which securities can be sold is
principally dependent on (a) market conditions, including yields on U.S.
Treasury securities with comparable maturities and differences between yields on
commercial mortgage backed-securities and U.S. Treasury securities ("CMBS
Spreads"), and (b) the terms of the particular securities, including the
interest rates payable on such securities, the maturities thereof and timing of
return of principal (including the likelihood of prepayment and degree of
protection from prepayment through payment of yield maintenance prepayment
premiums) and the ratings of such securities. The Company engages in hedging
activities designed to protect itself against changes in yields on U.S. Treasury
securities, but does not currently hedge to protect itself against changes in
CMBS Spreads. Further, although the Company sets interest rates on loans
originated by it to some extent in anticipation of each loan's impact on the
final pool of such loans to be used for securitization, the percentage of the
principal balance of securities in any securitization which may receive any
given rating level is dependent upon, among other things, the number of loans in
the final pool, the diversity of tenants, property types and geographic location
of the mortgaged properties and other factors which may not be known until the
time the final pool is presented to the Rating Agencies in anticipation of
securitization. Accordingly, the ability to include all originated loans in a
securitization, and the final characteristics of the securities to be offered,
will not be known until the final pool is aggregated and presented to the Rating
Agencies.
Prospectively, the Company's profitability in holding Mortgage Assets for
investment is primarily dependent on whether there are credit losses on such
assets, the interest rates earned on such assets, the interest rates paid on any
borrowing incurred to finance such assets and, to the extent the Company must
dispose of assets or, as an accounting matter, is required to adjust the value
of such assets to current market value, the market value of such Mortgage Assets
as they may be affected by changes in interest rates (including CMBS Spreads),
changes in ratings of the assets or other factors affecting expectations of
repayment, and changes in expectations as to timing of return of principal.
Interest rates and borrowing costs depend on the nature and terms of the
Mortgage Assets, the geographic location of the real estate securing the
Mortgage Loans included in or underlying the Mortgage Assets, conditions in
financial markets, the fiscal and monetary policies of the countries in which
the Company presently invests or may invest in the future (particularly the
United States government and the Federal Reserve Board) and competition and
other factors, none of which can be predicted with any certainty. Because
changes in interest rates may significantly affect the Company's activities, the
operating results of the Company will depend, in large part, upon the ability of
the Company to manage its interest rate risk effectively.
Furthermore, real property investments are subject to varying degrees of
risk. Real property values and cash flows of the properties which the Company
may acquire or for which the Company will originate loans will be affected by a
number of factors, including changes in the general economic climate, local
conditions (such as a reduction in rental demand in an area), competition from
other available properties, and the continued ability of Credit Tenants to make
all lease payments, to provide adequate maintenance and insurance and to control
operating costs. Real estate values and cash flows are also affected by such
factors as government regulations, including, without limitation, environmental,
public access, zoning and tax laws, interest rate levels and the availability of
financing. Each of such general risks will affect the value of the Existing
Loans, any additional loans or properties that the Company may originate or
acquire and the revenues and expenses relating to any such assets. Real estate
investments are relatively illiquid and therefore may tend to limit the ability
of the Company to react promptly to changes in economic or other conditions.
LOSSES ON MORTGAGE LOANS AND SUBORDINATE INTERESTS MAY ADVERSELY AFFECT THE
COMPANY'S RESULTS. The Company intends to originate, acquire, accumulate and
securitize Mortgage Loans (in particular, Credit Tenant Loans) as part of its
investment strategy. While holding Mortgage Loans (generally until a
securitization), the Company will be subject to risks of borrower defaults,
Credit Tenant defaults, bankruptcies, fraud, losses and special hazard losses
that may not be covered by standard hazard insurance.
19
<PAGE>
Also, the costs of originating, financing and hedging the Mortgage Loans could
exceed the interest income on the Mortgage Loans and/or the income from
securitizing such loans. In the event of any default under Mortgage Loans held
by the Company, the Company will bear the risk of loss of principal to the
extent of any deficiency between the value of the mortgage collateral and the
principal amount of the Mortgage Loan. It may not be possible or economical for
the Company to securitize all of the Mortgage Loans which it acquires, in which
case the Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults, bankruptcies, fraud losses and special hazard losses.
Furthermore, the Company expects to retain a Subordinate Interest in at least
some of the securitizations, in which case it would retain substantially all of
these risks in a more concentrated form up to the amount of its investment in
its Subordinate Interests.
The typical Credit Tenant Lease requires casualty insurance (which may be
through self insurance) to be maintained on the underlying property (generally
by the borrower or the tenant), with such coverages and in such amounts as are
or shall customarily be insured against with respect to similar properties, for
fire, vandalism and malicious mischief, extended coverage perils, all physical
loss perils, commercial general liability, flood (when the underlying property
is located in whole or in material part in a designated flood plain area) and
workers' compensation insurance. There are, however, certain types of losses
(such as from hurricanes, floods, earthquakes or wars) that may be either
uninsurable or not economically insurable. As part of its Lease Enhancement
mechanisms, the Company has obtained specialized insurance policies that cover
some of these risks, but do not eliminate all of these risks. Should an
uninsured loss occur, the Company could lose both its capital invested in, and
anticipated profits from, one or more Credit Tenant Loan properties.
OWNERSHIP OF NON-INVESTMENT GRADE CMBS MAY SUBJECT THE COMPANY TO INCREASED
RISK OF LOSS. The Company intends to retain or acquire a significant amount of
Non-Investment Grade CMBS (particularly those which include as a component
thereof Credit Tenant Loans). The Company has established no limits on its
ability to acquire or retain subordinate interests. This Non-Investment Grade
CMBS is expected to be rated securities (for purchased CMBS) and may include
rated or "first loss" credit support Subordinate Interests (for retained CMBS).
A first loss security is the most subordinated class in a structure and
accordingly is the first to bear the loss upon a default on, restructuring or
liquidation of the underlying collateral and the last to receive payment of
interest and principal. Such classes are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest than
the more senior, rated classes. The market values of Subordinate Interests tend
to be more sensitive to changes in economic conditions and less sensitive to
changes in interest rates than the more senior, rated classes. As a result of
these and other factors, Subordinate Interests generally may not be actively
traded and may not provide holders thereof with liquidity of investment.
The yield to maturity on Subordinate Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying Mortgage Loans and the timing of any such defaults
or losses. Furthermore, to the extent that underlying Mortgage Loans relating to
CMBS (unless insured) require balloon payments at maturity, the failure of the
applicable borrower to obtain refinancing of any such loan or loans in order to
make such balloon payment could result in the loss of all or a portion of the
Company's investment therein. Because the Subordinate Interests of the type the
Company intends to retain or acquire may have little credit support, to the
extent there are realized losses on the underlying Mortgage Loans, the Company
may not recover the full amount or, in extreme cases, any of its initial
investment in such Subordinate Interests.
THE COMPANY'S NONRECOURSE COMMERCIAL MORTGAGE LENDING MAY SUBJECT THE
COMPANY TO THE RISK OF LOSS OF RENT. Credit Tenant Loans are generally
non-recourse to the owner and in the event of default the lender thereunder is
entirely dependent on the loan collateral. The timely repayment of loans secured
by leased properties subject to Credit Tenant Leases is typically dependent upon
certain specified performance by the lessees under the related leases, rather
than upon the liquidation value of the underlying real estate. However, to the
extent the timely repayment of the loan is in any way dependent upon the
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liquidation value of the underlying real property, risks generally incident to
interests in real property may adversely impact the value of the property. The
liquidation value of a commercial property may be adversely affected by risks
generally incident to interests in real property, including changes in general
or local economic conditions and/or specific industry segments, declines in real
estate values, increases in interest rates, real estate tax rates and other
operating expenses including energy costs, changes in governmental rules,
regulations and fiscal policies, including environmental legislation, acts of
God, and other factors which are beyond the Company's or the applicable
borrower's control. There can be no assurance that a lender's remedies with
respect to the loan collateral will provide the Company with a recovery adequate
to repay the underlying Credit Tenant Loan.
MEZZANINE CONSTRUCTION LOANS INVOLVE GREATER RISK OF LOSS THAN LOANS SECURED
BY INCOME PRODUCING PROPERTIES. The Company expects to originate Mezzanine
Construction Loans. These types of loans involve a higher degree of risk than
long-term senior mortgage loans secured by income-producing real property, due
to a variety of factors, including, dependency on successful completion and
operation of the project for repayment, difficulties in estimating construction
or rehabilitation costs, loan terms that often require little or no
amortization, and that a foreclosure by the holder of the senior loan could
result in a Mezzanine Construction Loan becoming unsecured. Accordingly, in the
event of a borrower default, the Company may not recover some or all of its
investment in such Mezzanine Construction Loans.
CHANGES IN INTEREST RATES COULD ADVERSELY AFFECT THE COMPANY'S RESULTS. The
Company's operating results will depend greatly on differences between the
income from its assets (net of credit losses) and its borrowing costs and upon
the ability of the Company to securitize its portfolio of Mortgage Loans on
favorable terms. Unless effectively hedged, interest rate changes between the
date the Company commits a rate to a borrower and the date a Mortgage Loan is
included in a securitization or is otherwise sold may have a positive or
negative effect on the value of such Mortgage Loan. Also, the cost of
originating, financing and hedging the Mortgage Loans could exceed the interest
income on the Mortgage Loans and/ or the income from securitizing such loans.
The Company expects to hedge certain interest rate risks on its Mortgage Loans
during the warehousing period prior to securitization, but there can be no
assurance that such hedging will be successful or adequately reimburse the
Company for any loss. Moreover, the Company does not currently expect to hedge
credit risk. The Company intends to fund a substantial portion of its assets
with borrowings having interest rates that are floating rate or otherwise reset
relatively rapidly, such as monthly or quarterly. The Company anticipates that,
in most cases, the income from its assets that do not have match funding in
place will respond more slowly to interest rate fluctuations than the cost of
its borrowings, creating a potential mismatch between asset yields and borrowing
rates. Consequently, changes in interest rates, particularly short-term interest
rates, may significantly influence the net income. Increases in these rates will
tend to decrease the net income and market value of the Company's net assets.
Interest rate fluctuations resulting in the Company's interest expense exceeding
interest income would result in the Company incurring operating losses.
PREPAYMENTS OF CERTAIN MORTGAGE LOANS COULD ADVERSELY AFFECT THE VALUE OF
THE COMPANY'S INVESTMENTS. Commercial Mortgage Loans originated by the Company
generally prohibit prepayment for a period of years (a "Lockout Period"), and
thereafter permit prepayment only in conjunction with payment of a prepayment
premium designed to maintain the yield to investors. Such premiums are intended
to discourage prepayments and also compensate investors in the event a loan is
nevertheless voluntarily prepaid. Such mortgage loans are typically prepayable,
however, during or after the Lockout Period, without payment of any prepayment
premium, in the event of certain events of casualty or condemnation with respect
to the related mortgaged property. Further, a Mortgage Loan may effectively
prepay in the event of a default, in which event a prepayment premium may not be
recovered.
Prepayment of a Mortgage Loan held by the Company pending securitization may
adversely affect the Company to the extent that changes in interest rates or
other factors have increased the value of the Mortgage Loan to greater than its
principal balance but such premium is not recovered upon such
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prepayment. In such event, the Company may have incurred hedging losses on such
Mortgage Loan which are not then offset by sale proceeds above the principal
balance of the loan.
Further, to the extent the Company invests in CMBS acquired at a premium,
the Company may be adversely affected by prepayment to the extent a prepayment
premium is not received on the underlying Mortgage Loan, or any prepayment
premium which is received is not allocated to the CMBS held by the Company in an
amount sufficient to offset any loss in yield realized due to the prepayment.
Classes of CMBS entitled to little or no principal (including in particular any
IOs) will be particularly sensitive to the rate of prepayments on the underlying
Mortgage Loans absent receipt of sufficient prepayment premiums to protect their
yield, and in such event the Company may not recover its full investment.
Furthermore, the market value of a class of CMBS may be adversely affected by
changes in interest rates to the extent such changes create expectations of
different prepayment experience. While the Company's Credit Tenant Loans
currently all have yield maintenance-based prepayment premiums, and accordingly
CMBS issued by the Company, including classes retained by the Company, will have
the benefit of such provisions, subject to the limitations set forth above, the
Company may invest in CMBS issued by third parties which may be backed by
Mortgage Loans which do not have yield maintenance prepayment premiums. Further,
there can be no assurance that future Mortgage Loans originated by the Company
will continue to have such provisions.
RISKS RELATED TO INVESTMENTS IN REAL ESTATE
INVESTMENTS IN REAL PROPERTY NET LEASED TO TENANTS BEAR CERTAIN RISKS
DIFFERENT THAN THOSE ASSOCIATED WITH CREDIT TENANT LOANS. The Company intends
to invest in net leased real property from time to time. The value of the
Company's investments in such real property and the Company's income will depend
upon the ability of the applicable tenant to meet its obligations to maintain
the property under the terms of the net lease. If a tenant fails or becomes
unable to so maintain such property, the Company will be subject to all risks
associated with owning real estate. In addition, under many net leases the owner
of the property retains certain obligations with respect to the property,
including among other things, the responsibility for maintenance and repair of
the property, to provide adequate parking, maintenance of common areas and
compliance with other affirmative covenants in the lease. If the Company were to
fail to meet such obligations, the applicable tenant could abate rent or
terminate the applicable lease, which may result in a loss by the Company of its
capital invested in, and anticipated profits from, such property.
INVESTMENTS IN REAL PROPERTY WHERE A NET LEASE HAS CEASED BEAR ALL RISKS
ASSOCIATED WITH DIRECT INVESTMENTS IN REAL ESTATE PROPERTIES. If a net lease
upon real property owned by the Company is terminated or expires for any reason,
the Company will become subject to all risks related to owning such real
property. The risks related to owning real property include those listed below.
Revenues from real property may be affected adversely by changes in national
or local economic conditions, competition from other properties offering the
same or similar attributes, changes in interest rates and in the availability,
cost and terms of mortgage funds, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for capital
improvements (particularly in older structures), changes in real estate tax
rates and other operating expenses, adverse changes in governmental rules and
fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes
and other natural disasters (which may result in uninsured or underinsured
losses), acts of war, adverse changes in zoning laws, and other factors which
will be beyond the control of the Company. In addition, real estate investments
are relatively illiquid, and the ability of the Company to vary its portfolio in
response to changes in economic or other conditions will be limited.
All real property owned by the Company will be subject to real property
taxes and, in some instances, personal property taxes. Such real and personal
property taxes may increase or decrease as property tax rates change and as the
properties are assessed or reassessed by taxing authorities. An increase in
property
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taxes on the Company's real property could affect adversely the Company's
income, its ability to make distributions to its stockholders and could decrease
the value of that real property.
The operating costs and values of real property owned by the Company may be
affected by the obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of complying
with future legislation. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of hazardous
or toxic substances in, on, under or in the vicinity of such real property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The
Company's assets, income and ability to make distributions to its stockholders
could be affected adversely by the existence of an environmental liability with
respect to its properties.
THE ABILITY OF TENANTS TO REJECT LEASES IN A BANKRUPTCY COULD ADVERSELY
AFFECT THE VALUE OF THE COMPANY'S INVESTMENTS. To the extent that any of the
tenants of properties which are subject to Credit Tenant Loans with the Company
or which may be owned by the Company were to become a debtor in a bankruptcy
proceeding under the United States Bankruptcy Code (the "Bankruptcy Code"), such
lessee or its bankruptcy trustee could reject the lease. Lease Enhancements do
not cover risks attendant to tenant bankruptcies. If a lease were rejected,
rental payments thereunder would terminate as to the related property, thereby
leaving the owner without a source of rental payments to support its debt
servicing and other obligations under the applicable Credit Tenant Loans and
with a claim for damages as a source of payment of amounts due under such lease
under section 502(b)(6) of the Bankruptcy Code. A claim by a lessor for damages
resulting from the rejection by a debtor of a lease of real property (or
rejection of a guarantee of a lease upon the bankruptcy of the guarantor) is
limited to an amount equal to the rent reserved under the lease, without
acceleration, for the greater of one year or 15 percent (but not more than three
years) of the remaining term of the lease, plus rent already due but unpaid.
There can be no assurance that any such claim for damages (or any recovery on
the underlying mortgaged real estate) would be sufficient to provide for the
repayment of amounts then due under the lease.
THE COSTS OF ANY APPLICABLE ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE
COMPANY'S RESULTS. Under various environmental laws, the Company may be liable
for the costs of removal or remediation of hazardous or toxic substances on,
under, in or emanating from such property or other liabilities arising under
environmental laws. Based on Phase I environmental reports (which may not reveal
all potential environmental liabilities), the Company is aware of certain
environmental issues affecting the properties underlying the Existing Loans;
however, the Company does not believe that these issues will have a material
adverse effect on the Existing Loans that have environmental issues or the
Company's business or results of operations. In addition, the Company cannot
predict whether modifications of existing laws or regulations or the adoption of
new laws or regulations or changes in the known conditions of the properties
underlying the Existing Loans (or of other properties the Company may have an
interest in, from time to time) may have a material adverse effect on the
Company's business or results of operations in the future.
INVESTMENTS IN FOREIGN REAL ESTATE ASSETS COULD SUBJECT THE COMPANY TO
DIFFERENT RISKS. Any Credit Tenant Loans which the Company may make outside of
the United States or any direct investment in real estate properties outside of
the United States, will be subject to certain risks associated with such loans
or investments. Investments by the Company in Credit Tenant Loans or direct
investments in properties located outside of the United States create risks
associated with exposure to local political and economic conditions, the
uncertainty of foreign laws (including tax laws) and markets, fluctuations of
currency exchange rates, the enforceability of loan documentation and the
provisions of local foreclosure laws. In addition, income from activities
conducted in foreign jurisdictions may be subject to tax by those jurisdictions,
which would reduce the economic benefit of such investments. Neither the Company
nor its management has experience in conducting lending activities or in
investing in real property located in
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foreign countries. The Company currently, intends to limit its initial foreign
activities to Canada, Australia, the United Kingdom and Mexico. The Company has
not entered into any agreement to acquire real estate in any foreign
jurisdiction.
RISKS RELATED TO LEASE ENHANCEMENT
FAILURE OF THE COMPANY TO ADEQUATELY ANALYZE LEASES AND APPLY LEASE
ENHANCEMENT MECHANISMS. If in the Company's underwriting process, the Company
fails to adequately analyze a lease and to apply all appropriate Lease
Enhancement mechanisms, such a loan supported by such lease may be rejected
during the securitization process, which in turn could adversely affect the
value of the Company's investments and its results.
FAILURE OF LEASE ENHANCEMENT MECHANISMS WOULD ADVERSELY AFFECT THE VALUE OF
THE COMPANY'S INVESTMENTS AND ITS EARNINGS. The Company has developed certain
Lease Enhancement mechanisms which are designed to increase the ability of the
Company to securitize Credit Tenant Loans. These include insurance policies,
agreements with third party service providers and certain other mechanisms
designed by the Company. The Company may be adversely affected by any failure by
any third party insurer or servicer provider or of other enhancement mechanisms
to adequately ensure against loss. Furthermore, such event could adversely
effect the value of the loans held for securitization and the ability of the
Company to securitize such loans.
The Company has obtained non-cancellable casualty and condemnation insurance
policies from a third party insurance provider with respect to each Existing
Loan secured by a triple net lease or double net lease. Each such lease
enhancement policy provides generally that in the event of the exercise by a
Credit Tenant of its right to terminate the lease or abate rent as a result of a
casualty or condemnation, the enhancement insurer will on demand by the holder
of the mortgage have the option either to (i) pay to the insured a lump sum
payment equal to the outstanding principal balance of the Credit Tenant Loan,
plus accrued and unpaid interest thereon through the date of payment, and take
an assignment of the Credit Tenant Loan and all related rights (including any
rights under any related hazard or other insurance policies and rights to any
condemnation proceeds) or (ii) pay, for the remaining term of the Credit Tenant
Loan or the period of any rent abatement period, whichever is shorter, the
difference between the monthly rental payment and the amount actually received
from the Credit Tenant. Protection against casualty or condemnation termination
or abatement rights is provided first by the enhancement insurer through the
lease enhancement insurance policies and second, by the application of any
condemnation award or casualty insurance coverage. There are certain exclusions
under the lease enhancement insurance policies relating to war, insurrection,
rebellion, revolution or civil riot and radioactive matter, earthquakes (in
earthquake zones) and takings (other than by condemnation) by reason of danger
to public health, public safety or the environment. At May 15, 1998, less than
5% of the mortgage loans were with respect to properties in earthquake zones.
The Company obtains extended amortization insurance from a third party
insurance provider with respect to each Existing Loan that has an amortization
period that extends beyond the initial term of the associated Credit Tenant
Lease. Under each extended amortization policy, in the event that a borrower
defaults in its obligations to pay under the terms of the Loan after the
expiration of the initial term of the Credit Tenant Lease, the extension insurer
will protect the holder of the mortgage by (i) paying monthly debt service or
(ii) paying to the insured a lump sum payment equal to the outstanding principal
balance of the Credit Tenant Loan, plus accrued and unpaid interest thereon
through the date of payment, and take an assignment of the Credit Tenant Loan.
The failure by a Lease Enhancement insurer to pay under the terms of the
Lease Enhancement Policies (provided such failure occurred prior to the
securitization of the associated Credit Tenant Loan) could result in the loss by
the Company of its capital invested in, and anticipated profits from, such loan.
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Double net leases contain termination or abatement rights on the part of the
Credit Tenant in the event of the failure of the lessor to fulfill its
obligations under the Credit Tenant Lease. In particular, such Credit Tenant
Leases may include rights to terminate the Credit Tenant Lease or abate rent in
the event of a failure by the borrower, as and if required by the Credit Tenant
Lease, to maintain and repair the related commercial property or the related
common areas, if any as well as a variety of other non-recurring, non-expected
and non-quantifiable obligations such as environmental remediation. In each such
case, as applicable, the Credit Tenant Loan is additionally secured by a pledge
of a borrower reserve fund, funded over time from a portion of the Credit
Tenant's monthly rent payment on the Credit Tenant Lease not required for debt
service, in an amount which is generally at least 125% of the amount determined
by an engineering firm approved by the Company to be sufficient to cover the
costs of any such expected maintenance and repair during the term of the Credit
Tenant Loan. In the event (i) maintenance or repair is required which costs more
than amounts which are available in the borrower reserve fund, (ii) the borrower
fails to perform such maintenance or repairs at its own expense, and (iii)
either (x) the servicer is not required to or fails to make required advances
and/or perform appropriate protective actions, or (y) the Company declines to
make advances and perform appropriate protective actions, then the Credit Tenant
may be entitled to exercise a maintenance termination or abatement right under
the Credit Tenant Lease, which may result in a loss by the Company of its
capital invested in, and anticipated profits from, such loan.
THE LIMITED NUMBER OF INSURANCE CARRIERS AVAILABLE TO PROVIDE LEASE
ENHANCEMENTS RESTRICTS THE ABILITY OF THE COMPANY TO REPLACE SUCH INSURERS. The
Company presently obtains specialized Lease Enhancement insurance policies from
two carriers, as part of its Lease Enhancements. A deterioration in the
relationship of the Company with one or all of its current carriers (or a
deterioration in the credit quality or performance of any such carrier) may have
a material adverse effect on the Company's business, financial condition and
results of operations, as the economic benefit to the Company of the
securitizations performed by the Company could be greatly decreased by any
inability of the Company to obtain such policies, should they not be replaced by
comparable policies from other carriers.
RISKS RELATED TO BUSINESS STRATEGY AND POLICIES
RISKS ASSOCIATED WITH BUSINESS STRATEGY. The Company's business strategy
includes entering into related but new business areas. No assurance can be given
that the Company will be successful in its attempts to enter, or that if
entered, the Company will be successful in any new businesses. The Company's
prospects should be considered in light of the risks, expenses, and difficulties
frequently encountered in the establishment of new business lines and the
development and commercialization of new products and services based on
innovative ideas. Expansion of the Company's business may require capital
resources greater than the proceeds of the Offering, and there can be no
assurance that additional financing to fund these activities will be available.
Failure of the Company to accomplish its business strategy could adversely
affect the value of an investment therein.
FAILURE TO MANAGE GROWTH MAY ADVERSELY AFFECT THE COMPANY. As of May 15,
1998, the Company had 21 employees. If the Company grows rapidly, it may
experience a significant strain on its management, operational, financial and
other resources. The Company's ability to manage growth effectively will require
it to continue to improve its operational and financial systems, to expand,
train, and manage its employee base and to develop additional management
expertise. Management of growth is especially challenging for the Company due to
its short operating history and limited financial resources. The Company's
failure to increase its business and manage growth effectively could have a
material adverse effect on the Company's business, financial condition, results
of operations and prospects.
THE COMPANY'S BROAD DISCRETION WITH REGARD TO POLICIES AND STRATEGIES
CREATES UNCERTAINTY. The Company's Board of Directors has established the
investment policies, the operating policies, and the strategies set forth in
this Prospectus as the investment policies, operating policies and strategies of
the
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Company. However, such policies and strategies may be modified or waived by the
Board of Directors of the Company without stockholder consent, subject, in
certain cases, to approval by a majority of the Unaffiliated Directors.
Accordingly, stockholders of the Company will have limited control over changes
in policies of the Company.
HEDGING TRANSACTIONS MAY NOT EFFECTIVELY PROTECT THE COMPANY AGAINST
ANTICIPATED RISKS AND MAY SUBJECT THE COMPANY TO CERTAIN OTHER RISKS AND
COSTS. The Company intends to enter into hedging transactions primarily to
protect itself from the effect of interest rate fluctuations on its portfolio of
Credit Tenant Loans from the date on which the Company commits a rate to a
borrower and the date such Mortgage Loan is included in a securitization or is
otherwise sold. The Company's current policy is to attempt to hedge
substantially all of its interest rate risk during this period. The Company may
determine, from time to time, to hedge certain other risks associated with its
portfolio of assets. There can be no assurance that the Company's hedging
activities will have the desired beneficial impact on the Company's results of
operations or financial condition. In addition, there will be many market risks
against which the Company may not be able to effectively hedge, including
changes in the spreads of corporate bonds or CMBS over the underlying U.S.
Treasury rates. Furthermore, the Company does not intend to hedge any risks with
respect to CMBS which it purchases or retains for investment. Moreover, no
hedging activity can completely insulate the Company from the risks associated
with changes in interest rates. The Company's hedging strategy may serve to
reduce the returns which the Company could possibly achieve if it did not hedge
certain risks.
Hedging involves risk and typically involves costs. Such costs increase as
the period covered by the hedging increases and during periods of rising and
volatile interest rates. The Company may increase its hedging activity and thus
increase its hedging costs during such periods when interest rates are volatile
or rising and hedging costs have increased. The Company intends generally to
hedge as much of the interest rate risk as the Company determines is in the best
interests of the stockholders of the Company, given the cost of such hedging
transactions.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record keeping, financial responsibility or segregation of customer funds and
positions. Furthermore, the enforceability of agreements underlying derivative
transactions may depend on compliance with applicable statutory and commodity
and other regulatory requirements and, depending on the identity of the
counterparty, applicable international requirements. The business failure of a
hedging Counterparty with which the Company has entered into a hedging
transaction will most likely result in a default. Default by a party with which
the Company has entered into a hedging transaction may result in the loss of
unrealized profits and force the Company to cover its resale commitments, if
any, at the then current market price. Although generally the Company will seek
to reserve for itself the right to terminate its hedging positions, it may not
always be possible to dispose of or close out a hedging position without the
consent of the hedging Counterparty, and the Company may not be able to enter
into an offsetting contract in order to cover its risk. There can be no
assurance that a liquid secondary market will exist for hedging instruments
purchased or sold, and the Company may be required to maintain a position until
exercise or expiration, which could result in losses.
The Company will enter into hedging transactions in accordance with Company
policies, which may be changed by the Board of Directors in its sole discretion.
TEMPORARY INVESTMENT IN SHORT-TERM INVESTMENTS MAY ADVERSELY AFFECT THE
COMPANY'S RESULTS. The Company's results of operations may be adversely
affected during the period in which the Company is implementing its investment,
leveraging and hedging strategies (or during any period after which it has
received the proceeds of a securitization but has yet to invest such proceeds)
since during this time the Company will be primarily invested in short-term
investments.
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FUTURE OFFERINGS OF DEBT AND EQUITY MAY ADVERSELY AFFECT THE MARKET PRICE OF
THE COMMON STOCK. The Company may in the future increase its capital resources
by making additional offerings of equity and debt securities, including classes
of preferred stock, common stock, commercial paper, medium-term notes and senior
or subordinated notes. All debt securities and other borrowings, as well as all
classes of preferred stock, will be senior to the Common Stock in a liquidation
of the Company. The effect of additional equity offerings will be substantial
dilution of the equity of stockholders of the Company or the reduction of the
price of shares of the Common Stock, or both. The Company is unable to estimate
the amount, timing or nature of additional offerings as they will depend upon
market conditions and other factors.
RISKS RELATED TO COMPETITION
COMPETITION MAY ADVERSELY AFFECT THE ABILITY OF THE COMPANY TO CONDUCT ITS
BUSINESS. The Company's net income depends, in large part, on the Company's
ability to originate or acquire Mortgage Assets at favorable spreads over the
Company's borrowing costs and to securitize such assets. In originating or
acquiring Mortgage Assets, the Company competes with other specialty finance
companies, insurance companies, investment banks, savings and loan associations,
banks, mortgage bankers, mutual funds, institutional investors, other lenders,
governmental bodies and other entities, including REITs. Many of the Company's
competitors for Mortgage Assets may have greater access to capital and other
resources and may have other advantages over the Company.
RISKS RELATED TO PERSONNEL
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL COULD ADVERSELY AFFECT THE
COMPANY'S OPERATIONS IF SUCH PERSONNEL ARE NO LONGER AVAILABLE. The Company
will rely on the Company's officers and key employees to manage the Company
properly. The failure by such employees to manage the Company properly could
have a material adverse effect on the viability of the Company's operations. The
Company will be wholly dependent on the diligence and skill of the Company's
employees for the selection, structuring and monitoring of its Mortgage Assets
and associated borrowings. The Company is highly dependent on the efforts of the
Company's officers. Although the Company will enter into employment agreements
with certain senior officers, there can be no assurance that such agreements
will prevent key personnel from terminating their employment with the Company or
that services rendered thereunder will be sufficient for the Company's purposes.
The loss of key personnel and/or the retention of their services by competitors
could have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations.
RISKS RELATED TO OWNERSHIP CONCENTRATION
CONCENTRATION OF OWNERSHIP MAY ADVERSELY AFFECT THE ABILITY OF NEW INVESTORS
TO INFLUENCE THE COMPANY. Upon completion of this Offering, the current owners
of CLF will own approximately 38% in the aggregate of the outstanding shares of
Common Stock. Accordingly, such current owners will collectively have
significant influence over the Company and may determine to vote their shares
together. The Company's management group plans to vote its shares together. Such
influence may result in Company decisions which may not fully serve the best
interests of all stockholders. The Charter and Bylaws each also contain
provisions that may make it difficult to acquire control of the Company by means
of a tender offer, an open market purchase, a proxy fight or otherwise, if such
acquisition is not approved by the Company's Board of Directors.
RISKS RELATED TO ACCOUNTING FOR SECURITIZATION
IF THE COMPANY ELECTS GAIN ON SALE ACCOUNTING TREATMENT, IRREGULAR
SECURITIZATIONS MAY AFFECT THE MARKET PRICE OF THE COMMON STOCK. To the extent
the Company elects to securitize its loans in a transaction which would result
in gain on sale accounting, the Company will receive a significant portion of
its revenues from such securitizations. To the extent it cannot generate a
sufficient volume of Credit Tenant
27
<PAGE>
Loans to securitize in each fiscal quarter, the Company may experience
fluctuations in its quarterly financial results. Uneven financial results from
quarter to quarter may adversely affect the market price of the Common Stock.
RISKS RELATED TO SOFTWARE DEFICIENCIES
YEAR 2000 SOFTWARE DEFICIENCIES COULD ADVERSELY AFFECT THE COMPANY. The
Company relies upon a significant number of computer software programs and
operating systems in conducting its operations. To the extent that these
software applications contain source code that is unable to appropriately
interpret the upcoming calendar "Year 2000," some level of modification or even
possibly replacement of such source code or applications will be necessary. The
Company's computers have all been purchased within the last 24 months and
management believes them to be "Year 2000" compliant, and thus it is currently
not anticipated that these "Year 2000" costs will have any material adverse
impact on the Company's business, financial condition or operations, although
this cannot be assured. In addition, there can be no assurance that "Year 2000"
problems will not adversely affect financial markets or the Company's lenders,
suppliers and borrowers and their ability to perform their obligations to the
Company and the ability of borrowers under Credit Tenant Loans and tenants under
Credit Tenant Leases to perform their obligations thereunder.
DILUTION, LEGAL AND OTHER RISKS
THE OFFERING RESULTS IN A DILUTION TO NEW INVESTORS. Purchasers of shares
of Common Stock in the Offering will experience an immediate and substantial
dilution of $8.34 per share of Common Stock in the net tangible book value of
shares of Common Stock based upon an assumed initial public offering price of
$15.00 per share. See "Dilution."
CHARTER PROVISIONS MAY RESTRICT A CHANGE OF CONTROL. The authorized capital
stock of the Company includes preferred stock issuable in one or more series.
The issuance of preferred stock could have the effect of making an attempt to
gain control of the Company more difficult by means of a merger, tender offer,
proxy contest or otherwise. The preferred stock, if issued, would have a
preference on dividend payments that could affect the ability of the Company to
make dividend distributions to the common stockholders.
The provisions of the Company's Charter or relevant Maryland law may inhibit
market activity and the resulting opportunity for the holders of the Common
Stock to receive a premium for their Common Stock that might otherwise exist in
the absence of such provisions.
Certain provisions of the Maryland General Corporation Law, as amended
("MGCL") relating to "business combinations" and a "Control Share Acquisition"
and of the Charter and Bylaws of the Company may also have the effect of
delaying, deterring or preventing a takeover attempt or other change in control
of the Company that would be beneficial to stockholders and might otherwise
result in a premium over then prevailing market prices. Although the Bylaws of
the Company contain a provision exempting the acquisition of Common Stock by any
person from the Control Share Acquisition statute, there can be no assurance
that such provision will not be amended or eliminated at any time in the future.
STAGGERED BOARD COULD DISCOURAGE A CHANGE OF CONTROL. The Board has been
divided into three classes of directors. The terms of the classes will expire in
1999, 2000 and 2001 respectively. Beginning in 1999, as the term of a class
expires, directors in that class will be elected for a three-year term and the
directors in the other two classes will continue in office. Such staggered board
provision will make it more difficult for a potential acquiror to remove
directors or elect a majority of new directors.
ISSUANCE OF ADDITIONAL SHARES AND PREFERRED SHARES COULD DISCOURAGE A CHANGE
OF CONTROL. The Company's Articles of Incorporation authorize the Board to
issue additional shares or preferred shares of beneficial interest, par value
$.01 per share ("Preferred Shares"), or classify any unissued shares or
28
<PAGE>
Preferred Shares and to reclassify any previously classified but unissued shares
or Preferred Shares of any series from time to time. No such shares or Preferred
Shares have been so classified or reclassified to date. The issuance of
Preferred Shares or other Shares with voting rights different from the shares
could make it more difficult for a potential acquiror to obtain sufficient votes
to approve proposed transactions. Furthermore, Preferred Shares or other shares
may be issued with rights senior to the Common Stock with respect to dividends,
payments upon liquidation, voting or other matters.
ACCOUNTING RULE CHANGES COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS. To
the extent that accounting rules with respect to the treatment of leases change,
it may affect the origination volume of the Company's Credit Tenant Loans.
FAILURE TO DEVELOP A STABLE MARKET MAY RESULT IN A DEPRESSED MARKET
PRICE. Prior to the Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop,
or if developed, will be sustained. The initial public offering price has been
determined by negotiations between the Company and the Representative of the
Underwriters, and may not be indicative of the prices that will prevail in the
open market. See "Underwriting."
FAILURE TO MAINTAIN EXCLUSION FROM THE INVESTMENT COMPANY ACT WOULD RESTRICT
THE COMPANY'S OPERATING FLEXIBILITY. The Company at all times intends to
conduct its business so as to be excluded from regulation as an investment
company under the Investment Company Act. Accordingly, the Company does not
expect to be subject to the restrictive provisions of the Investment Company
Act. The Investment Company Act excludes from regulation entities that are
primarily engaged in the business of purchasing or otherwise acquiring
"mortgages and other liens on and interests in real estate." Under the current
interpretations of the staff of the Commission, in order to qualify for this
exception, the Company must, among other things, maintain at least 55% of its
assets directly in mortgage loans, qualifying pass-through certificates and
certain other qualifying interests in real estate. In addition, unless certain
mortgage-backed securities represent all the certificates issued with respect to
an underlying pool of mortgage loans, such securities may be treated as
securities separate from the underlying mortgage loans and thus may not qualify
as qualifying interests in real estate for purposes of the 55% requirement. The
Company's ownership of certain mortgage and other assets, therefore, will be
limited by the provisions of the Investment Company Act. If the Company fails to
qualify for exception from registration as an investment company, its ability to
use leverage would be substantially reduced, and it would be unable to conduct
its business as described herein. Any such failure to qualify for such exemption
would have a material adverse effect on the Company.
SALES BY SHAREHOLDERS COULD ADVERSELY AFFECT THE MARKET PRICE OF THE COMMON
SHARES. Upon completion of the Offering, the Company will have a total of
11,880,000 shares of Common Stock outstanding. Of these shares, all 7,340,000
shares of Common Stock offered hereby (8,441,000 shares if the Underwriters'
over-allotment options are exercised in full) will be freely tradeable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined under the Securities Act. The remaining
shares of Common Stock outstanding (4,540,000 shares) will be "restricted
securities" as defined by Rule 144 promulgated under the Securities Act.
All investors holding equity interests in the Company on the date hereof
(including Hyperion Partners II L.P., South Ferry 2, L.P., all of the Company's
officers and substantially all of the Company's employees) have agreed not,
directly or indirectly, to offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock directly or indirectly, for a period of one year, after the date of this
Prospectus without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters. After such one-year period, this
restriction will expire and such shares would be eligible for sale under Rule
144, provided that the Company shall have been subject to the reporting
requirements of the Exchange Act for at least 90 days
29
<PAGE>
and the relevant holding period under Rule 144 shall have expired (which period
will expire on the first anniversary of the closing of the Offering).
Furthermore, such securities would be available for private resale. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
prior notice, release all or any portion of the shares of Common Stock subject
to such agreements. No predictions can be made of the effect, if any, that the
sale or availability for sale of additional shares of Common Stock will have on
the market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through an
offering of its equity securities. See "Shares Eligible for Future Sale."
EFFECT OF FUTURE OFFERINGS OF DEBT AND EQUITY ON MARKET PRICE OF THE COMMON
STOCK. The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, common stock, commercial paper, medium-term notes and senior or
subordinated notes. All debt securities and other borrowings, as well as all
classes of preferred stock, will be senior to the Common Stock in a liquidation
of the Company. The effect of additional equity offerings will be substantial
dilution of the equity of stockholders of the Company and may result in the
reduction of the price of shares of the Common Stock. The Company is unable to
estimate the amount, timing or nature of additional offerings as they will
depend upon market conditions and other factors.
30
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately
$101,478,000 ($116,836,950 if the Underwriters' overallotment option is
exercised in full), assuming an initial public offering price of $15.00 per
share. Of the net proceeds of the Offering, the Company will initially apply
approximately $55 million to pay down a portion of the outstanding balance under
the NationsBank Warehouse, approximately $21.6 million to retire the preferred
interest issued by CLF, approximately $18.5 million to repay notes payable to
one of CLF's limited partners, approximately $0.3 million to the general partner
of CLF with the remainder (approximately $5.3 million) to be retained by the
Company for working capital purposes. Following the Offering, the Company
expects to draw down upon its Warehouse Credit Facilities, as necessary. The
proceeds of the NationsBank Warehouse and the notes payable were used to finance
the Company's Credit Tenant Loans and certain of its hedging expense. The
portion of the NationsBank Warehouse to be repaid bears interest at rates
ranging from LIBOR plus 1% to LIBOR plus 6% (in each case per annum) and matures
on April 1, 2000. The notes payable to CLF's limited partner bear interest at
20% per annum and are payable on demand.
The Company intends temporarily to invest some of the net proceeds of the
Offering in readily marketable interest bearing short-term investment grade
securities or guaranteed obligations of the U.S. government, until appropriate
real estate assets are identified and acquired. The Company may require up to 15
months to fully implement the leveraging strategy to increase its Mortgage Asset
investments to its desired level. Pending full investment in the desired mix of
assets, funds may be invested in interest-bearing short-term investment grade
securities or guaranteed obligations of the U.S. government or to reduce the
Warehouse Credit Facilities that are expected to provide a lower net return than
the Company hopes to achieve from its Credit Tenant Loans and other intended
primary investments.
DIVIDEND AND DISTRIBUTION POLICY
CLF, Inc. has never declared or paid any cash dividends. CLF, Inc. intends
to retain future earnings for use in the development of its business and does
not anticipate declaring or paying any cash dividends on the Common Stock in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other factors, CLF, Inc.'s
earnings, financial condition, capital requirements, levels of indebtedness, and
other considerations which the Board of Directors deems relevant. The
distribution policy of CLF, Inc. is subject to revision at the discretion of the
Board of Directors. All distributions will be made by CLF, Inc. at the
discretion of the Board of Directors and will depend on the earnings and
financial condition of CLF, Inc., and such other factors as the Board of
Directors deems relevant.
31
<PAGE>
CAPITALIZATION
The capitalization of the Company, as of March 31, 1998, and as adjusted to
reflect the sale of the shares of the Common Stock offered hereby at an assumed
initial public offering price per share is as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
CONTRIBUTIONS
AND THE PRO FORMA
OFFERING COMPANY
HISTORICAL --------------- --------------
CLF AS OF
MARCH 31, 1998
-----------------
(UNAUDITED)
<S> <C> <C> <C>
DEBT:
Repurchase agreement obligations(1)........................ $ 315,266,832 $ (55,709,820) $ 259,557,012
Notes payable to partner(2)................................ 18,507,023 (18,507,023) --
----------------- --------------- --------------
333,773,855 (74,216,843) 259,557,012
PARTNERS' CAPITAL (DEFICIT)/ STOCKHOLDERS' EQUITY:
Partners' Capital (Deficit)................................ (68,007) 68,007 --
Common Stock, $.01 par value;
50,000,000 shares authorized;
11,880,000 issued and outstanding
on a pro forma basis(3)(4)............................... -- 118,800 118,800
Additional paid-in capital................................. -- 79,030,036 79,030,036
----------------- --------------- --------------
Total Partners' Capital (Deficit)/Stockholders' Equity..... (68,007) 79,216,843 79,148,836
----------------- --------------- --------------
Total Capitalization................................... $ 333,705,848 $ 5,000,000 $ 338,705,848
----------------- --------------- --------------
----------------- --------------- --------------
</TABLE>
- ------------------------
(1) Upon completion of the Offering and the application of the net proceeds to
the repayment of a portion of the principal and accrued interest outstanding
under the repurchase obligations, the Company will have approximately $260
million of such repurchase obligations outstanding. The Company's credit
facilities are expected to total $930 million upon completion of the
Offering and to be available for funding loans at specified advance rates.
(2) Represents notes payable made by CLF, to a limited partner of CLF, which
notes payable will be retired upon completion of the Offering.
(3) After deducting underwriting discounts and commissions and estimated
expenses of the Offering of approximately $9.0 million, and assuming no
exercise of the Underwriters' over-allotment option to purchase up to an
additional 1,101,000 shares of Common Stock.
(4) Does not include 1,425,600 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's 1998 Stock Option Plans. See
"Directors and Executive Officers--Stock Options."
32
<PAGE>
DILUTION
Purchasers of shares of Common Stock sold in the Offering will realize an
immediate and substantial dilution in the net tangible book value of their
shares. The initial public offering price per share exceeds the net tangible
book value per share. Net tangible book value per share of Common Stock is
determined by subtracting total liabilities from total tangible assets and
dividing the remainder by the number of shares of Common Stock that will be
outstanding after the Offering. The following table illustrates the dilution to
purchasers of shares of Common Stock sold in the Offering based on the assumed
initial public offering price and assuming no exercise of the Underwriters'
over-allotment option.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1).......... $ 15.00
Pro forma net tangible book value per share before the
Offering................................................ $ (0.02)
Increase per share attributable to new investors.......... 6.68
---------
Pro forma net tangible book value per share after the
Offering(2)............................................... 6.66
---------
Dilution of net tangible book value of Common Stock to new
investors(3).............................................. $ 8.34
---------
---------
</TABLE>
- ------------------------
(1) Before deducting the underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Pro forma net tangible book value after the Offering and the Formation
Transactions are determined by dividing the Company's consolidated net
tangible book value of approximately $79.1 million at March 31, 1998 by
11,880,000 Common Shares outstanding.
(3) Dilution is determined by subtracting pro forma net tangible book value
after giving effect to the Offering and the Formation Transactions from the
assumed initial public offering price paid by a new investor for a share of
Common Stock.
The following table sets forth the number of shares of Common Stock to be
sold by the Company in the Offering, the total amount to be paid to the Company
by purchasers of Common Stock sold in the Offering, the number of shares of
Common Stock outstanding immediately prior to the Offering and the total
consideration paid and average price per share paid for such shares by the
existing shareholders, based on an assumed initial public offering price of $15
per share and no exercise of the underwriters' overallotment option.
<TABLE>
<CAPTION>
SHARES ISSUED
----------------------- TOTAL AVERAGE CONSIDERATION
SHARES PERCENT CONSIDERATION PER SHARE
------------ --------- -------------- ---------------------
<S> <C> <C> <C> <C>
Existing Stockholders....... 4,540,000 38.22% $ 8,000,000(1) $ 1.76
New Investors............... 7,340,000 61.78% 110,100,000 $ 15.00
------------ --------- --------------
Total................. 11,880,000 100.00% $ 118,100,000
------------ --------- --------------
------------ --------- --------------
</TABLE>
- ------------------------
(1) The total consideration from the existing stockholders consists of the
capital contributed by the existing stockholders to the common capital of
the predecessor entity, CLF.
33
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The selected historical financial information set forth below as of and for
the years ended December 31, 1997 and 1996, and for the period September 29
(commencement of operations) through December 31, 1995, have been derived from
the financial statements of Capital Lease Funding, L.P. included elsewhere
herein, which have been audited by Ernst & Young LLP, independent auditors, and
should be read in conjunction with those financial statements (including the
notes thereto) and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all appearing elsewhere in this
Prospectus.
The results shown below reflect significant investment in the future growth
of its business such as the development of its lending and securitization
programs, from which the Company expects to reap an ongoing benefit. For
example, the Company's operating losses to date reflect the substantial
investments the Company has made to enable the Company to achieve its growth
plans, including investments in personnel, product development, securitization
related documents and the development and training of a national correspondent
network. As a result of these investments, management believes that its staff is
largely sufficient in terms of size, expertise and training to achieve the
Company's projected growth and that its innovative programs provide it with
competitive advantages.
The Company made a strategic decision to securitize a small developmental
pool of Credit Tenant Loans in January 1997. This initial pool's smaller size
and characteristics, as well as associated non-recurring expenses of
approximately $0.7 million, resulted in an economically inefficient transaction.
However, this initial securitization resulted in a number of benefits for the
Company. The Company received preliminary subordination levels from the Rating
Agencies in connection with a proposed second securitization during the fourth
quarter of 1997. These preliminary subordination levels were significantly more
favorable than those obtained in the first securitization, reflecting the
increased size and diversity of the proposed pool. Management believes that
pools of Credit Tenant Loans greater than $200 million and involving more than
10 Credit Tenants can be efficiently and profitably securitized. Management
estimates that the value of the Company's loans exceeded their carrying value by
$10 million at December 31, 1997, and by $13.0 million at May 15, 1998, after
giving effect to the value of associated hedge positions.
The selected unaudited pro forma balance sheet as of March 31, 1998 set
forth below is presented as if the transactions contemplated by this Prospectus,
including the Offering and the application of the proceeds therefrom, had
occurred on March 31, 1998. The selected unaudited pro forma statements of
operations data for the three months ended March 31, 1998 and the year ended
December 31, 1997 are presented as if the transactions contemplated by this
Prospectus, including the Offering and the application of the estimated net
proceeds therefrom, had occurred on January 1, 1997. See "Use of Proceeds." The
pro forma financial information set forth below is not necessarily indicative of
what the actual results of operations or financial position of the Company would
have been, nor does it purport to represent the Company's results of operations
or financial position for future periods. The pro forma financial information
should be read in conjunction with the Company's pro forma financial statements
and related notes and historical financial statements and related notes included
elsewhere in this Prospectus. See "Summary--Summary Selected Historical and Pro
Forma Financial Information" and "Financial Statements and Information."
34
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT OF
THREE MONTHS ENDED OPERATIONS) TO
MARCH 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------------- ---------------------------------------------- --------------------
HISTORICAL PRO FORMA COMPANY HISTORICAL CLF, L.P. HISTORICAL CLF, L.P.
1998 ------------------------ ----------------- -------------------------- --------------------
PRO FORMA 1998 1997 1997 1997 1996 1995
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
REVENUE:
Interest income
from mortgage
loans........... $5,279,888 $5,279,888 $1,498,770 $9,859,768 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of
mortgage
loans........... -- -- (160,782 ) (160,782) (160,782) (923,611) --
Other revenue from
mortgage
loans........... 20,787 20,787 8,081 43,326 43,326 16,520 --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Total Revenues.... 5,300,675 5,300,675 1,346,069 9,742,312 9,742,312 4,153,585 224,313
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
LOAN EXPENSES:
Interest on
repurchase
agreements...... 3,288,281 4,899,369 1,146,617 3,662,631 8,829,548 4,048,601 221,400
Loss on loan in
default......... -- -- -- -- -- -- 717,359
Servicer fees..... 40,721 40,721 13,341 76,328 76,328 50,320 --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Total Loan
Expenses........ 3,329,002 4,940,090 1,159,958 3,738,959 8,905,876 4,098,921 938,759
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Operating Expenses:
Personnel
expense......... 761,176 736,176 466,949 2,980,307 2,880,307 2,100,932 313,916
General and
administrative
expense......... 265,887 203,387 200,096 977,642 727,642 1,298,368 736,461
Marketing and
advertising
expense......... 165,844 165,844 85,766 501,091 501,091 405,930 36,943
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Total Operating
Expenses........ 1,192,907 1,105,407 752,811 4,459,040 4,109,040 3,805,230 1,087,320
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Operating Income
(Loss)............ 778,766 (744,822 ) (566,700 ) 1,544,313 (3,272,604) (3,750,566) (1,801,766)
OTHER INCOME
(EXPENSE):
Other interest
income.......... 38,956 38,956 66,756 169,889 169,889 155,781 136,789
Interest expense
on notes
payable......... -- (924,315 ) (5,175 ) -- (292,827) (68,881) --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Net other income
(expense)....... 38,956 (885,359 ) 61,581 169,889 (122,938) 86,900 136,789
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
INCOME (LOSS) BEFORE
PROVISION FOR
FEDERAL AND STATE
INCOME TAX........ 817,722 (1,630,181 ) (505,119 ) 1,714,202 (3,395,542) (3,663,666) (1,664,977)
Provision for
Federal and State
Income Tax........ (327,100 ) -- -- (685,700) -- -- --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
Net Income (Loss)... $ 490,622 $(1,630,181) $ (505,119 ) $1,028,502 $ (3,395,542) $ (3,663,666) $(1,664,977)
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
PRO FORMA NET INCOME
PER SHARE......... $ 0.04 $ -- $ -- $ 0.09 $ -- $ -- $ --
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
----------- ----------- ----------- ----------------- ------------ ------------ --------------------
OTHER DATA:
Cash flows from
operating
activities...... $ -- $(4,060,275) $4,684,622 $ -- $ (2,704,304) $(13,630,639) $(4,411,903)
Cash flows from
investing
activities...... $ -- $ (1,198 ) $ (12,968 ) $ -- $ (60,612) $ (77,581) $ --
Cash flows from
financing
activities...... $ -- $6,232,704 $ (487,559 ) $ -- $ 5,032,880 $ 7,546,214 $12,714,139
Number of loans
funded.......... -- 23 12 -- 60 26 6
Original principal
amount of loans
funded.......... $ -- $62,475,112 $50,963,285 $ -- $224,866,628 $137,940,791 $22,735,140
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF DECEMBER 31,
------------------------ ----------------------
<S> <C> <C> <C> <C>
PRO FORMA HISTORICAL HISTORICAL CLF, L.P.
----------- ----------- ----------------------
<CAPTION>
(UNAUDITED) (UNAUDITED) 1997 1996
---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... 1$1,964,425 $6,579,425 $4,408,194 $2,140,230
Mortgage loans held for sale....................................... 323,509,279 323,509,279 263,473,373 157,719,912
Total assets....................................................... 342,423,635 337,423,635 274,378,058 168,349,353
Notes payable...................................................... -- 18,507,023 12,274,318 487,559
Total liabilities.................................................. 263,274,799 337,491,642 272,815,884 154,671,846
Total partners' capital (deficit)/shareholders' equity............. 79,148,836 (68,007) 1,562,174 13,677,507
</TABLE>
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE SELECTED CONSOLIDATED
FINANCIAL AND OTHER INFORMATION, THE COMPANY'S PRO FORMA AND HISTORICAL
FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company currently operates principally as a specialty lender originating
Credit Tenant Loans. The Company's revenues and cash flows will be derived from
interest or distributions paid on Mortgage Assets, fee interest from the
origination of Mortgage Loans, rents received from Real Estate Assets, the
proceeds from any sales or securitizations of loans or sales of properties, and
interest and revenues from other investments. The Offering will significantly
increase the Company's capital resources. Subsequent to the Offering, the
Company will continue its existing business, and intends to make investments in
other real estate related assets. The Company's operating results subsequent to
the Offering are anticipated to be significantly different from its operating
results prior to the Offering.
The Company's operating losses to date reflect substantial investments
intended to position and enable the Company to achieve its growth plans. These
investments include costs associated with: attracting and retaining qualified
employees; product development; non-recurring legal fees for drafting,
structuring and implementing lease enhancement mechanisms, form loan
documentation, disclosure documents, warehouse agreements, rating agency
negotiation, and various other organizational matters; establishing and training
the Company's national correspondent network; the purchase and development of
information systems; the creation of underwriting standards; and the creation of
associated infrastructure. Management believes that these costs will be largely
non-recurring.
A significant component of the Company's operating expenses to date are
attributable to an increase in the number of its employees. Management believes
that its current staff of 21 is largely sufficient in terms of size, expertise
and training to achieve the Company's projected growth including the
origination, underwriting and processing of expected increased loan volume.
These personnel investments are consistent with the Company's strategy of
strengthening its position as a leading lender in the Credit Tenant Loan market.
HISTORICAL RESULTS--JANUARY 1997 SECURITIZATION
In January 1997, the Company made a strategic decision to securitize a
developmental pool of Credit Tenant Loans. This initial pool's smaller size and
characteristics resulted in a less economically efficient transaction than the
Company believes would have been obtained with a larger, more diverse pool.
Management believes that securitizing this developmental pool allowed the
Company to gain a number of important benefits. These benefits included
establishing valuable relationships with the Rating Agencies, understanding and
participating in the development of Rating Agency methodologies and criteria,
establishing the Company as a market leader in Credit Tenant lending, and
validating the Company's Lease Enhancement mechanisms. Management believes that
these benefits offset the inefficiencies and costs associated with securitizing
a small pool. The Company expects that future securitizations will gain the
benefits of the initial costs incurred by the Company in securitizing its first
pool and will also benefit from gains in, execution, subordination levels,
geographic and tenant diversity, and efficiencies realized by securitizing a
larger pool of assets. Management believes that pools of Credit Tenant Loans
greater than $200 million and involving more than 10 Credit Tenants can be
efficiently and profitably securitized in an efficient and profitable manner.
Management believes that the costs associated with the Company's first
securitization will not be indicative of costs for future securitizations. A
significant portion of the costs associated with the January 1997 securitization
was for legal expenses related to drafting various disclosure and other
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operative documents, the models of which can be used for future transactions, as
well as certain other costs and expenses which management believes will be
largely non-recurring. Management estimates that the non-recurring expenses
allocated to the January 1997 securitization were at least $700,000. Management
believes that certain other expenses will be lower (on a percentage basis) on
future transactions, including routine placement agent, legal and rating agency
fees. Further, these increased expenses have been charged against a
securitization that was significantly smaller than the Company expects to
conduct in the future. In addition, the loss of approximately $1.1 million
attributable to this securitization does not reflect net interest income in the
amount of approximately $1.0 million received by the Company during 1996 while
it held the loans in portfolio.
CURRENT LOANS
As of May 15, 1998, the Company held 93 Credit Tenant Loans with an
aggregate principal balance of $342 million, backed by 32 different Credit
Tenants. The Company currently carries these loans at the lower of cost or
market. Management estimates, however, that the market value of these loans in a
securitization exceeds cost by approximately $13 million, after giving effect to
the value of the associated hedge position. At year end, Management estimates
the market value of the Company's loans exceeded their carrying value of $244
million by approximately $10 million. Following the Offering, the Company
intends to securitize these loans (along with additional loans acquired prior to
closing of the Offering). In contrast to this larger pool, the Company's
developmental CTL Securitization in January 1997 had only 30 Credit Tenant Loans
with an aggregate principal balance of approximately $130 million, backed by 13
different Credit Tenants. The number and diversity of Credit Tenants in a
securitization directly affects the ratings and, thus, the value of such
securitization.
During the fourth quarter of 1997, the Company had intended to securitize a
pool of approximately $212 million, consisting of a portion of the Existing
Loans. The Company received preliminary subordination levels from the Rating
Agencies in connection with this proposed securitization that were significantly
more favorable than those obtained on the first securitization, reflecting the
increased size and diversity of this pool. The Company decided not to securitize
this pool in contemplation of the Offering.
CERTAIN ACCOUNTING POLICIES
The Company has historically derived the majority of its revenues from
interest and fee income from Credit Tenant Loans originated by the Company, and
from the securitization of such loans. The Company generally defers certain fee
income and costs associated with its Credit Tenant Loans until such loans are
securitized. Prior to securitization, fee income and costs associated with
Credit Tenant Loans are recorded as deferred income and costs on the Company's
balance sheet. Such costs include, among other items, loan fee costs net of
related revenues, legal fees incurred in the loan closing process, insurance
costs, legal fees with respect to securitization, rating agency fees, hedging
related gains and losses (including realized and unrealized gains and losses)
and other loan related costs.
To date, the Company has held all of its Mortgage Loans for sale or
securitization. Accordingly, such loans have been recorded at the lower of cost
or fair value. To the extent the Company may in the future hold some or all of
such Mortgage Loans for investment, such Mortgage Loans will generally be
recorded at cost and interest on such loans will be recognized as revenue when
earned. Additionally, with respect to such Mortgage Loans which are originated
at a discount and held for investment, the Company will amortize into income
over the estimated life of such loans the difference between its cost basis and
the face amount of such loans.
For such securitizations which are treated as financings for accounting
purposes, the Company will recognize income and expenses over time as interest
income is received and interest expense is incurred. For securitizations which
are accounted for as sales for accounting purposes, the Company will recognize
income and expenses in the period in which the transaction occurs.
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HISTORICAL RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. Total revenue consists predominantly of interest income from
Mortgage Loans. With the exception of interest income and other income which are
treated as period income, revenues collected by the Company related to
origination of Mortgage Loans are recorded as deferred items and recognized upon
the sale or securitization of the related loans. Total revenue increased to $5.3
million for the quarter ended March 31, 1998 from $1.3 million for the quarter
ended March 31, 1997, primarily due to an increase in interest income as a
result of the increased volume of Mortgage Loans originated and held by the
Company compared to the same period in the preceding year.
MORTGAGE LOAN EXPENSES. Mortgage Loan expenses include interest expense on
repurchase agreement obligations and servicer fees on Mortgage Loans. With the
exception of interest expense and servicer fees which are treated as period
expenses, other costs incurred by the Company related to Mortgage Loans are
recorded as deferred costs and recognized upon the sale or securitization of the
related Mortgage Loans. Mortgage Loan expenses increased to $4.9 million for the
quarter ended March 31, 1998 from $1.2 million for the quarter ended March 31,
1997.
Interest on repurchase agreement obligations increased to $4.9 million for
the quarter ended March 31, 1998 from $1.1 million for the quarter ended March
31, 1997, primarily due to the increased volume of Mortgage Loans originated and
held by the Company compared to the same period in the preceding year.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense, general and administrative expense (including professional fees), and
marketing and advertising expense. Operating expenses increased to $1.1 million
for the quarter ended March 31, 1998 from $0.8 million for the quarter ended
March 31, 1997.
Personnel expense increased to $0.7 million for the quarter ended March 31,
1998 from $0.5 million for the Quarter ended March 31, 1997. The Company added
several additional personnel during 1997 in support of loan origination and
processing activities.
General and administrative expense was unchanged for the quarter ended March
31, 1998 compared with the quarter ended March 31, 1997.
Marketing and advertising increased to $0.2 million for the quarter ended
March 31, 1998 from $0.1 million for the quarter ended March 31, 1997, due to
increased marketing and advertising activities.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income and
interest expense not related to Mortgage Loans. Other interest income was
approximately unchanged for the quarter ended March 31, 1998 compared with the
quarter ended March 31, 1997. Interest expense on notes payable increased $0.9
million for the quarter ended March 31, 1998 from the quarter ended March 31,
1997, due to increased notes payable issued in support of hedging and operating
capital requirements.
CASH FLOW DATA. Cash flows from operating activities decreased to ($4.1
million) for the quarter ended March 31, 1998 from $4.7 million for the quarter
ended March 31, 1997, primarily due to the effects of interest rates and the
corresponding margin requirements under the Company's hedging programs. Cash
flows from investing activities was approximately unchanged for the quarter
ended March 31, 1998 compared to the quarter ended March 31, 1997.
Cash flows from financing activities increased to $6.2 million for the
quarter ended March 31, 1998 from $(0.5) million for the quarter ended March 31,
1997 due to increased notes payable issued in support of hedging and operating
capital requirements.
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HISTORICAL RESULTS OF OPERATIONS--1997 TO 1996
REVENUES. Total revenue consists predominantly of interest income from
Mortgage Loans. Total revenue increased to $9.7 million for the year ended
December 31, 1997 from $4.2 million for the year ended December 31, 1996.
Loss on sales of mortgages reflects the losses incurred by the Company in
the securitization of a pool of mortgage loans in January 1997. With respect to
such securitization, a provision for loss on sale of $923,611 was recorded
during 1996, and an additional loss of $160,782 was recognized during 1997.
Interest income from mortgages increased to $9.9 million for the year ended
December 31, 1997 from $5.1 million for the year ended December 31, 1996,
primarily due to the increased volume of mortgage loans originated and held by
the Company compared to the preceding period.
LOAN EXPENSES. Loan expenses include interest expense on repurchase
agreement obligations and servicer fees on Mortgage Loans. With the exception of
interest expense and servicer fees which are treated as period expenses, other
costs incurred by the Company related to Mortgage Loans are recorded as deferred
costs and recognized upon the sale or securitization of the related loans. Loan
expenses increased to $8.9 million for the year ended December 31, 1997 from
$4.1 million for the year ended December 31, 1996.
Interest on repurchase agreement obligations increased to $8.8 million for
the year ended December 31, 1997 from $4.0 million for the year ended December
31, 1996, primarily due to the increased volume of Mortgage Loans originated and
held by the Company compared to the preceding period.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense, general and administrative expense (including professional fees), and
marketing and advertising expense. Operating expenses increased to $4.1 million
for the year ended December 31, 1997 from $3.8 million for the year ended
December 31, 1996.
Personnel expense increased to $2.9 million for the year ended December 31,
1997 from $2.1 million for the year ended December 31, 1996. The Company added
several additional personnel during 1997 in support of loan origination and
processing activities.
General and administrative expense decreased to $727,642 for the year ended
December 31, 1997 from $1.3 million for the year ended December 31, 1996,
primarily due to decreased legal expenses.
Marketing and advertising increased to $501,091 for the year ended December
31, 1997 from $405,930 for the year ended December 31, 1996, due to increased
marketing and advertising activities.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income and
interest expense not related to Mortgage Loans. Other interest income increased
to $169,889 for the year ended December 31, 1997 from $155,781 for the year
ended December 31, 1996. Interest expense on notes payable increased to $292,827
for the year ended December 31, 1997 from $68,881 for the year ended December
31, 1996, due to increased notes payable issued in support of hedging
requirements and operating capital requirements.
CASH FLOW DATA. Cash flows from operating activities increased to $(2.7)
million for the year ended December 31, 1997 from $(13.6) million for the year
ended December 31, 1996, primarily due to increased levels of borrowings under
the Company's repurchase agreements versus mortgage assets originated. Cash
flows from investing activities increased to ($60,612) for the year ended
December 31, 1997 from ($77,581) for the year ended December 31, 1996 due to
lower levels of fixed asset purchases by the Company. Cash flows from financing
activities decreased to $5.0 million for the year ended December 31, 1997 from
$7.5 million for the year ended December 31, 1996, due to lower net levels of
capital additions to the Company.
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PRO FORMA RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998
Pro forma net income was $0.5 million for quarter ended March 31, 1998,
compared to a historical net loss of $1.6 million for the same period. Pro forma
interest expense on repurchase agreements declined by $1.6 million as as result
of the reduction of interest expense based on repayment of a portion of the
amounts outstanding under the NationsBank Warehouse. Pro forma interest expense
on notes payable was eliminated based on repayment of the outstanding notes
payable from the proceeds of the Offering. Pro forma personnel expense increased
by $25,000 to reflect additional personnel hired related to operating as a
public company. Pro forma general and administrative expense increased by
$62,500 to reflect increased general and administrative expenses associated with
operating as a public company. Pro forma income decreased by $327,100 to reflect
a provision for federal and state income taxes. The pro forma adjustments were
assumed to have occurred on January 1, 1997.
PRO FORMA RESULTS OF OPERATIONS--1997
Pro forma net income was $1.0 million for the year ended December 31, 1997,
compared to a historical net loss of $3.4 million for the same period. Pro forma
interest expense on repurchase agreements declined by $5.2 million as a result
of the elimination of interest expense based on repayment of a portion of the
amounts outstanding under the NationsBank Warehouse. Pro forma interest expense
on notes payable was eliminated based on repayment of the outstanding notes
payable from the proceeds of the Offering. Pro forma personnel expense increased
by $100,000 to reflect additional personnel hired related to operating as a
public company. Pro forma general and administrative expense increased by
$250,000 to reflect increased general and administrative expenses associated
with operating as a public company. Pro forma income decreased by $685,700 to
reflect a provision for federal and state income taxes. The pro forma
adjustments were assumed to have occurred on January 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At May 15, 1998, CLF had $4.6 million in cash and cash equivalents. The
Company's sources of funds historically have been operating cash from its
limited partners, and borrowings with respect to loan fundings from NationsBank.
Upon the closing of this Offering and the application of the net proceeds as
contemplated herein, the Company will have Warehouse Credit Facilities with
NationsBank and Prudential Credit totaling $930 million, with an outstanding
balance under these facilities of approximately $260 million. Under the terms of
the Warehouse Credit Facilities, NationsBank will advance up to 100% of the
funded balance on a Credit Tenant Loan. The NationsBank Warehouse was initially
established in July 1996 with a commitment of $350 million, and was increased to
$550 million in April 1998. The NationsBank Warehouse will decrease to $350
million on September 1, 1998, unless the increase of this facility to $550
million is extended by NationsBank. Unless extended, the NationsBank Warehouse
will expire on April 1, 2000. The Company entered into the Prudential Warehouse
in May 1998 in the initial amount of $100 million, which will increase to $350
million upon closing of the Offering; Prudential Credit will advance up to 98%
of the funded balance on a Credit Tenant Loan.
The Company has entered into a separate additional warehouse facility from
Prudential Credit with a commitment of $30 million, the purpose of which will be
for warehousing loans financed under its Mezzanine Construction Loan program.
The Company intends to repay a portion of the balance outstanding under the
Warehouse Credit Facilities with the net proceeds from the Offering. Management
does not expect any discretionary repayment on the Warehouse Credit Facilities
to reduce the amounts available to the Company under the terms of the Warehouse
Credit Facilities. Any discretionary repayment toward the Warehouse Credit
Facilities will be done to maximize the efficiency of cash management and
earnings of the Company. Management believes that the net proceeds of the
Offering, combined with the cash flow from operations and borrowings, will be
sufficient to enable the Company to meet its anticipated liquidity and capital
requirements. See "Use of Proceeds" and "The Company."
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LEVERAGE
The Company intends to employ a leveraging strategy of borrowing against
Credit Tenant Loans to originate or acquire additional assets, generally through
the use of repurchase agreements under its Warehouse Credit Facilities, dollar
roll agreements, CTL Securitizations, loan agreements, lines of credit,
commercial paper borrowings, and other credit facilities. The Company may also
issue debt in the public market to the extent that management deems appropriate.
Leverage can reduce the net income available for distributions to stockholders.
To the extent that changes in market conditions cause the cost of such financing
to increase relative to the income that can be derived from the assets held by
the Company, the Company may reduce the amount of leverage it utilizes. The
Company also intends to securitize the majority of the Mortgage Loans that it
originates or acquires. It may do so by selling such Mortgage Loans, or may
retain such Mortgage Loans and pledge them to secure structured debt. Because
any such debt would be nonrecourse debt (recourse being limited to the pledged
Mortgage Loans) and such debt would be structured to have, in the aggregate,
fixed interest rates corresponding to the interest rates on the Mortgage Loans,
and would pay down principal as principal on the underlying Mortgage Loans is
paid, the economic impact to the Company will be substantially equivalent to a
sale in which a Subordinate Interest is retained.
HEDGING
The Company has historically hedged a substantial portion of its exposure to
long-term interest rate fluctuations to insulate the Company from significant
value changes in its assets prior to securitization. The Company intends to
enter into hedging transactions to protect its portfolio of Mortgage Assets and
related debt from interest rate fluctuations prior to securitization. These
hedging transactions may include (i) interest rate swaps, (ii) the purchase or
sale of interest rate futures, U.S. Treasuries, collars, caps, floors or
options, and (iii) other hedging instruments. The Company will generally not
hedge Mortgage Assets and related debt from interest rate fluctuations after
securitization.
The Company's hedging strategies typically require initial margin deposits
and margin calls depending on changes in interest rates. At March 31, 1998, the
Company had short positions in futures on U.S. Treasuries of approximately $390
million related to its loan portfolio hedging.
INTEREST RATES AND INFLATION
Interest rates will be expected to have a potentially significant effect on
the Company's financial condition and results of operations, because the value
of the Company's assets prior to securitization will be sensitive to changes in
general long-term interest rates, and the cost of funds for the Company will be
sensitive to changes in general short-term interest rates.
In light of these valuation and interest rate exposures, interest rates will
be expected to have a much greater effect on the Company's financial condition
and results of operations than will inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates.
YEAR 2000 ISSUES
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus, the programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the "Year 2000 Problem." The
Company has initiated a company-wide review of its business applications and
equipment to address any exposure to the Year 2000 Problem. The Company uses
mainstream business and database software in its operations. The Company has
made due inquiries with its software vendors to determine that its critical
software applications are Year 2000 compliant. The Company is also identifying
and prioritizing critical lenders, suppliers and borrowers and will follow up
with them concerning their plans and progress addressing the Year 2000 Problem.
The Company is not expected to incur any significant expenditures with respect
to the Year 2000 Problem related to its software and business applications.
The Company is currently evaluating the Year 2000 readiness of its equipment
with a comprehensive review to assure that critical equipment is Year 2000
compliant. The Company does not expect to incur any significant expenditures
with respect to the Year 2000 Problem related to its equipment.
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THE COMPANY
GENERAL
The Company was formed on March 6, 1998, to continue the growth of CLF as a
specialty lender. Since 1995, CLF has been primarily engaged in the business of
originating, underwriting and securitizing mortgage loans secured by first liens
on commercial properties which are long-term net leased to tenants ("Credit
Tenants") whose unsecured credit rating is equal to or greater than BB- (or its
equivalent such leases "Credit Tenant Leases," and loans to owners of real
property subject to Credit Tenant Leases, "Credit Tenant Loans"). The Company's
financing strategy is to accumulate Credit Tenant Loans and periodically to
securitize them with the intention of matching the terms of its assets with the
terms of its long-term liabilities. The Company believes that its national
network of loan origination correspondents, underwriting and loan processing
systems, securitization experience and loan product innovations have established
the Company as a leading originator and securitizer of Credit Tenant Loans and
that continued innovation will permit the Company to expand into other related
real estate investment activities.
Since 1995, the Company has closed over 120 Credit Tenant Loans with an
aggregate original principal amount exceeding $480 million. The Company expects
to continue to fund all of its loans through warehouse and other lines of credit
which, upon closing of this Offering, will aggregate approximately $930 million
and will be provided by NationsBank, N.A. ("NationsBank"), and Prudential
Securities Credit Corporation ("Prudential Credit").
The Company's revenues are principally derived from the spread between
interest revenues from its loans and the cost it incurs on its borrowings. The
Company's business strategy is to grow its revenues both through increasing loan
origination volumes and increasing the net interest spread on its loans and
other investments. This increased spread may occur from the origination of
higher margin products and/or decreasing the Company's cost of funding. The
Company's strategy has been to securitize its Credit Tenant Loans in order to
lower its costs of funds. The Company strategy is to securitize its Credit
Tenant Loans in order to lower its cost of funds through securitizations or
through the sale of whole loans.
CTL Securitizations involve the formation and utilization of a special
single-purpose entity into which is placed a pool of multiple borrower Credit
Tenant Loans involving multiple Credit Tenants. The Credit Tenant Loans in CTL
Securitization pools are either "bond" leases or enhanced to "bond" status so
that these loans are rated on the quality of the Credit Tenant rather than on
the value of the underlying real estate. The ratings received for any pool will
be dependent, in part, on the size of the pool and the diversity of the Credit
Tenant Loans. A CTL Securitization, as structured in the past by CLF, differs
from other mortgage securitizations because of the reliance of a Credit Tenant
Loan on the credit rating of the underlying Credit Tenant. This reliance upon
the expected cash flow from the applicable Credit Tenant, rather than the
underlying value of the real property, allows the Company to underwrite higher
loan to value loans with prepayment protection provisions that increase the
proceeds available to the borrower.
In 1997, CLF completed the first ever CTL Securitization which involved a
variety of Credit Tenants and multiple enhanced net leased properties. This
transaction involved a private placement of approximately $130 million of
various classes of securities backed by a pool of 30 Credit Tenant Loans with 13
Credit Tenants. As of May 15, 1998, CLF held 93 Credit Tenant Loans with an
aggregate original principal balance exceeding $350 million (the "Existing
Loans"). In addition, as of May 15, 1998 CLF has issued 68 commitments to fund
further Credit Tenant Loans with an aggregate committed principal balance of
approximately $402 million (the "Committed Loans"). Furthermore, the Company has
purchased or committed to purchase real property net leased to tenants with an
aggregate purchase price of approximately $12 million (the "Purchase
Commitments"). In connection with the Formation Transactions, the Company will
acquire all of the existing business of CLF, including the Existing Loans, the
Committed Loans and the Purchase Commitments, as well as its pipeline of
outstanding loan applications and term sheets (which, as of May 15, 1998,
totaled approximately $623 million), and the business which may be generated
therefrom. See "The Company--Existing Loans and Pipeline for Future
Originations." The
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Company intends to engage in a transaction to securitize all or a portion of the
Existing Loans and certain of the Committed Loans following completion of the
Offering and expects to securitize the remaining Committed Loans in future
transactions.
The Company's objective is to maximize stockholder value by creating an
on-going and increasing cash flow stream available for distribution through
originating and securitizing Credit Tenant Loans and by investing in related net
leased real estate assets. Upon completion of the Offering, the Company intends
to continue to expand its Credit Tenant Loan business and to expand into related
real estate lines of business. The Company expects that its business expansion
will enhance the growth of its existing Credit Tenant Loan business. These
related lines of business include Mezzanine Construction Lending, the purchase
of real estate net leased to Credit Tenants (generally in conjunction with a
Credit Tenant Loan), investment in the Subordinate Interests in securitized
pools of the Company's Credit Tenant Loans, and selective investments in
Subordinate Interests in other CMBS (particularly those which include, as a
component thereof, Credit Tenant Loans).
The Company has sustained negative net income from operating and investing
activities in each year since its inception in 1995. The negative net income was
principally the result of factors such as the Company's historic cost of
borrowing and degree of leverage, expenses incurred by establishing a national
origination network, and investments in product development, marketing and loan
processing systems, a lack of historic loan origination volume, and the
completion of only a single CTL Securitization which was of limited size and
diversity, during the past three years. There is no assurance that the Company
will be profitable in the future, and it should be noted that the Company's
experience in CTL Securitization transactions is limited to the one CTL
Securitization accomplished in January 1997, and the Company's future business
plans call for it to expand into related real estate lines of business in which
it has no or limited experience. For certain of these new businesses, the
Company will require financing, the availability of which will be dependent upon
numerous factors, including, possibly the Company's ability to attain positive
cash flow or net income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
The Company's principal executive offices are located at 85 John Street,
12th Floor, New York, New York 10038, telephone number (212) 587-7676. The
Company is a Maryland corporation.
CREDIT TENANT LOAN BUSINESS
The financing of Credit Tenant Loans through securitizations of pools of
diversified credits in the capital markets is a new financing technique and was
pioneered by the Company. Credit Tenant Loans are mortgage loans made by the
Company to owners of commercial properties net leased to Credit Tenants under
Credit Tenant Leases. Each Credit Tenant Loan is secured by a first mortgage on
a commercial real property subject to a long-term net lease to a Credit Tenant,
and by a collateral assignment of the Credit Tenant Lease and all rents due
under the lease.
The Company primarily focuses on making loans on properties net leased to
Credit Tenants. This focus differentiates the Company from conventional real
estate lenders. The typical Credit Tenant Loan (other than the Company's
Extended Term Loans) made by the Company is fully amortized by scheduled rent
payments under the Credit Tenant Lease (or payments under insurance policies and
other mechanisms designed to protect against defaults in certain events where
sufficient rent might not otherwise be payable or to replace other required
payments under the applicable loan). Furthermore, under the Company's Credit
Tenant Loans, prepayments are available only after a period of time (generally
eight years) and then only with a yield maintenance premium or a suitable
defeasance mechanism. As a result, the Credit Tenant Loans originated by the
Company are analyzed principally on the basis of the credit of the applicable
Credit Tenant and whether the stream of rental payments under the applicable
Credit Tenant Lease and such insurance policies and other mechanisms (rather
than liquidation value of the property) will be sufficient to pay all amounts
due under the loan. Consequently, the Company's Credit
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Tenant Loans tend to have debt service coverage ratios lower than conventional
mortgage loans (approaching a ratio of scheduled rent payments to debt service
under the loan of 1.0) and higher loan-to-value ratios (95-100%).
The credit underwriting analysis for conventional real estate lending relies
heavily on the liquidation value of collateral securing the loan and therefore
loan proceeds are generally limited to amounts significantly lower than the
appraised value of the applicable real property. Even where the mortgaged
property is net leased to a Credit Tenant, the underwriting of such Mortgage
Loans has nevertheless typically been done largely on the basis of an assessment
of the liquidation value of the mortgaged property (taking into account the
anticipated cash flows from the lease as appropriate) so long as (i) the lease
payments are insufficient to pay interest on and fully amortize the loan (if,
for example, a portion of the loan balance remains outstanding at the end of the
lease term) or (ii) the tenant has significant rights to terminate the lease or
abate rent. Consequently, the original principal balance of such loans is
limited by a requirement to maintain a property liquidation value significantly
in excess of the loan balance.
Historically, Credit Tenant Loans of the type made by the Company were only
available when the applicable Credit Tenant Lease was a "bond" lease. In a
"bond" lease, the Credit Tenant is responsible for every monetary obligation
associated with managing, owning, developing and operating the leased premises
including, but not limited to the costs associated with utilities, taxes,
insurance, maintenance, repairs and losses due to casualty and condemnation. As
a result, the Credit Tenant's ability to terminate a lease or abate rent on a
"bond" lease (other than as a result of bankruptcy) is non-existent or available
under extremely limited circumstances. Consequently, loans secured by a "bond"
lease are analyzed as if they were a direct obligation of the applicable tenant
and can be expected to receive credit ratings equivalent to the unsecured debt
rating of the applicable Credit Tenant.
A net lease (often referred to as a double- or triple-net lease) generally
is a lease on a long-term basis (ten years or more) to tenants who are
responsible for paying all or many of the costs of owning, operating, and
maintaining the leased property during the term of the lease, in addition to the
payment of a monthly net rent to the landlord for the use and occupancy of the
premises. Under many net leases in contrast to a "bond" lease, a tenant has the
right to terminate the applicable lease or abate rent in certain circumstances,
such as the occurance of significant casualty loss or condemnation, or failure
by the landlord fails to maintain or repair the property, provide adequate
parking, maintain common areas or comply with affirmative covenants of the
lease, or if the landlord engages in or promotes a competing property within a
specified radius of the property or otherwise violates negative covenants in the
lease.
Properties subject to net leases do not qualify as "bond" leases have been
traditionally financed as conventional real estate loans. The use of the
Company's specialized Lease Enhancement mechanisms substantially mitigates the
risk of a potential interruption in the rental stream so that such Credit Tenant
Leases can be evaluated as if they were "bond" leases. Upon securitization, a
properly structured Credit Tenant Loan and Credit Tenant Lease with the
appropriate Lease Enhancements can be expected to receive a rating from one or
more of the Rating Agencies equivalent to the unsecured debt rating of the
applicable Credit Tenant. The expected receipt of such a rating increases the
amount which may be borrowed against the collateral of the Credit Tenant Loan
and Lease (as compared to a conventional real estate loan), enabling the Company
to compete successfully for loan originations, while preserving the profits
available to the Company in the securitization of Credit Tenant Loans.
The Company's Lease Enhancement mechanisms consist primarily of an
integrated set of specialized insurance policies, servicer advancing mechanisms,
loan documents, and various borrower and expense reserve accounts. The
specialized insurance policies are non-cancellable during the term of the Credit
Tenant Loan and have been designed to protect the holder of the mortgage from
(i) rent abatement or lease termination under the associated Credit Tenant Lease
as a result of a casualty or condemnation event, (ii) under the Company's
Extended-Term Loans, failure of the borrower to pay the balance of the mortgage
outstanding, if any, at the expiration of the initial term of the Credit Tenant
Lease, or (iii) under
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the Company's Consumer Price Indexed Loans, increases in rent. The servicer
advancing mechanisms and reserve funds (combined with specialized borrower
recourse provisions where appropriate) have been established to support the
landlord's maintenance and other obligations under the Credit Tenant Lease so as
to mitigate the risk of rent abatement or lease termination by the Credit Tenant
due to landlord performance problems.
The Company pioneered the development of many of these Lease Enhancement
mechanisms. In addition, the Company continues to design creative and new
financing programs which enable the Company to offer borrowers a wide array of
Credit Tenant Loan programs to best meet their needs. The Company believes that
by offering these financing programs in addition to increasing the number of
currently available programs, it will continue to be a leader in the Credit
Tenant Loan business and increase its market penetration. The Company expects
that proceeds from the Offering will enable the Company to continue to develop
and aggressively to promote these programs.
CONSTRUCTION/PERMANENT LOANS. The Company has developed a
"Construction/Permanent" program with loans made thereunder
("Construction/Permanent Loans") under which a developer/borrower may obtain
both a construction loan from a commercial bank and a permanent loan from the
Company with one set of documents in one integrated closing process. The program
has been marketed with NationsBank under the name "1TC" for "One Time Close."
This program enables a borrower (provided that a pre-construction Credit Tenant
Lease is in place) to enter into a commitment and final documentation for
permanent financing at an early stage without additional transaction costs, and
also allows the borrower to "lock in" an interest rate for the permanent loan at
the time the construction loan is made. The 1TC program (introduced in August
1997) enables the Company to build and manage its loan pipeline by arranging for
permanent financing earlier in the borrowing cycle. As of May 15, 1998, the
Company had committed to fund approximately $168 million in the aggregate of
Construction/Permanent Loans, including approximately $64 million for which
NationsBank has commenced advances under the construction loan portion under the
1TC portion. In addition, in March 1998, the first 1TC loan completed the
construction phase and the permanent loan was funded by the Company. The Company
is developing similar programs with other selected banks that make construction
loans on net leased properties.
EXTENDED-TERM LOANS. Although Credit Tenant Loans depend on Credit Tenant
Lease payments and generally are fully amortized over the initial term of the
Credit Tenant Lease, the Company's "Extended-Term Loan" program (introduced in
May 1997) allows a borrower to extend the amortization period of the Credit
Tenant Loan beyond the initial term of the associated Credit Tenant Lease. As a
result of extending the amortization period, loan proceeds can be increased or
periodic debt service can be reduced (making more cash flow available to the
borrower), enhancing certain tax benefits that may be available to borrowers. As
of May 15, 1998, the Company had funded approximately $54 million in additional
aggregate principal amount of extended-term loans and has committed to fund
approximately $98 million in aggregate principal of extended-term loans. This
program has been marketed under the name the "Extended Amortization Program."
CONSUMER PRICE INDEXED LOANS. The Company is a discounted cash flow lender
and its Credit Tenant Loans typically depend upon repayment from the fixed
rental stream under the Credit Tenant Lease. The Company's consumer price index
("CPI") program (loans made thereunder, "CPI Loans") (introduced in March 1998)
makes available additional loan proceeds based upon a portion of expected Credit
Tenant Lease rental increases as a result of contractual CPI adjustments
(typically up to two percent per annum) as if they were fixed and determinable
at the time of execution of the Credit Tenant Lease. As of May 15, 1998, the
Company has committed to fund one CPI Loan with an estimated principal balance
of approximately $22 million.
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RELATED BUSINESSES
As part of the Company's growth plans, the Company intends to expand into
real estate lines of business which are related to, but do not consist solely
of, Credit Tenant Loans. These additional activities are an outgrowth of the
Credit Tenant Loan business, and their development uses many of the same product
innovations and personnel skills that have permitted the Company to develop and
grow its Credit Tenant Loan business. The related real estate lines of business
to which the Company has devoted management attention and development efforts to
date are:
MEZZANINE CONSTRUCTION LOANS. Under the Company's "Mezzanine Construction"
Loan program, the Company will lend to a developer (provided that an executed
Credit Tenant Lease is in place) up to the difference between a developer's
project costs and the proceeds (generally 75% to 90% of the project costs) of
the available construction loan. The Company will only make Mezzanine
Construction Loans to developers who will qualify for a permanent Credit Tenant
Loan with the Company (based on the level of rent payments under the Credit
Tenant Lease) in an amount significantly in excess of the amounts required to
pay the senior construction loan and Mezzanine Construction Loan and return the
borrower's invested capital. The Company expects these transactions to generate
yields superior to conventional bank construction loan yields and significantly
better than Credit Tenant Loans. Furthermore, one of the design features of this
product is to enable the Company to develop relationships with borrowers earlier
in the construction and borrowing cycle. The Company has a dedicated credit
facility with one of its lenders for making Mezzanine Construction Loans. These
loans will be secured by second mortgages and/or pledges of ownership interests
in the borrower. In addition, based upon an analysis of the creditworthiness of
the borrower, these loans will be full recourse to a creditworthy borrower or
personally guaranteed by the principals of the borrower during the construction
period.
EQUITY INVESTMENTS IN REAL ESTATE. In connection with its Credit Tenant
Loan business, the Company frequently is presented with opportunities to
purchase net leased properties from developers, other owners or tenants of such
properties. From time to time, the Company intends to purchase such a property,
make its usual Credit Tenant Loan upon such property (to be securitized later)
and retain ownership of the property. Because net leased properties are
generally required to be maintained by tenants, the Company does not expect to
incur significant management costs with respect to such properties.
COMMERCIAL MORTGAGE-BACKED SECURITIES. In its Credit Tenant Loan business,
the Company will issue CTL Securitizations backed by pools of Credit Tenant
Loans. The Company anticipates that it will retain the Subordinate Interests
backed by such pools depending upon the then current market condition and
business needs. Management believes that the Company is in a unique position to
analyze whether the Subordinate Interests of its CMBS provide an attractive
investment on an adjusted risk/return basis, because the Company originates and
underwrites each Credit Tenant Loan and is familiar with the applicable Lease
Enhancements. Having developed the specialized skills to analyze the risks
associated with investing in the Subordinate Interests in its own pools,
management believes that the Company is well-positioned to analyze and invest in
interests in CMBS issued by unrelated third parties (particularly those which
include, as a component thereof, Credit Tenant Loans). The Company intends to
invest primarily in (i) Subordinate Interests in CMBS pools originated by the
Company and others, including Investment Grade, Non-Investment Grade and, in the
case of those originated by the Company, unrated interests, and (ii)
interest-only classes in some of such CMBS pools. Subordinate Interests and
interest-only classes generally afford a higher yield and entail greater risk
than more senior investment grade securities.
OTHER INVESTMENTS. The Company intends to engage in other real estate
related businesses from time to time, which management believes are
complementary to its Credit Tenant Loan business. These investments may include
making equity investments in, and/or Credit Tenant Loans on, real properties net
leased to Credit Tenants in selected international markets. The Company may also
invest in interests in
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REITs, registered investment companies, partnerships and other investment funds
and operating companies involved in the ownership of real estate interests or
the rendering of real estate-related services.
COMPETITIVE ADVANTAGES
There are several companies engaged in the business of providing Credit
Tenant Loans as an adjunct to their other lending businesses. The Company
believes, however, that it enjoys competitive advantages over such companies.
FOCUS AND EXPERIENCE. The Company believes that it has the largest
organization in the U.S. dedicated to originating, underwriting and securitizing
Credit Tenant Loans. In addition, because management was instrumental in
developing a wide array of Lease Enhancements for Credit Tenant Loans and Credit
Tenant Leases, and in securitizing these instruments for the first time,
management has developed a level of expertise which is not easily matched by
competitors not possessing the Company's specific Credit Tenant Loan focus and
experience. The Company's focus and expertise are essential to competing
effectively in the specialized Credit Tenant Loan market, in enabling the
Company to attract borrowers and correspondent mortgage brokers and efficiently
identifying and processing loans. In addition, the Company believes that its
experience in working with the Rating Agencies in developing new products and in
securitizing its first loan portfolio have given management valuable insight
into the methodologies and criteria the Rating Agencies employ in reviewing and
rating Credit Tenant Loans individually and on a pool basis.
INNOVATIVE PROGRAMS. The Company believes that it has been continuously
able to develop innovative lending programs that have provided borrowers with an
increasing number of attractive financing options, largely unavailable from
traditional mortgage lenders, while simultaneously strengthening and expanding
its Credit Tenant Loan business. Many of these programs have been designed to
enable the Company to develop relationships with borrowers earlier in the
construction and borrowing cycle.
RELATIONSHIPS WITH CORRESPONDENTS. The Company believes that it has
established strong working relationships with its correspondent mortgage
brokers. Through its emphasis on training, process simplification, new product
development, ongoing communications, marketing support and service, the Company
believes that it will continue to retain, expand and continually improve the
origination capabilities of its correspondents.
RELATIONSHIPS WITH CREDIT TENANTS. As of May 15, 1998, the Company had
closed over 120 Credit Tenant Loans backed by leases with 35 different Credit
Tenants. The Company believes that through this contact it has developed good
working relationships with a number of Credit Tenants. The Company believes that
a good working relationship with Credit Tenants enables the Company to structure
and close its Credit Tenant Loans in an efficient and timely manner, that these
relationships will lead to referrals of business with new borrowers and are
expected, in the future, to lead to the development of financing programs
directly with Credit Tenants.
EFFICIENT OPERATIONS. The Company has continuously engineered its loan
underwriting and closing process with the intent of eliminating redundant
procedures and speedily approving loans to prospective borrowers. Management
believes that its current process is one of the most streamlined and
comprehensive in the commercial mortgage lending industry. The Company believes
that this process appeals to correspondent mortgage brokers, Rating Agencies and
borrowers by permitting timely funding in a cost-efficient manner, while
simultaneously reducing the Company's costs. The Company has established a
target of closing loans within 45 days from receipt of an application.
Despite the competitive position of the Company and its products, many of
the Company's competitors for loan origination (including other specialty
finance companies, REITs, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, institutional investors, investment
banking firms, other lenders and other entities) have been in existence
significantly longer and have
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substantially greater financial and other resources than the Company and may be
better established in the markets in which the Company currently operates.
BUSINESS STRATEGY
The Company's principal business objective is to continue to focus on and
expand its lending and securitization business while at the same time
selectively expanding into related, value-added real estate lines of business in
a manner that generates attractive investment returns on a risk adjusted basis.
Management believes that the real estate industry has been undergoing a
significant restructuring which has, to some degree, been led by the increased
prominence of publicly held real estate companies (such as REITs) and the
increasing importance of capital markets in real estate financing. The Company
believes that this industry restructuring offers the Company significant
opportunities to expand its existing business, offer new products and expand
into related businesses.
The Company plans to build on its streamlined underwriting and processing
organization, national correspondent origination network, expertise in Credit
Tenant Leases and Credit Tenant Loans, product innovations and increased capital
as a result of the Offering and its increased credit facilities to achieve its
growth and profit objectives, through the following:
- EXPANDING EXISTING BUSINESS. The Company intends to continue to build on
its growing market presence and increasing borrower base to expand
origination volume in existing business lines.
- INTRODUCING VALUE-ADDED, INNOVATIVE PRODUCTS. Over the past twelve months
the Company has introduced a number of value-added products that it
expects will enhance its returns. These products include
Construction/Permanent Loans, Extended-Term Loans, CPI Loans and Mezzanine
Construction Loans. The Company continuously works to develop new
financing products and investment opportunities and expects to commit to
invest in such products or investments from time to time. The Company
believes that its strategy of continuing product innovation will permit it
to differentiate itself and anticipate opportunities to provide greater
services and to remain efficient and competitive in its areas of focus and
expertise. As part of its product development strategy, the Company
designs these products to develop relationships with borrowers and Credit
Tenants earlier in the construction and borrowing cycle as a means of
expanding and better controlling loan origination.
- EXPANDING THE COMPANY'S MARKET REACH. In the past, the Company's strategy
has been to finance properties net leased to Investment Grade tenants. The
Company believes that it can utilize its existing credit tenant financing
programs to make and securitize Credit Tenant Loans on favorable terms on
properties net leased to BB Grade tenants. Management believes that the
market for financing properties net leased to tenants with BB Grade
ratings represents a large and attractive business opportunity. In
addition, the Company plans to continue to build on its relationships with
Credit Tenants to develop innovative financing alternatives directly with
Credit Tenants.
- ACQUIRING SELECTED PROPERTY LEASED TO A CREDIT TENANT. From time to time,
the Company is presented with the opportunity to purchase real property
net leased to a Credit Tenant. The Company intends to purchase selected
properties and generally will simultaneously finance such properties with
Credit Tenant Loans. The Company would then seek to securitize the Credit
Tenant Loans, while retaining the ownership of the properties.
Although the Company presently outsources servicing, the Company may explore
acting as a primary servicer, subservicer or special servicer.
In addition, the Company believes that many of the technologies that have
supported the growth of the capital markets in U.S. commercial real estate are
readily exportable to offshore markets. As these offshore markets continue to
develop, the Company believes that U.S. firms will play an important role
(primarily in the early stages of development of such markets). Management
believes that the Company
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will be well positioned to expand into selected international markets as a
result of its position as a market innovator and its expertise in Credit Tenant
Loans. For example, the Company has established a relationship with a leading
United Kingdom real estate law firm and real estate services companies who could
act as advisors and have the ability to direct the Company to sources of
origination. The Company may explore such opportunities as they arise.
The Company believes that its standardized procedures and integrated systems
enable the Company and its employees efficiently to manage a large and
increasing volume of transactions while maintaining underwriting quality and
high levels of service to borrowers. In addition, by coordinating the Company's
automated loan tracking and document production systems with those of its
outside legal counsel, the Company has been able to improve efficiency and
reduce the legal costs associated with closing loans.
As its loan volume grows, the Company expects to continue to improve cost
efficiency by modestly expanding its internal loan closing support staff and
relying less on outside service providers. The Company also plans to continue to
refine and upgrade its systems and loan processing infrastructure to reduce
costs and improve efficiency and to support its growth strategy by selectively
adding employees and expanding its marketing and sales effort.
In 1997, the Company completed the first securitization of a pool of Credit
Tenant Loans with a variety of Credit Tenants and multiple properties backed by
enhanced leases with the sale of approximately $130 million of mortgage-backed
pass-through certificates. This securitization was rated by Duff & Phelps Credit
Rating Co. ("DCR") and Fitch IBCA, Inc. ("Fitch"). The effectiveness of the
Company's underwriting practices is reflected in the fact that of approximately
$345 million of Company-underwritten Credit Tenant Loans reviewed to date
(including those included in the Company's securitization and certain Credit
Tenant Loans since made by the Company) by DCR, Fitch or S&P, none were rejected
as not meeting Rating Agency requirements for Credit Tenant Loans. Furthermore,
at May 15, 1998, of the 93 outstanding loans owned by the Company, none were
delinquent more than 30 days or are otherwise non-performing.
Exposure to changes in underlying interest rates can have a great effect on
the value and profitability of the Company's Credit Tenant Loans, prior to
securitization. The Company has accordingly employed a hedging strategy designed
to mitigate the effect that movements in market rates have on its Credit Tenant
Loans prior to securitization. See "The Company--Hedging Strategy."
EXISTING LOANS AND PIPELINE FOR FUTURE ORIGINATIONS
In the Formation Transactions, the Company will acquire CLF's portfolio of
Existing Loans having an aggregate outstanding principal balance at May 15,
1998, of approximately $342 million. In addition, the Company will assume
commitments made by CLF to fund approximately $402 million of Credit Tenant
Loans (subject to completion of the Company's underwriting process). These
commitments generally are expected to fund within the next twelve months.
Management believes that the Credit Tenants underlying approximately 92% in
aggregate principal amount of the Existing Loans are rated Investment Grade
(with the remaining 8% being rated BB Grade) and the Credit Tenants underlying
approximately 98% of the expected aggregate principal amount of the Committed
Loans are rated Investment Grade. The Company expects to securitize all or part
of these loans in 1998. The Company's current loan pool is larger and more
diversified than the pool for the Company's previous securitization.
Consequently, the post-Offering securitization (based upon a preliminary review
by the Rating Agencies of a large portion of this loan pool) is expected by
management to result in subordination levels more favorable to the Company than
were obtained in the first securitization. In addition, the Company will assume
commitments by CLF to purchase Net Leased Real Estate in the amount of
approximately $12 million . In each case, the amount of the loans and
commitments listed above are as of May 15, 1998 and are expected to increase
between such date and the closing of the Offering.
The Company's pipeline includes potential loans in various stages of
development. The Company receives requests for Credit Tenant Lease financing on
a daily basis. At any given time, the Company may
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have hundreds of potential transactions in different stages in the Company's
loan qualification, pricing and due diligence process. Once a lease has been
reviewed by the Company and is determined to be financeable under the Company's
Credit Tenant Loan program, the Company will, at a borrower's request, issue a
term sheet (a "Term Sheet") which briefly outlines the pricing and terms under
which the Company proposes to finance the property (such potential loan, after
delivery of the Term Sheet, being at the "Term Sheet Stage"). Upon acceptance of
the Term Sheet by a borrower, the Company issues a form of application which
sets forth the detailed terms of the transaction (the potential loan then being
at the "Application Stage"). Once a borrower signs an application and delivers
it to the Company with a deposit and the application is accepted, subject to the
underwriting process by the Company's loan committee, the Company considers such
loans to be Committed Loans, and the formal due diligence process begins. The
Company generally closes a Committed Loan in four to eight weeks. At any time
from the date of acceptance of the application until closing, the borrower may
lock in the interest rate on the loan by payment of an additional fee. While an
application may be declined by the Company upon completion of the Company's
underwriting process, or the prospective borrower may forfeit its deposit and
withdraw the application prior to closing, management believes, based on the
Company's historical operating experience, that the substantial majority of
these Committed Loans result in closed loans. Furthermore, it has been the
Company's experience, that once the Company has committed to make a Credit
Tenant Loan and has locked in an interest rate (receiving a rate-lock fee),
closing of that loan is relatively assured ("Rate-Locked Loans"). Management
believes, based on the Company's operating experience, that a significant
portion of loans in the Application Stage and a lesser percentage of loans in
the Term Sheet Stage, respectively, will move into the category of Committed
Loans. Since the Company receives requests for loan financing daily, the
Company's loan pipeline frequently changes as new transactions are added and
others are removed.
Since commencing operations in 1995, the volume of closed and Rate-Locked
Loans increased from $22.7 million in calendar year 1995 to $145.7 million in
calendar year 1996 to $351.1 million in calendar year 1997. In the first quarter
(historically the slowest quarter of the year) of 1998, the Company generated
closed and Rate-Locked Loans totaling approximately $115 million, as compared
with $49 million during the same period in 1997.
Management believes that loan originations will continue to grow throughout
1998 as a result of the following factors:
- As of May 15, 1998, the Company's total pipeline of 265 loans either under
various stages of negotiation or under due diligence totaled approximately
$1.3 billion, the largest such loan having a principal amount of $36
million. Of this pipeline, the Company had 88 Committed Loans (potential
loans as to which the Company had accepted signed loan applications and
commenced due diligence) with respect to approximately $402 million in
Credit Tenant Loans. In addition, at such date the Company had potential
loans in the Application Stage and Term Sheet Stage in the amount of $239
million, and $383 million, respectively.
- The Company believes that its Extended Term Loans and the
Construction/Permanent Loan programs, which were introduced between May
and July of 1997, are gaining greater market awareness and acceptance,
resulting in increased year-over-year loan origination. Furthermore, the
Company expects to increase its volume of these loans through the year. As
of May 15, 1998, the Company had funded approximately $54 million in
Extended-Term Loans and had committed to make an additional $98 million of
Extended-Term Loans. Furthermore, as of May 15, 1998, the Company had
committed to fund approximately $168 million in aggregate principal amount
of Construction/Permanent Loans.
- New financing and property acquisition programs introduced in the first
quarter of 1998 are expected to generate additional loans throughout 1998.
These programs include expanding the Company's loan programs to include BB
Grade Tenants (which management believes is a large potential market for
its programs), Mezzanine Construction Loans and Consumer Product Index
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financing. In addition, the Company anticipates acquiring properties net
leased to Credit Tenants on which it expects to place its Credit Tenant
Loans.
Management believes, based on the foregoing factors, the volume of Credit
Tenant Loans closed since January 1, 1998 and management's current expectation
of additional loans it expects to originate and close through the remainder of
1998 (based on a review of the daily flow of leases received by the Company,
outstanding term sheets and applications, discussions with correspondents about
market conditions and future potential transactions, expected completion of
construction projects in which the Company is providing a permanent loan
takeout, and other factors), that, if current market conditions continue and if
historical percentages of potential loans in the Term Sheet Stage, Application
Stage, Committed Loans and Rate-Locked converting to closed loans continue, the
Company's loan originations will continue to grow during calendar year 1998.
There can be no assurance, however, that the Company's growth will continue.
MANAGEMENT
The Company will be internally managed and self-administered, and CLF's
entire staff is expected to be employed by the Company upon completion of the
Offering. The Company will be subject to the direction and oversight of a Board
of Directors composed of five persons. Mr. William R. Pollert, President and
Chief Executive Officer, who will serve as Chairman of the Board of Directors,
is the only member of the Company's management to serve on the initial Board of
Directors. See "Directors and Executive Officers."
The Company has a specialized and experienced staff (many of the members of
which have been previously employed by the real estate departments from major
financial institutions and law firms) which is focused principally on
structuring, underwriting and making Credit Tenant Loans which meet Rating
Agency criteria for such loans and on making the transactional and credit
judgments required to make Credit Tenant Loans. The principal executive officers
of the Company will consist of: Mr. William R. Pollert, President, Chief
Executive Officer and Director; Mr. Edwin J. Glickman, Executive Vice President,
Product Development; Mr. Steven L. Maloy, Senior Vice President, Marketing and
Sales; Mr. Paul H. McDowell, Senior Vice President and General Counsel; and Mr.
Shawn P. Seale, Senior Vice President and Chief Financial Officer. Upon
completion of the Offering, the Company will have in place a complement of
executive and investment officers with established expertise in the business
activities the Company intends to undertake. All the members of senior
management of the Company have worked together at CLF since its inception. See
"Directors and Executive Officers."
LOAN ORIGINATION CAPABILITY AND CORRESPONDENT NETWORK
The principal source of origination for the Company's business is its
national network of independent correspondent mortgage brokers. The Company has
established relationships with over 500 individual mortgage brokers at over 60
correspondent mortgage brokerage companies. These correspondents operate offices
in more than 100 locations throughout the United States and maintain close
working relationships with the borrowers they represent. The Company has entered
into a written or oral arrangement with each of its correspondent brokers who
are compensated by the applicable borrower.
Credit Tenant Lease financing demands of mortgage brokers specialized
knowledge and skills not generally required for traditional real estate
financing activities. The Company dedicates significant resources to training
correspondent mortgage brokers in all aspects of Credit Tenant Lease financing
and routinely presents on-site training seminars throughout the United States.
Training seminars are supplemented with bimonthly newsletters, brochures and
other written material intended to keep correspondents up to date on the latest
underwriting requirements for Credit Tenant Loans and Credit Tenant Leases,
Lease Enhancements, and changes in tenant credit ratings, as well as providing
up-to-date information on the Company's latest innovative financing programs.
A comprehensive marketing, advertising and public relations program supports
correspondent loan origination efforts. The objective of the program has been to
establish and build the Company's name
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recognition and credibility as a specialty lender and to promote the Company's
specialized Credit Tenant financing programs. The Company believes it has been
successful in achieving its objectives of market awareness and prominence in the
Credit Tenant Loan market.
In addition to the Company's training and marketing support of
correspondents, the Company's executives and staff periodically assist
correspondents in originating loans by meeting with potential borrowers to
explain various aspects of the Credit Tenant Loan program, and by assisting in
structuring transactions to best meet the borrower's requirements.
The Company believes that its ongoing marketing efforts combined with
comprehensive training programs are key factors not only in attracting and
retaining productive correspondent mortgage brokers but also in improving their
productivity. Furthermore, the Company believes that it has streamlined its loan
approval processes and centralized loan underwriting as well as many
transactional and structuring matters to make the origination of Credit Tenant
Loans with the Company efficient for its correspondents. As a result, the
Company believes its correspondents can focus on identifying possible additional
borrowers for Credit Tenant Loans and facilitating the loan closing process,
rather than focusing solely on underwriting each loan. The Company constantly
reviews correspondent performance and has been able to attract experienced
mortgage brokers in a correspondent relationship to replace correspondents with
whom the Company is not satisfied.
In addition to its ability to originate loans for its principal business
lines, the Company believes that its correspondent network can be utilized
without significant further training to find opportunities that will be eligible
for the related business lines described above.
CREDIT FACILITIES
The Company has warehouse credit facilities provided by NationsBank (the
"NationsBank Warehouse") and Prudential Credit (the "Prudential Warehouse"). CLF
entered into the NationsBank Warehouse in the initial amount of $350 million in
July, 1996. In April 1998, the facility was temporarily increased to $550
million for a limited period ending on September 1, 1998, and the Company may
not choose to seek a continuation of this increase. The NationsBank Warehouse's
scheduled expiration is on April 1, 2000. The NationsBank Warehouse is used
primarily to fund and hold the Company's Credit Tenant Loans prior to
securitization as well as certain other functions directly related thereto.
These other functions include: $20,000,000 available for use by the Company to
replace the "equity" that would otherwise be required to be posted by the
Company under the agreement when it makes Credit Tenant Loans; and $20,000,000
to support margin requirements under the Company's interest rate hedging
program. The Company pledges its Credit Tenant Loans as collateral under the
NationsBank Warehouse. NationsBank is one of the Company's correspondents and an
affiliate of NationsBank was the lead placement agent with respect to the
Company's January 1997 securitization of Credit Tenant Loans.
The Company has entered into the Prudential Warehouse in the initial amount
of $100 million in May 1998, which will increase to $350 million upon closing of
the Offering. The Prudential Warehouse will expire one year from the date of
closing of the Offering. As with the NationsBank Warehouse, the Company intends
to utilize the Prudential Warehouse for purposes of funding and holding the
Company's Credit Tenant Loans prior to securitization. In addition, the Company
has entered into a Mezzanine Construction Loan financing facility (the
"Mezzanine Construction Facility") with Prudential Credit in the initial amount
of $30 million in May 1998. The Mezzanine Construction Facility will be used by
the Company to fund its Mezzanine Construction Loans.
The availability of financing to the Company under the Warehouse Credit
Facilities will be subject to compliance by the Company with the terms and
conditions established for each such facility.
The Warehouse Credit Facilities are secured facilities and are evidenced by
warehouse agreements pursuant to which the Company may obtain financing for the
origination of Mortgage Loans and the purchase of Mortgage Backed Securities.
These agreements provide that the lender thereunder makes a
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loan in an amount equal to a percentage of the market value of the pledged
collateral. At maturity (or upon an earlier securitization), the Company is
required to repay the loan and the pledged collateral is released. The pledged
assets continue to pay principal and interest to the Company prior to
securitization.
Additionally, the Warehouse Credit Facilities require the Company to deposit
additional collateral or reduce its borrowings thereunder, if the market value
of the pledged collateral declines. This may require the Company to sell a
portion of its Invested Portfolio to provide such additional collateral or to
reduce its borrowings.
LOAN PROCESS
From the time an application for a Credit Tenant Loan is submitted to the
Company until the time such a loan is closed, the prospective loan undergoes
several steps and procedures, many of which involve third-parties which, while
meeting the Company's quality standards, are not under the control of the
Company, including correspondent brokers, outside counsel, insurance companies,
and other product or service providers. The Company has worked closely with
these third-party providers to set quality standards and to develop a
streamlined process for originating and closing Credit Tenant Loans. The Company
has established a target of closing loans within 45 days from receipt of an
application.
HEDGING STRATEGY
Management believes that exposure to changes in underlying interest rates
can have a profound effect on the value (and hence profitability) of its Credit
Tenant Loans while they are held in the Company's portfolio prior to
securitization. Accordingly, the Company has employed a hedging strategy to
mitigate the effects of movements in underlying interest rates on the value of
its Credit Tenant Loans. The Company has done so by having hedge positions that
react in a corresponding but opposite manner to offset declines or increases in
the value of the Company's fixed rate loans due to changes in underlying
interest rates. For example, as underlying interest rates fall, the value of the
Company's fixed rate loans increases while the value of the Company's hedge
position declines. Conversely, as underlying interest rates rise, the value of
the Company's fixed rate loans falls while simultaneously the value of the
Company's hedge position increases.
The Company intends generally to continue to seek to manage its interest
rate exposure, in coordination with the Company's financial advisors, as the
Company determines is in the best interests of the Company's stockholders, given
the cost of such hedging transactions.
SECURITIZATION
The Company completed the first CTL Securitization in January 1997 with the
sale of approximately $130 million of mortgage pass-through certificates. The
transaction was rated by DCR and Fitch and was placed by NationsBanc Capital
Markets, Inc. (the predecessor to NationsBanc Montgomery Securities LLC) and
Goldman, Sachs & Co.
In connection with the first CTL Securitization, the Company successfully
utilized Lease Enhancement mechanisms to eliminate or mitigate significantly the
risk that a Credit Tenant could terminate a lease or abate rent due to a
condemnation, casualty or failure of a landlord to maintain a property. In the
process, the Company gained valuable insight into how these Rating Agencies
evaluate and rate Credit Tenant Loan pools.
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In September and October of 1997, the Company worked with all four national
Rating Agencies-- S&P, Moody's Investors Service, Fitch and DCR--to rate its
second Credit Tenant Loan pool of approximately $215 million. While the Company
chose to delay securitizing this pool until the completion of the Offering, it
had received preliminary subordination levels substantially more favorable than
it received for its first securitization. The Company intends to securitize a
pool of Existing Loans as soon as reasonably practicable, and taking into
account market conditions following the Offering. No definitive actions have yet
been taken to pursue this planned CTL Securitization. This result reflected both
an increased familiarity by the Rating Agencies with the Company's Lease
Enhancement mechanisms and the greater credit diversity in the pool. Reduced
subordination levels permit more of the securities to be rated "AAA" and results
in the Company receiving more proceeds from securitization, lowering the
Company's overall cost of funds.
In the future, the Company intends to securitize its loans, either directly
or through one or more wholly owned subsidiaries, in the form of real estate
mortgage conduits ("REMICS") and other borrowings. In a REMIC Securitization,
the Company would securitize its Credit Tenant Loans by transferring them to a
special purpose trust or other entity that elects to be treated as a REMIC. The
REMIC would issue mortgage-backed pass-through certificates to the Company,
which would sell some or all of the various classes of such certificates. It is
probable that the Company would retain certain classes of the REMIC
certificates. Other borrowing arrangements may include a pledge of assets by the
Company to a wholly owned subsidiary to secure the issuance of a debt instrument
to an investment banking company or other third party that intends to contribute
such debt instrument to a financial asset securitization investment trust
("FASIT").
The Company intends to use the proceeds from such REMIC securitizations and
other borrowings to invest in additional mortgage loans, mortgage-backed
securities, and other assets and, in turn, to borrow against such newly acquired
assets, primarily through additional securitizations and borrowings. The
Company's strategy is to repeat this process to the extent opportunities to use
leverage are available and the Company determines that using additional leverage
is prudent and consistent with maintaining an acceptable level of risk.
The Company expects that it will retain interests in the underlying Credit
Tenant Loans which will be subordinated with respect to payments of principal
and interest on the underlying Credit Tenant Loans to the classes of securities
issued to investors in such securitizations. Accordingly, any losses incurred on
the underlying Credit Tenant Loans will be applied first to reduce the remaining
amount of the Company's retained interest, until reduced to zero. Thereafter,
the Company expects to have no further exposure to losses.
Typically, in connection with the creation of a new Credit Tenant Loan
securitization, the issuer or trustee for such securitization generally will be
required to enter into a master servicing agreement with respect to such series
of mortgage securities with a Master Servicer. Currently, the Company does not
engage in this business. In order to assist the Company in maintaining its
exclusion from regulation under the Investment Company Act, the Company expects
that it will retain the right to initiate, direct or forbear foreclosure
proceedings in connection with defaults on any of the underlying Credit Tenant
Loans and may retain special Servicers to maintain borrower performance and to
exercise available remedies, including foreclosure, at the direction of the
Company. Exercise of such rights may require the Company to be responsible for
advancing payments to investors in such securitizations as if such default has
not occurred.
COMPANY POLICIES
LOAN UNDERWRITING GUIDELINES. The Company has adopted underwriting
guidelines for making Credit Tenant Loans. Such guidelines and the compliance
therewith is monitored by the Company's Loan Committee which consists of the
Company's President, Executive Vice President, General Counsel, Associate
General Counsel and Chief Financial Officer. Pursuant to these guidelines, each
proposed loan
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is required to be submitted to the Loan Committee prior to the execution of the
applicable application and again prior to funding of such loan.
OPERATING POLICIES. The Board of Directors has established certain
operating policies for the Company. Except as specifically prohibited by the
Company's Charter or Bylaws, the Board of Directors may, in its sole discretion
and without stockholder approval, revise the guidelines from time to time in
response to changes in market conditions or opportunities.
The Company also has adopted compliance guidelines, including restrictions
on acquiring, holding and selling assets, to ensure that the Company is excluded
from regulation as an investment company. The Company will regularly monitor its
Mortgage Assets and other assets (and its commitments to fund or purchase such
Mortgage Assets or other assets) and the income generated from such assets,
including income from its hedging activities, in an effort to ensure that at all
times the Company maintains its exclusion from regulation under the Investment
Company Act.
CAPITAL, LEVERAGE AND FINANCING POLICIES. There is no limit on the maximum
indebtedness which the Company may incur and the Company's organizational
documents do not limit the amount of indebtedness that the Company may incur.
The Company has adopted certain policies which the Company must adhere to before
increasing its level of indebtedness, although such policies may be altered by
the Company in its sole discretion. When appropriate, the Company intends to
utilize various sources of capital, including the Warehouse Credit Facilities
and the issuance of debt or equity securities in public or private capital
markets for future acquisitions, capital improvements and development. See "Risk
Factors--Operating-- A Lack of Availability of Financing Could Adversely Affect
the Company's Results; --The Company Expects to be Highly Leveraged Which May
Subject the Company to Increased Risk of Loss."
The Company intends to increase its portfolio of Mortgage Loans, direct
investments in real estate, securities owned and other assets through the use of
leverage. Initially, the Company intends to finance its Mortgage Loan
origination business and the acquisition of other assets with the net proceeds
of this Offering, and with funds available under its Warehouse Credit
Facilities. In the future, the Company intends to continue to borrow against or
"leverage" its portfolio of Mortgage Loans and other assets and use the proceeds
to make additional Credit Tenant Loans and to acquire additional investments.
Such financings are expected to include, among other things, reverse repurchase
agreements (pursuant to its Warehouse Credit Facilities), securitizations of its
Credit Tenant Loans and secured and unsecured loans. The Company may also borrow
on a long-term basis and issue additional shares as a source of longer-term
capital, including Preferred Shares or additional Shares of Common Stock. See
"Risk Factors--Operating--A Lack of Availability of Financing Could Adversely
Affect the Company's Results." However, neither the Charter nor the Bylaws limit
the amount of indebtedness the Company can incur, and the Board of Directors has
discretion to deviate from or change the Company's indebtedness policy at any
time, without the consent of the Company's stockholders. The Company intends to
maintain an adequate capital base to protect against various business
environments in which the Company's financing and hedging costs might exceed
interest income (net of credit losses) from its portfolio of assets. These
conditions could occur, for example, due to credit losses or when, due to
interest rate fluctuations, interest income on the Company's portfolio of assets
lags behind interest rate increases in the Company's borrowings, some of which
are expected to be at a variable rate. See "Risk Factors--Changes in Interest
Rates Could Adversely Affect the Company's Results." The Company may enter into
hedging transactions in an effort to protect its Invested Portfolio and related
debt from interest rate fluctuations. See "Risk Factors--Operations--Hedging
Transactions May Not Effectively Protect the Company Against Anticipated Risks
and May Subject the Company to Certain Other Risks and Costs."
CREDIT RISK MANAGEMENT. With respect to its assets, the Company will be
exposed to various levels of credit and special hazard risk, depending on the
nature of the underlying assets and the nature and level of enhancements, if
any, supporting such assets. The Company will originate or purchase Mortgage
Loans which meet the guidelines established by the Company. The Company will
review and monitor credit risk
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<PAGE>
and other risks of loss associated with each investment. In addition, the
Company will seek to diversify the Company's portfolio of assets to avoid undue
tenant, geographic, borrower, issuer, industry and certain other types of
concentrations. The Board of Directors will monitor the overall portfolio risk
and review levels of provision for loss.
ASSET/LIABILITY MANAGEMENT. The Company will follow an interest rate risk
management policy intended to mitigate the negative effects of major interest
rate changes. The Company intends to minimize its interest rate risk from
borrowings both through hedging activities and by attempting to structure the
key terms of its borrowings to generally correspond (in the aggregate for the
entire portfolio, and not on an asset-by-asset basis) to the interest rate and
maturity parameters of its assets.
HEDGING ACTIVITIES. The Company intends to enter into hedging transactions
to protect its Invested Portfolio from interest rate fluctuations and other
changes in market conditions. These transactions may include interest rate
swaps, the purchase or sale of Treasury bonds and notes, Treasury futures,
interest rate collars, caps or floors, options, Mortgage Derivative Securities
and other hedging instruments. These instruments may be used to hedge as much of
the interest rate risk as the Company determines is in the best interest of the
Company's stockholders, given the cost of such hedges. The Company may elect to
have the Company bear a level of interest rate risk that could otherwise be
hedged when the Company believes, based on all relevant facts, that bearing such
risk is advisable. The Company has substantial experience in hedging the
interest rate risk associated with real estate assets.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there may be no requirements with
respect to record keeping, financial responsibility or segregation of customer
funds and positions. The business failure of a hedging Counterparty with which
the Company has entered into a hedging transaction could result in a default,
which may result in the loss of unrealized profits and force the Company to
cover its resale commitments, if any, at the then current market price. In
addition, although generally the Company will seek to reserve for itself the
right to terminate its hedging positions, it may not always be possible to
dispose of or close out a hedging position without the consent of the hedging
Counterparty, and the Company may not be able to enter into an offsetting
contract in order to cover its risk. There can be no assurance that a liquid
secondary market will exist for hedging instruments purchased or sold, and the
Company may be required to maintain a position until exercise or expiration,
which could result in losses.
The Company intends to protect its Invested Portfolio against the effects of
significant interest rate fluctuations and to preserve the net income flows and
capital value of the Company. Specifically, the Company's asset acquisition and
borrowing strategies are intended to offset the potential adverse effects
resulting from the differences between fixed rates associated with its mortgage
assets and the shorter term predominantly variable nature of the Company's
related short-term borrowings.
The Company's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable spread
between yields from Mortgage Assets and the Company's borrowing costs across a
reasonable range of adverse interest rate environments. Capital preservation
refers to maintaining a relatively steady level in the market value of the
Company's capital across a reasonable range of adverse interest rate scenarios.
To monitor and manage capital preservation risk, the Company will model and
measure the sensitivity of the market value of its capital (i.e., the
combination of its assets, liabilities and hedging positions) to various changes
in interest rates under various economic scenarios. The Company will not enter
into these types of the transactions for speculative purposes.
The Company believes its hedging activities will provide a level of income
and capital protection against reasonable interest rate risks. However, no
strategy can insulate the Company completely from changes in interest rates.
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The Company will enter into hedging transactions in accordance with Company
policies, which may be changed by the Company in its sole discretion.
OTHER POLICIES. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act. The Company may (i)
underwrite securities of other issuers, particularly in the course of disposing
of its assets, (ii) originate loans and (iii) issue securities in exchange for
real property or other assets.
FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board of
Directors has approved the investment policies, the operating policies and the
strategies described in this Prospectus. The Board of Directors has the power to
modify or waive such policies and strategies without the consent of the
stockholders to the extent that the Board of Directors (including a majority of
the Unaffiliated Directors) determines that such modification or waiver is in
the best interest of the Company or its stockholders. Among other factors,
developments in the market that affect the policies and strategies mentioned
herein or which change the Company's assessment of the market may cause the
Company's Board of Directors to revise its policies and strategies. However, if
such modification or waiver relates to the relationship of, or any transaction
between, the Company and any Affiliate of the Company, the approval of a
majority of the Unaffiliated Directors is also required.
Borrowing arrangements may include a pledge of assets by the Company to a
wholly owned subsidiary to secure the issuance of a debt instrument to an
investment banking company or other third party that intends to contribute such
debt instrument to a financial asset securitization investment trust ("FASIT").
The Company may also securitize Credit Tenant Loans by transferring them to a
special purpose trust or corporation which elects to be treated as a REMIC or a
FASIT. The special purpose entity would issue CMBS pass-through certificates
("Pass-Through Certificates") to the Company, which would sell certain classes
and which may retain certain Investment Grade, Non-Investment Grade and IO
classes. Alternatively, the Company may transfer such Credit Tenant Loans to a
subsidiary which would form such a REMIC or a FASIT and distribute the proceeds
thereof (including such retained classes) to the Company.
The Company intends to use the proceeds from securitizations and borrowings
to originate and invest in additional Credit Tenant Loans, CMBS, real property
and other assets and, in turn, to borrow against those newly acquired assets,
primarily through additional securitizations. The Company's strategy is to
repeat this process to the extent opportunities to use leverage are available
and management determines and advises that using leverage is prudent and
consistent with maintaining acceptable levels of risk until the Company has
significantly leveraged its portfolio of Credit Tenant Loans and other assets.
Furthermore, the Company may determine to sell one or more of its Credit Tenant
Loans or other Mortgage Assets to third parties from time to time. There can be
no assurance that the Company will be able to originate or acquire appropriate
assets other than the existing Credit Tenant Loans, that the terms or results of
the Company's acquisitions will be beneficial to it, or that the Company will
achieve its objectives. See "Risk Factors."
In addition, the Company may decide to pursue other strategies and other
available acquisition opportunities it deems suitable for the Company's
portfolio. The Company also may acquire real property. See "The
Company--Business Strategy."
INDUSTRY OVERVIEW
Properties that are net leased to Credit Tenants are an important subset of
the overall commercial real estate market. For a variety of strategic,
competitive and accounting reasons, many corporations choose to lease properties
in which they operate rather than own the underlying real estate. These types of
properties are generally owned by developers who have built the properties or
individual or corporate owners who purchase them after construction is complete
and who have the ability to own and operate the properties as a relatively
stable investment opportunity. Management's experience has been that these
properties are typically financed shortly after completion of construction.
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Management believes that traditionally owners of properties net leased to
Credit Tenants have financed these properties through banks, insurance companies
and other lenders seeking to invest in long-term assets. The Company believes
that these institutions have traditionally financed these properties based more
upon real estate liquidation values than on the underlying strength of the
Credit Tenant (other than in the case of bond leases), with resulting lower
amounts of leverage available to borrowers.
As the CMBS market has grown, the Company believes that the specialty nature
of underwriting and securitizing Credit Tenant Loans has deterred expansion by
capital markets-oriented lenders into the Credit Tenant Loan market (the "CTL
Market") except with respect to properties subject to bond leases. The Company
believes it was instrumental in establishing a viable capital markets-oriented
Credit Tenant lending program through its innovative lease enhancement
mechanisms and by successfully securitizing, in 1997, the first pool of Credit
Tenant Loans with a variety of Credit Tenants involving multiple properties.
The ability of the Company to underwrite and securitize high-leverage Credit
Tenant Loans has provided owners of these properties with an attractive
alternative to traditional forms of borrowing on these properties. Management
believes that the securitization market for Credit Tenant Loans is in its early
stages of development and is under served by capital markets oriented lenders
whose primary focus has been to make conventional real estate loans.
The size of the CTL Market in relation to the overall commercial real estate
market is difficult to estimate for several reasons. Management is unaware of
any published data estimating the overall size of the CTL Market. In addition,
while all properties that are subject to net leases to Credit Tenants could
potentially be financed by the Company or its capital markets oriented
competitors, the Company is unaware of any published data that indicates which
properties are subject to net leases which would be financeable as Credit Tenant
Loans. However, based on the data available to the Company and its experience in
the CTL Market, the Company believes this market is substantial and growing.
EMPLOYEES
At the closing of the Offering, the Company initially expects to have 21
employees, each of whom will be full-time employees of the Company. The Company
is not party to any collective bargaining agreements and believes its
relationship with its employees is good.
COMPETITION
The businesses in which the Company expects to engage are highly competitive
with numerous companies competing for borrowers, investments and financing
sources. Companies typically compete for borrowers on the basis of the interest
rates and amount of loan proceeds offered as well as payment terms and services
provided. The Company believes that it and its loan products compete effectively
on these bases. Despite the competitive position of the Company and its
products, many of the Company's competitors for loan origination (including
other specialty finance companies, REITs, savings and loan associations, banks,
mortgage bankers, insurance companies, mutual funds, institutional investors,
investment banking firms, other lenders and other entities) have been in
existence significantly longer and have substantially greater financial and
other resources than the Company and may be better established in the markets in
which the Company currently operates.
CERTAIN KEY RELATIONSHIPS
The Company has worked closely with insurance companies and other product or
service providers to develop certain of its key Lease Enhancements and loan
processing procedures. The Company believes that its relationships with these
providers is good and that if any such relationship were to deteriorate, the
Company could replace a provider with another provider of similar services.
There can be no assurance, however, that such relationships will not deteriorate
or if such relationships do deteriorate, that the
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Company could establish a relationship with a replacement provider or establish
such a relationship on favorable terms.
FACILITIES
The Company presently subleases office space at 85 John Street, 12th Floor,
New York, New York 10038. In May of 1998, the Company executed a sublease for
12,000 square feet of office space at 80 Pine Street, New York, New York 10038.
The Company expects to move to these new executive offices within the next
several months.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company is a party or to
which any property of the Company is subject.
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FORMATION TRANSACTIONS
The assets, liabilities and equity of CLF will be contributed to CLF, Inc.,
on the date of issuance of the shares offered hereby. The assets of the Company
will include the Existing Loans and Committed Loans (which, as of May 15, 1998,
were in the aggregate amount of approximately $342 million and $402 million,
respectively), subject to the existing indebtedness, as well as all of the
operating assets of CLF.
A series of integrated transactions (the "Formation Transactions") will be
entered into initially to establish the structure of CLF, Inc. and its business.
The Formation Transactions include the following transactions, which will have
occurred or will occur prior to or upon closing of the Offering:
A. The limited partners of CLF will transfer their limited partnership
interests to CLF, Inc. in exchange for Common Stock of CLF, Inc. and cash.
More specifically, Hyperion Partners II L.P., South Ferry #2, L.P., CLF
Investors LLC, and the Class C limited partners will transfer their limited
partnership interests in CLF for shares of Common Stock of CLF, Inc.
Hyperion Partners II L.P. and South Ferry #2, L.P. will transfer their
preferred limited partnership interests in CLF to CLF, Inc. for an amount
projected to be approximately $21.4 million.
B. CLF Holdings, Inc., one of the two general partners of CLF, will
transfer its general partnership interest in CLF for Common Stock of CLF,
Inc. CLFC HPII Inc. (the other general partner of CLF), will transfer its
general partnership interest in CLF to CLF, Inc. in exchange for Common
Stock of CLF, Inc. and cash of approximately $500,000.
C. Upon the completion of these transfers, CLF, Inc. will own all of
the interests in CLF and CLF will automatically liquidate in accordance with
applicable law.
The number of shares of the Company and the cash that each equity ownership
class of CLF will receive in conjunction with this transaction, in accordance
with the Partnership agreement, is as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES CASH
---------- -------------
<S> <C> <C>
General partners:
CLF Holdings, Inc. ............................................. 275,308 --
CLFC HP II, Inc. ............................................... 39,225 $ 215,862
Limited partners:
Preferred....................................................... -- 21,370,295
Class A......................................................... 1,922,007 290,000
Class B......................................................... 1,250,094 --
Class C......................................................... 1,053,366 --
---------- -------------
4,540,000 $ 21,876,157
---------- -------------
---------- -------------
</TABLE>
As a result of the Formation Transactions, upon completion of the Offering,
CLF, Inc. will succeed to all of the assets and liabilities of CLF.
The Company will record the predecessor historical balance sheet as of March
31, 1998, including the assets, assumption of liabilities and deficits, at their
historical amounts in accordance with purchase accounting.
The Company expects that it will originate all of its future loans through a
newly-formed subsidiary limited partnership (a Delaware limited partnership
which, upon conclusion of the Formation Transactions, will be renamed "Capital
Lease Funding, L.P.") of which the Company directly owns 100% of the limited
partnership interests and, indirectly through a wholly-owned subsidiary, 100% of
the general partnership interests. In addition, the Company expects that it will
purchase real estate through individual Delaware business trusts of which it
will be the sole beneficiary.
As a result of the Formation Transactions, including the Offering, the
existing investors in CLF, as a group (including substantially all of the
Company's employees), and purchasers in the Offering, as a group, will own 38%
and 62%, respectively, of the then outstanding Common Stock of CLF, Inc.
The following diagrams illustrate the Formation Transactions, by showing (i)
the ownership of CLF prior to the Formation Transactions, (ii) the ownership of
CLF, Inc. after the contribution of the CLF partnership interests discussed in
A. and B., above, (iii) the liquidation of CLF in accordance with applicable law
discussed in C. above, and (iv) the anticipated ownership of CLF, Inc. following
the Offering.
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STRUCTURE PRIOR TO FORMATION TRANSACTIONS
[CHART]
STRUCTURE AFTER TRANSFER OF PARTNERSHIP INTERESTS
[CHART]
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STRUCTURE FOLLOWING THE OFFERING
[CHART]
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YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS
Before acquiring an asset for inventory or portfolio investment, the Company
will consider the expected yield of the investment. In the case of assets
acquired for inventory, the yield is calculated based on the cost of originating
or acquiring a particular asset as compared with expected proceeds of
disposition of the asset, factoring in interest rate, credit and other risks, as
well as the cost of carrying the asset, including, principally, financing costs.
In the case of assets acquired for portfolio investment, the Company will
consider the expected yield to maturity of the investment, taking into account
the price of the asset and the anticipated cash flows of asset after adjusting
for anticipated credit losses, likelihood of prepayment and other factors.
"Yield to maturity" is the discount rate that will make the present value of the
anticipated future cash flow from an investment equal to its price.
Despite the substantial experience of the officers and employees of the
Company in evaluating potential yields on assets, no assurances can be given
that the Company can make an accurate assessment of the actual yield to be
produced by an asset. Many factors beyond the control of the Company are likely
to influence the yield on the Company's investments, as described in more detail
below, such that the actual yield on an investment may vary substantially from
its expected yield.
CREDIT TENANT LOANS HELD IN INVENTORY
The Company's principal line of business is the origination or acquisition
of Credit Tenant Loans with a view to disposition of such Credit Tenant Loans
through a securitization or otherwise. Accordingly, such loans are generally
held in inventory for a short period of time. The yield of such investments is
dependent principally on (i) the cost of origination or purchase, (ii) the cost
or profit of carrying the asset (generally being the difference between interest
earned on the Credit Tenant Loan and interest paid on any warehouse facility or
other financing used to carry the Credit Tenant Loan) and (iii) the net proceeds
of disposition of the Credit Tenant Loan.
The net proceeds of disposition of Credit Tenant Loans held for inventory
are affected by many factors. Net disposition proceeds are principally affected
by (i) the interest rate, term, prepayment restrictions and other payment terms
of the Credit Tenant Loan and the related impact on the payment terms of
securities issued in the resulting securitization, (ii) the costs of preparing
the Credit Tenant Loan for securitization (including, principally, the cost of
Lease Enhancements or other mechanisms designed to convert any Credit Tenant
Lease which is not a "bond" lease into the approximate equivalent of a "bond"
lease), and (iii) the impact of such Credit Tenant Loan on credit enhancement
levels in a CTL Securitization. To the extent required credit enhancement levels
are low, the Company is able to issue a greater percentage of its securities in
higher rating categories, thereby generating higher sale proceeds. Credit
enhancement levels are principally affected by the credit quality of such Credit
Tenant Loans, including in particular the credit ratings of the Credit Tenants.
Any default on such Credit Tenant Loans or credit downgrades of the related
Credit Tenants while such Credit Tenant Loans are held by the Company will tend
adversely to affect net disposition proceeds, while improvements in credit
ratings of the Credit Tenants will tend to improve such proceeds. In addition,
credit enhancement levels will be affected by the terms of the underlying Credit
Tenant Leases (including, in particular, any adverse affect to the extent the
related Lease is not a "bond" lease and such Credit Tenant Lease, as enhanced,
is considered not to be fully the equivalent of a "bond" lease), and the impact
of such Credit Tenant Loan on the diversity of the securitization pool. Credit
enhancement levels tend to be favorably affected by greater diversity within the
pool of Credit Tenant Loans in terms of geographic location of the properties,
identity of Credit Tenants, business lines for such Credit Tenants and other
factors, and tend to be adversely affected by a concentration of any such
characteristics. Further, net disposition proceeds are affected by the costs
directly related to such disposition, including, among other things: rating
agency, printing, servicing, trustee and legal fees and expenses and any
underwriting discounts or placement fees.
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Net proceeds of disposition are also significantly affected by levels of
interest rates for commercial mortgage-backed securities, which in turn are
affected by yields on comparable-maturity United States Treasury securities and
the "spreads", or differences in yields, of commercial mortgage-backed
securities of different rating levels over comparable-maturity United States
Treasury securities. The Company intends to engage in hedging strategies as
described in "The Company--Hedging Strategies". The Company anticipates that it
will be able to hedge effectively against changes in interest rates of United
States Treasury securities (generating hedging profits to substantially offset
any drop in net disposition proceeds as a result of rising interest rates, but
with the consequence of generating losses on such hedges which will offset any
increase in net disposition proceeds as a result of falling interest rates, but
any such hedging strategies do not perfectly match the risks being hedged, and
are subject to their own credit and other risks, and accordingly there can be no
assurance that such hedging strategies will fully protect the Company from
changes in yields of United States Treasury securities. Furthermore, the Company
does not anticipate that it will effectively be able to hedge against changes in
spreads in yields of commercial mortgage-backed securities over yields of
comparable-duration United States Treasury securities. Accordingly, the
Company's yield on its investment in Credit Tenant Loans held for inventory will
be adversely affected by increases in such spreads, and will be favorably
affected by decreases in such spreads.
Because the credit on Credit Tenant Loans is based on the credit of rated
Credit Tenants, and because Credit Tenant Loans held in inventory are held for a
relatively short term, the Company believes that the risk of default during such
term is small. However, any defaults that do occur will generally prevent such
Credit Tenant Loans from being included in the Company's CTL Securitizations,
will generally have an adverse affect the net disposition proceeds of any such
Credit Tenant Loan sold on an individual or "whole loan" basis, and may make it
impossible to dispose of such Credit Tenant Loans. To the extent the Company
continues to hold defaulted Credit Tenant Loans through liquidation, the
Company's yield will be affected by the severity of any loss, determined largely
by the market value of the underlying property. Because the Company originates
its Credit Tenant Loans at higher loan-to-value ratios than typically apply for
commercial mortgage loans not involving Credit Tenants, the severity of losses
on default may be greater than for such other types of commercial mortgage
loans. Further, defaults, if any, on Credit Tenant Loans are expected to arise
generally only as a result of defaults by the related Credit Tenants, who may
therefore no longer be in occupancy. In such event, loss severity may increase
because the appraised value of vacant, or "dark," properties will generally be
lower than the appraised value assuming Credit Tenant occupancy which is used in
connection with origination or acquisition of the Credit Tenant Loan.
OTHER MORTGAGE LOANS
The Company anticipates that it will invest in certain other Mortgage Loans
without a view to disposition thereof, including, in particular, Mezzanine
Construction Loans. Mezzanine Construction Loans are short-term loans expected
to be paid in full from proceeds of a permanent Credit Tenant Loan. Yields on
Mortgage Loans held in portfolio for investment will be affected by their
interest rates, prepayment restrictions and other payment terms. The
profitability of such Mortgage Loans for the Company will also be affected by
the cost of any financing used to carry such Mortgage Loans.
In addition, the yield to maturity on Mortgage Loans will be sensitive to
defaults by the borrowers and the severity of the losses that might result from
such defaults. Mezzanine Construction Loans will be particularly sensitive to
defaults because they are subordinate to the senior construction financing.
Mezzanine Construction Loans are made only in cases where a Credit Tenant Lease
is in place and the Company has issued a commitment to make a Credit Tenant Loan
upon completion of construction in an amount sufficient to pay the full
principal balance of the Mezzanine Construction Loan and the senior construction
loan, to pay all costs of construction under the terms of applicable
construction contracts, all of which provide for a fixed or capped cost of
construction, and to pay a certain level of unanticipated additional expenses.
In the event, however, that construction costs exceed costs provided in the
contract, or construction takes significantly longer than provided in the
contract, and the contractor or any bonding
64
<PAGE>
company defaults in its obligation to complete construction or to cover any
additional costs, or the ultimate Credit Tenant Loan is not made due to failure
to satisfy conditions to such loan, such as a default by the Credit Tenant under
its Credit Lease, there may be insufficient funds to repay the Mezzanine
Construction Loan. The borrower generally will have an equity investment in the
project, but if the borrower defaults there can be no assurance that losses will
not exceed such amount. Because the borrower's equity may be insufficient to
protect the Company's investment, the Company's yield on Mezzanine Construction
Loans may be directly and adversely affected by defaults.
The yield to maturity of the Mortgage Loans held for investment and, in
particular, longer-term Mortgage Loans, will be affected by the rate of
prepayments on such Mortgage Loans and any yield maintenance or other prepayment
premiums payable upon any such prepayment. Whether and when there are any
principal prepayments on such Mortgage Loans will be affected by a variety of
factors, including, without limitation, the credit liquidity and other
attributes of the borrower, the terms of such Mortgage Loans, the level of
prevailing interest rates, the availability of mortgage credit and economic,
tax, legal and other factors. Principal prepayments on such Mortgage Loans
secured by commercial properties are likely to be affected by lock-out periods
and prepayment premium provisions applicable to each of such Mortgage Loans, and
by the extent to which the Company, or a servicer acting on its behalf, is able
to enforce such prepayment premium provisions. It is anticipated that any such
Mortgage Loans will generally be protected from prepayment as a result of
program requirements that generally require eight-year Lockout Periods followed
by "make whole" prepayment provisions.
COMMERCIAL MORTGAGE-BACKED SECURITIES
The Company expects that in connection with securitizations of its Credit
Tenant Loans it will retain certain classes of CMBS issued by the Company. In
addition, the Company expects that, from time to time, it will acquire CMBS
issued directly by third parties (particularly those which include, as a
component thereof, Credit Tenant Loans). The yield to maturity on any class of
CMBS will depend upon, among other things, the price at which such class is
purchased, the interest rate for such class, and the timing and aggregate amount
of distributions on the securities of such class, which in turn will depend
primarily on (i) whether there are any losses on the underlying loans allocated
to such class, (ii) whether and when there are any prepayments of the underlying
Mortgage Loans (which include both voluntary prepayments by the obligors on the
underlying Mortgage Loans and prepayments resulting from liquidations due to
defaults and foreclosures), and (iii) whether there are any early redemptions of
such securities.
The yield on the CMBS retained or acquired by the Company will be extremely
sensitive to defaults on the Mortgage Loans included in the collateral for such
securities and the severity of losses resulting from such defaults, as well as
the timing of such defaults and actual net losses. The Company's right as a
holder of subordinated classes of CMBS to distributions of principal and
interest will generally be subordinated to all of the more senior classes of
securities although the timing and extent of such subordination will depend upon
the particular terms of a security. Actual losses on the underlying Mortgage
Loans (after default, where the proceeds from the foreclosure sale of the real
property securing the underlying Mortgage Loans are less than the unpaid balance
of the Mortgage Loan plus accrued interest thereon and disposition costs) will
be allocated first to the subordinated classes of CMBS prior to being allocated
to the more senior classes of securities. The subordinated classes of CMBS the
Company expects to retain or acquire from time to time are subject to
substantially greater risk of loss of principal and non-payment of interest than
the more senior classes of such securities.
If the Company retains or acquires CMBS with an anticipated yield as of the
securitization or acquisition date based on an assumed rate of default and
severity of loss on the underlying Mortgage Loans that is lower than the actual
default rate and severity of loss, the yield on such CMBS will be lower than the
Company initially anticipated. In the event of substantial losses, the Company
may not recover the full amount (or, indeed, any) of its investment. The timing
of actual losses and the timing of the recognition of such losses provided for
in the underlying securitization transaction also will affect the
65
<PAGE>
Company's yield, even if the rate of default and severity of loss are consistent
with the Company's expectations. In general, the earlier a loss occurs, the
greater the adverse effect on the Company's yield. There can be no assurance as
to the rate of default, severity of loss or the limiting of any such losses on
mortgage loans underlying CMBS and thus as to the actual yield received by the
Company.
The aggregate amount of distributions on the Company's CMBS and their yield
also will be affected by the amount and timing of principal prepayments on the
underlying Mortgage Loans. CMBS issued and retained by the Company will
generally be backed by Credit Tenant Loans with yield maintenance features that
reduce the likelihood of prepayment. To the extent that more senior classes are
outstanding, all prepayments of principal on the underlying Mortgage Loans
typically will be paid to the holders of the more senior classes, and typically
none (or very little) will be paid to the Company as a holder of the CMBS during
the first five years, and in some cases a longer period, after the original
issue date of the CMBS. This subordination of the CMBS to more senior classes
may adversely affect the yield on the CMBS acquired by the Company. Even if
there are no actual losses on the Mortgage Loans, interest and principal
payments are made on the more senior classes before interest and principal are
paid with respect to subordinated classes of CMBS. Typically, interest deferred
on CMBS is payable on subsequent payment dates to the extent funds are
available, but such deferral does not itself bear interest. Such deferral of
interest will reduce the actual yield on the Company's CMBS.
Because the Company will acquire CMBS at a significant discount from their
outstanding principal balance, if the Company estimates the yield on a security
based on a faster rate of payment of principal than actually occurs, the
Company's yield on that security will be lower than the Company anticipated. In
addition, the Company will be required to accrue taxable OID income on the basis
of a constant yield to maturity on any CMBS that were both issued and acquired
at a significant discount, and will be required to accrue taxable market
discount income on the basis of a constant yield method or pro rata method on
REMIC CMBS acquired at a significant discount. Whether and when there are any
principal prepayments on the underlying mortgage loans will be affected by a
variety of factors, including, without limitation, the terms of the Mortgage
Loans, the level of prevailing interest rates, the availability of mortgage
credit and economic, tax, legal and other factors. Principal prepayments on
Mortgage Loans secured by commercial properties are likely to be affected by
lock-out periods and prepayment premium provisions applicable to each of the
Mortgage Loans, and by the extent to which the Servicer is able to enforce such
prepayment premium provisions. Moreover, the yield to maturity on such CMBS also
may be affected by any extension of the scheduled maturity dates of the Mortgage
Loans as a result of modifications of the Mortgage Loans by the Servicer, if
permitted.
DESCRIPTION OF EXISTING REAL ESTATE INTERESTS
The Company intends to originate and invest principally in the following
types of Mortgage Assets, subject to the operating restrictions described in
"The Company--Company Policies" above and the additional policies described
below.
CREDIT TENANT AND OTHER MORTGAGE LOANS
The Company intends to originate and accumulate fixed-rate Credit Tenant
Loans and Mezzanine Construction Loans secured by first or second liens on
commercial real property subject to a Credit Tenant Lease as a significant part
of its investment strategy.
Such loans will primarily be originated through the Company's existing
correspondent network. The Board of Directors of the Company has not established
any concentration limits upon loans to be acquired by the Company. See "The
Company--Company Policies--Loan Underwriting Guidelines."
In addition, the Company may purchase, from time to time, BB Grade Credit
Tenant Loans which the Company will hold in its portfolio. The Company may or
may not securitize such purchased loans.
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<PAGE>
INITIAL INVESTMENTS; EXISTING LOANS, COMMITMENTS AND PROPERTIES
The Existing Loans consist of 93 fixed-rate mortgage loans. All of the
Existing Loans are secured by (i) absolute assignments of leases and rents on
properties net leased to the Tenants pursuant to the Credit Tenant Leases from
one of 32 different Credit Tenants (and in the case of one loan, two Credit
Tenants), (ii) first mortgages on fee or leasehold interests, such commercial
properties, and (iii) a security interest in funds on deposit in certain rent
escrow and reserve accounts, all as described herein. In addition, 86 of the
Existing Loans are further secured by certain non-cancelable credit lease
enhancement insurance policies (the "Lease Enhancement Policies") issued by an
insurer with a claims paying rating of "AAA" rating from S&P (such subsidiaries,
collectively, the "Enhancement Insurer") that protect against losses due to
termination of or abatement of rent under a Credit Tenant Lease as a result of a
casualty or condemnation event at the commercial property. Also, seven of the
Existing Loans have maturities or amortization periods that extend beyond the
initial term of the associated Credit Tenant Loan and are accordingly further
secured by certain credit lease renewal insurance policies or residual value
insurance policies (the "Extended Amortization Policies") issued in the case of
seven loans by an insurer with a claims paying rating of "AAA" by S&P (the
"Extension Insurer") that protect against losses due to the failure of the
Credit Tenant to renew the Credit Tenant Lease followed by a subsequent default
by the borrower of its obligations under the associated Credit Tenant Loan or
the failure of the borrower to pay a balloon balance at the maturity of the
associated Credit Tenant Loan. All of the Existing loans are current and have
experienced no default. There is no assurance that these results will be
representative of results which the Company may experience on the loans
underlying the CMBS which the Company may purchase or loans the Company will
make in the future or on future results of the Existing Loan.
As of May 15, 1998, the aggregate outstanding principal balance of the
Existing Loans was $342.7 million with an average loan size of approximately
$3.7 million (maximum: $20.5 million, minimum: $0.9 million). The weighted
average gross coupon was 7.57% (maximum: 8.20% and minimum: 6.92%) with a
weighted average original term to maturity of 243.6 months (maximum: 308 months,
minimum 133 months) and a remaining weighted average term to maturity of 235.8
months (maximum 301 months, minimum: 118 months). The weighted average original
debt service coverage was 1.05x (maximum 1.493x, minimum 1.003x). The appraised
weighted average loan amount to leased fee value of the properties assuming the
Credit Tenant Leases were in place was 88.2% (maximum: 98.8%, minimum: 70.5%)
and the appraised weighted average loan amount to dark value of the properties
assuming the properties were not subject to the Credit Tenant Leases was 127.2%
(maximum: 231.3%, minimum 36.9%). All of the Existing Loans have "call"
protection that prohibits prepayments under the loans for a term generally of
eight years with a weighted average remaining Lockout Period of 88 months
(maximum: 96 months, minimum 77.5 months). At the conclusion of the Lockout
Period the Existing Loans are pre-payable provided such prepayment is
accompanied by a yield maintenance payment generally calculated so that the
lender would receive the same yield by investing the prepaid loan amount in then
current U.S. Treasury obligations as would have been received had the loan been
held to maturity.
Unless otherwise indicated, all information set forth in the tables set
forth below is as of May 15, 1998.
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<PAGE>
EXISTING LOANS--TENANT CONCENTRATION
<TABLE>
<CAPTION>
NUMBER OF CURRENT % OF
MORTGAGE AGGREGATE AGGREGATE
TENANT/GUARANTOR(1) LOANS BALANCE BALANCE
- -------------------------------------------------------------------------- --------------- -------------- -----------
<S> <C> <C> <C>
CVS Corporation or a subsidiary thereof................................... 22 $ 51,050,808 14.9%
Rite Aid Corporation...................................................... 20 38,480,581 11.2
Koninklijke Ahold, N.V.................................................... 3 27,568,836 8.0
Circuit City Stores, Inc.................................................. 3 20,735,066 6.1
The Home Depot, Inc. or a subsidiary thereof.............................. 2 20,553,503 6.0
BlueCross and Blue Shield of Texas, Inc................................... 1 20,514,134 6.0
CareGroup, Inc............................................................ 1 20,249,768 5.9
Wal-Mart Stores, Inc...................................................... 2 19,010,446 5.5
Walgreen Co............................................................... 6 15,188,568 4.4
Eckerd Corporation........................................................ 6 12,176,165 3.6
Georgia Baptist Health Care System, Inc................................... 1 12,130,649 3.5
KeyBank National Association.............................................. 1 11,172,055 3.3
John H. Harland Company................................................... 1 9,534,875 2.8
Wegmans Food Markets, Inc................................................. 1 8,412,266 2.5
The Pep Boys--Manny, Moe & Jack........................................... 3 5,869,283 1.7
MedPartners, Inc.......................................................... 1 5,636,627 1.6
The TJX Companies, Inc.................................................... 1 5,633,817 1.6
Riggs Bank N.A............................................................ 1 5,484,602 1.6
Hanson North America, Inc................................................. 1 5,328,070 1.6
State of New Jersey....................................................... 1 3,981,124 1.2
Tandy Corporation......................................................... 1 3,879,159 1.1
McDonald's Corporation.................................................... 3 3,463,482 1.0
American Drug Stores, Inc................................................. 1 3,105,236 0.9
Bridgestone/Firestone, Inc................................................ 2 2,236,087 0.7
The Chase Manhattan Bank.................................................. 1 2,027,033 0.6
Hannaford Bros. Co........................................................ 1 1,758,382 0.5
Exxon Corporation......................................................... 1 1,480,897 0.4
Boston Gas Company........................................................ 1 1,452,449 0.4
Mobil Oil Corporation..................................................... 1 1,365,427 0.4
Sears, Roebuck & Co....................................................... 1 1,347,796 0.4
Amoco Oil Company......................................................... 1 950,773 0.3
United States Postal Service.............................................. 1 925,132 0.3
--
-------------- -----
Total............................................................. 93 $ 342,703,096 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>
- ------------------------
(1) Meaning either, in the case of the tenant, the primary obligor under the
lease and, in the case of the Guarantor, the entity which guarantees the
obligations under the associated Credit Tenant Lease. In either case, the
principal credit upon which the Company is relying is listed.
CREDIT RATING CONCENTRATION
The following table sets forth the long-term credit ratings of the tenants
or guarantors under the Credit Tenant Leases underlying the Existing Loans as of
May 15, 1998. Such ratings of the tenants or guarantors (other than those
internally classified ("IC")) are published by S&P and are publicly available.
The long-term credit rating is an opinion of the applicable Rating Agency of an
obligor's overall credit worthiness and its ability to pay its financial
obligations as they come due. Such ratings should not be
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<PAGE>
deemed a recommendation to purchase the securities offered hereby or any
securities which may be offered in any future securitization of the Existing
Loans.
<TABLE>
<CAPTION>
CUMULATIVE
NUMBER OF % OF % OF
TENANT/GUARANTOR MORTGAGE AGGREGATE AGGREGATE AGGREGATE
CREDIT RATING LOANS BALANCE BALANCE BALANCE
- ------------------------------------------------------- --------------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
AAA.................................................... 3 $ 3,356,802 1.0% 1.0%
AA+.................................................... 1 3,981,124 1.2 2.1
AA..................................................... 6 23,839,355 7.0 9.1
AA-.................................................... 2 20,553,503 6.0 15.1
A+..................................................... 7 17,215,601 5.0 20.1
A...................................................... 12 72,619,273 21.2 41.3
A-..................................................... 25 64,690,029 18.9 60.2
BBB+................................................... 24 49,983,681 14.6 74.8
BB+.................................................... 1 5,636,627 1.6 76.4
BBB-................................................... 1 5,484,602 1.6 78.0
IC..................................................... 11 75,342,499 22.0 100.0
--
-------------- ----- -----
Total.............................................. 93 $ 342,703,096 100.0% 100.0%
--
--
-------------- ----- -----
-------------- ----- -----
</TABLE>
INDUSTRY CONCENTRATION
<TABLE>
<CAPTION>
NUMBER OF % OF
MORTGAGE AGGREGATE AGGREGATE
TENANT/GUARANTOR INDUSTRY LOANS BALANCE BALANCE
- ------------------------------------------------------------------------- ----------------- -------------- -----------
<S> <C> <C> <C>
Retail Drug.............................................................. 55 $ 120,001,358 35.0%
Healthcare Services...................................................... 3 38,017,044 11.1
Grocery.................................................................. 5 37,739,484 11.0
Retail Electronics....................................................... 4 24,614,225 7.2
Insurance................................................................ 1 20,514,134 6.0
Retail Building Materials................................................ 2 20,553,503 6.0
Retail Discount & General Merchandise.................................... 2 19,010,446 5.5
Banking.................................................................. 3 18,683,690 5.5
Printing................................................................. 1 9,534,875 2.8
Automotive............................................................... 5 8,105,370 2.4
Retail Apparel........................................................... 1 5,633,817 1.6
Manufacturing............................................................ 1 5,328,070 1.6
Energy................................................................... 4 5,249,546 1.5
Government............................................................... 2 4,906,256 1.4
Food Service............................................................. 3 3,463,482 1.0
Department Stores........................................................ 1 1,347,796 .4
--
-------------- -----
Total................................................................ 93 $ 342,703,096 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>
69
<PAGE>
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
MORTGAGE AGGREGATE AGGREGATE
PROPERTY LOCATION LOANS BALANCE BALANCE
- ----------------------------------------------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
NY..................................................................... 22 $ 65,114,439 19.0%
MA..................................................................... 10 53,922,284 15.7
TX..................................................................... 5 45,717,945 13.3
GA..................................................................... 2 22,718,208 6.6
MI..................................................................... 10 21,159,763 6.2
PA..................................................................... 7 20,437,636 6.0
VA..................................................................... 9 17,837,459 5.2
FL..................................................................... 3 17,393,681 5.1
MD..................................................................... 2 14,333,176 4.2
CA..................................................................... 3 14,067,123 4.1
NJ..................................................................... 5 13,625,197 4.0
OH..................................................................... 1 5,914,373 1.7
NE..................................................................... 1 5,570,223 1.6
TN..................................................................... 3 5,408,624 1.6
AR..................................................................... 1 3,993,004 1.2
NC..................................................................... 2 3,079,537 0.9
NV..................................................................... 1 2,926,136 0.8
CT..................................................................... 2 2,589,128 0.8
ME..................................................................... 1 2,521,593 0.7
SC..................................................................... 1 2,100,639 0.6
IL..................................................................... 1 1,347,796 0.4
WA..................................................................... 1 925,132 0.3
--
-------------- -----
93 $ 342,703,096 100.0%
--
--
-------------- -----
-------------- -----
</TABLE>
Total Number of States Represented 22
OUTSTANDING COMMITMENTS CONCENTRATION
<TABLE>
<CAPTION>
APPROXIMATE
AGGREGATE
EXPECTED NUMBER OF MORTGAGE PRINCIPAL % OF AGGREGATE
PRINCIPAL AMOUNT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------------- ------------- --------------
<S> <C> <C> <C>
$0-999,999........................................................ 1 928,000 0.2%
$1,000,000-$2,499,999............................................. 44 77,177,000 19.3
$2,500,000- 4,999,999............................................. 33 94,115,000 23.5
$5,000,000- 7,499,999............................................. 4 22,405,000 5.6
$7,500,000- 9,999,999............................................. 3 24,275,000 6.1
$10,000,000 & greater............................................. 9 181,767,000 45.3
--
------------- -------
Total........................................................... 94 400,667,000 100.0%
--
--
------------- -------
------------- -------
</TABLE>
(1) Includes $64 million of the construction/permanent loans for which
NationsBank has commenced advances under the construction loan portion.
CVS CORPORATION
Loans, constituting 14.9% of the Existing Loans are secured by
properties leased to CVS Corporation ("CVS") or a subsidiary (or former
subsidiary thereof). The obligations of each tenant (other than CVS itself)
under these leases are guaranteed by CVS. CVS, formerly Melville Corporation, is
a
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<PAGE>
Delaware corporation, and is a leader in the chain drug industry. The long-term
senior credit rating of CVS by S&P is A-.
CVS's stock trades on the New York Stock Exchange (the "NYSE") under the
symbol "CVS," and its World Wide Web site is located at http://www.cvs.com. CVS
currently is subject to the public reporting requirements of the Exchange Act.
RITE AID CORPORATION
Loans, constituting 11.2% of the Existing Loans, are secured by
properties leased to Rite Aid Corporation ("Rite Aid") or for which leases Rite
Aid is the guarantor. Rite Aid is a Delaware corporation operaing a chain of
retail drugstores in the United States. The long-term senior credit rating of
Rite Aid by S&P is BBB+.
Rite Aid's common stock trades on the NYSE under the symbol "RAD," and its
World Wide Web site is located at http://www.riteaid.com. Rite Aid currently is
subject to the public reporting requirements of the Exchange Act.
TARGETED INVESTMENTS
NET LEASED REAL ESTATE
The Company intends to invest in Net Leased Real Estate. Such investment may
be made directly by the Company or through partnerships or other entities formed
with other parties. The Company may also form one or more partnerships, the
limited partnership interests in which would be convertible into Common Stock,
for the purpose of enabling the Company to acquire real estate or interests
therein from real estate owners on a tax deferred basis in exchange for such
real estate or interests therein.
Net Leased Real Estate is generally defined as real estate that is net
leased on a long-term basis (i.e., ten years or more) to tenants who are
customarily responsible for paying all costs of owning, operating, and
maintaining the leased property during the term of the lease, in addition to the
payment of monthly rent to the landlord for the use and occupancy of the
premises.
The Company expects to acquire Net Leased Real Estate on a leveraged basis
by utilizing its Credit Tenant Loans to provide an attractive return on its
investment therein. Although the time during which the Company will hold Net
Leased Real Estate will vary, the Company anticipates holding most Net Leased
Real Estate for more than ten years, although there are no assurances that it
will do so. The Company will focus on Net Leased Real Estate that is either
leased to Credit Tenants or is real estate that can be leased to other tenants
in the event of a default of the initial tenant. In particular, the Company
expects to invest in Net Leased Real Estate that is subject to (or will become
subject to) a Credit Tenant Loan originated by the Company. See "Risk
Factors--Operations--The Company's Operations are Dependent Upon the Credit
Tenant Loan and Securitization Business."
The Company expects periodically to sell or dispose of a significant
component of its Net Leased Real Estate as circumstances warrant. The Company
believes that a significant number of the Net Leased Real Estate it sells or
disposes of will be acquired by buyers motivated by the "like kind exchange
rules" of Section 1031 of the Code. Generally under the like kind exchange
rules, buyers may defer capital gains taxes on a transfer of real estate
investments provided that they identify a "like kind" property within 45 days of
transferring the previous property. Net Leased Real Estate is a desirable
exchange medium for buyers interested in deferring capital gains due to the high
credit quality of real estate backed by a Credit Tenant Lease, the relatively
straightforward due diligence necessary for such acquisitions and the limited
nature of the owner's on-going responsibilities during the life of the Credit
Tenant Lease.
71
<PAGE>
COMMERCIAL MORTGAGE-BACKED SECURITIES
The Company intends to retain certain subordinated classes of CMBS in
connection with securitizations of its Credit Tenant Loans and to acquire other
CMBS, primarily Non-Investment Grade classes (including IO's), from various
sources (particularly those which include, as a component thereof, Credit Tenant
Loans). CMBS typically are divided into two or more interests, sometimes called
"tranches" or "classes." The senior classes are often securities which, if
rated, would have ratings ranging from low Investment Grade "BBB" to higher
Investment Grades "A," "AA" or "AAA." The junior, subordinated classes typically
would include one or more classes which, if rated, would have ratings below
Investment Grade. Such subordinated classes also typically include an unrated
higher-yielding, credit support class (which generally is required to absorb the
first losses on the underlying Mortgage Loans).
The mortgage collateral supporting CMBS may be pools, single-property whole
loans or other CMBS, or any combination thereof. Of the interests in CMBS that
the Company acquires, most will be subordinated or IO classes of CMBS, but the
Company may also acquire more senior classes or combined classes of first-loss
CMBS.
Unlike residential MBS, which typically are collateralized by thousands of
single family Mortgage Loans, CMBS are collateralized generally by a more
limited number of commercial or multifamily Mortgage Loans with larger principal
balances than those of single family Mortgage Loans. As a result, a loss on a
single Mortgage Loan underlying a CMBS will have a greater negative effect on
the yield of such CMBS, especially the subordinated classes in such CMBS.
With respect to CMBS purchased from a third-party, the Company will use
sampling and other appropriate analytical techniques to determine on a
loan-by-loan basis which loans will undergo a full-scope review and which loans
will undergo a more streamlined review process. Although the choice is a
subjective one, considerations that influence the choice for scope of review
often include loan size, debt service coverage ratio, loan to value ratio, loan
maturity, lease rollover, property type and geographic location. A full-scope
review may include, among other factors, a property site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the loan, a review of major leases for each property
(if available); recent appraisals (if available), engineering and environmental
reports (if available), and the price paid for similar CMBS by unrelated third
parties in arm's length purchases and sales (if available) or a review of broker
price opinions (if the price paid by a bona fide third party for similar CMBS is
not available and such price opinions are available). For those loans that are
selected for the more streamlined review process, the Company's evaluation may
include a review of the property operating statements, summary loan level data,
third party reports, and a review of prices paid for similar CMBS by bona fide
third parties or broker price opinions, each as available. If the Company's
review of such information does not reveal any unusual or unexpected
characteristics or factors, no further due diligence is performed. The Company
expects to hold its CMBS in book-entry form, to the extent possible.
OTHER INVESTMENTS
The Company may also pursue a variety of complementary commercial real
estate and finance-related businesses and investments in furtherance of its
investment policies and strategies, including without limitation, purchasing
Credit Tenant Loans originated by third parties. Such activities may include,
but are not limited to, foreign real estate-related asset investments and
investing in (or lending to) REITs and similar companies. Any lending with
regard to the foregoing may be on a secured or an unsecured basis and may or may
not be subject to risks similar to those attendant to investing in Credit Tenant
Loans, CMBS and commercial real estate. The Company seeks to maximize yield by
managing credit risk through credit underwriting, although there can be no
assurance that the Company will be successful in this regard.
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<PAGE>
INVESTMENT IN OTHER ENTITIES
The Company may acquire equity interests or make other investments in REITs,
registered investment companies, partnerships and other investment funds and
real estate operating companies when the Company believes that such purchases or
investments will yield attractive returns on capital. When the stock market
valuations of such companies are low in relation to the market value of their
assets, such stock purchases can be a way for the Company to acquire an interest
in a pool of targeted investments at an attractive price. The Company may also
decide in the future to pursue business acquisition opportunities that it
believes will complement the Company's operations.
FOREIGN INVESTMENTS
The Company may acquire or originate Credit Tenant Loans secured by real
estate located outside the United States or may acquire such real estate.
Investing in real estate related assets located in foreign countries creates
risks associated with the uncertainty of foreign laws and markets and risks
related to currency conversion. The Company may attempt to mitigate such
currency risks, to the extent practicable, depending on the nature of the
investment. For example, the Company may originate Credit Tenant Loans or
acquire Net Leased Real Estate which require payments or are otherwise
denominated in U.S. dollars. The Company may be subject to foreign income tax
with respect to its investments in foreign real estate related assets. However,
any foreign tax credit that otherwise would be available to the Company for
United States federal income tax purposes will not pass through to the Company's
stockholders.
73
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
William R. Pollert............................. 54 President, Chief Executive Officer, Chairman of the Board
of Directors
Edwin J. Glickman.............................. 66 Executive Vice President, Product Development
Steven L. Maloy................................ 40 Sr. Vice President, Marketing and Sales
Paul H. McDowell, Esq.......................... 38 Sr. Vice President, General Counsel, Secretary
Shawn P. Seale................................. 35 Sr. Vice President, Chief Financial Officer, Assistant
Secretary
Scott A. Shay.................................. 40 Director
DIRECTORS TO BE APPOINTED UPON COMPLETION OF THE OFFERING
RICHARD J. CAMPO............................... 43
LAWRENCE CHIMERINE............................. 57
DAN KEARNEY....................................
</TABLE>
WILLIAM R. POLLERT
Mr. Pollert is a founder of Capital Lease Funding, L.P. and a principal
investor. Mr. Pollert has had extensive experience in managing a wide variety of
companies. From 1993 until joining the Company in 1995, Mr. Pollert was the
President and Chief Executive Officer of Equitable Bag Co., Inc., a leading
manufacturer of custom bag products for non-food retailers and specialty
packaging. From 1986 to 1993 Mr. Pollert held a variety of senior management
positions in Triarc Companies, Inc. (Arby's, RC Cola, Graniteville, National
Propane); Trian Group L.P.C.; Avery, Inc. (Uniroyal Chemical Co.); and Triangle
Industries, Inc. (American National Can Co., Brandt, Inc., Triangle Wire &
Cable, Inc., and Rowe International, Inc.). Triarc, Trian, Avery, Triangle and
Equitable Bag Co., Inc. were at one time or are controlled by Nelson Peltz and
Peter May.
From 1973 to 1985, Mr. Pollert held a variety of senior management positions
at International Paper Company, ending as Vice President of the Consumer
Packaging business and a member of the Company's Executive Operating Committee.
Mr. Pollert received a Ph.D. in Management & Organization Sciences from the
University of Florida in 1971, an MBA in Finance from Columbia University in
1967, and a BA from Lehigh University in 1965.
EDWIN J. GLICKMAN
Mr. Glickman is a founder and principal of the Company and has over forty
years of experience in the field of real estate. From 1990 until joining the
Company in 1995, Mr. Glickman acted as a real estate finance consultant
concentrating largely on loan restructuring and tax planning for troubled real
estate. From 1977 to 1990, Mr. Glickman was a principal at Sybedon Corporation,
serving successively as Executive Vice President and President. Sybedon engaged
in the arrangement of real estate debt and equity financing as well as
syndication and development. Prior to 1977, Mr. Glickman acted as a principal in
a variety of partnerships and companies engaged in the development and
syndication of real estate transactions. Mr. Glickman was a development partner
in the Galleria, a 57-story mixed-use building in midtown Manhattan.
In addition to his business activities, Mr. Glickman has lectured widely on
real estate finance and tax matters, and was a lecturer (1985) and Adjunct
Assistant Professor (1986 and 1987) at the Real Estate
74
<PAGE>
Institute of New York University. Mr. Glickman is a Trustee of Atlantic Realty
Trust, which is listed on the Nasdaq National Market. Mr. Glickman served as a
First Lieutenant in the U.S. Army. Mr. Glickman received a BA from Dartmouth
College in 1953.
STEVEN L. MALOY
Mr. Maloy is a founder and principal of the Company. From 1990 until joining
the Company in 1995, he was a principal at Liberty Equities, Inc./Richard Brock
Real Estate Investments, a real estate investor, where he was responsible for
the acquisition of apartment properties, office buildings, and retail and
industrial properties. From 1988 to 1990 he was engaged in real estate finance
with Mr. Glickman, first at Sybedon Corporation and subsequently at Schoenfeld,
Glickman, Maloy, Inc. From 1982 to 1988 he was a real estate broker at Coldwell
Banker and Cushman & Wakefield, Inc., New York City. In 1981 he began his real
estate career as an office leasing broker of Coldwell Banker. Mr. Maloy received
a BS from the University of Hartford in 1979.
PAUL H. MCDOWELL
Mr. McDowell is a founder and a principal of the Company. From 1991 until
joining the Company in 1995, Mr. McDowell was corporate counsel for Sumitomo
Corporation of America, the principal U.S. subsidiary of one of the world's
largest integrated trading companies. As corporate counsel, Mr. McDowell advised
on a wide range of domestic and international corporate legal matters including
acquisitions, complex financing transactions, power plant development, shipping,
litigation management and real estate. From 1987 to 1990, Mr. McDowell was an
associate in the corporate department at the Boston law firm of Nutter,
McClennen & Fish. Mr. McDowell received a JD with honors from Boston University
School of Law in 1987 and received a BA from Tulane University in 1982.
SHAWN P. SEALE
Mr. Seale is a founder and principal of the Company. From 1988 until joining
the Company in 1995, Mr. Seale was a founder, Vice President and Treasurer of
Taylor Consulting Group, Inc., a corporate consulting group in Atlanta. At the
Taylor Consulting Group, Mr. Seale provided a wide range of financial valuation
and financial analysis services to a diverse mix of public and private
companies, including Coca-Cola. From 1985 to 1988, Mr. Seale was a member of the
Management/Distribution and Management/ Finance consulting group in the Boston
and Atlanta offices of Ernst & Whinney (a predecessor to Ernst & Young). Mr.
Seale is a certified public accountant. Mr. Seale received a BS from the
Massachusetts Institute of Technology in 1985.
SCOTT A. SHAY
Mr. Shay has been a Managing Director of Ranieri & Co., Inc. since its
formation in 1988. Mr. Shay is a founder of Hyperion Partners and Hyperion
Partners II L.P. Mr. Shay is currently a member of the board of directors of
Bank United Corp., Bank United, Hyperion Capital Management, Inc., Transworld
Healthcare, Inc. and Bank Hapoalim B.M., in Tel Aviv, Israel. He is a director
of one of the general partners of Cardholder Management Services, L.P., an
independent credit card servicer, as well as an officer or director of other
direct and indirect subsidiaries of Hyperion Partners and Hyperion Partners II
L.P. Mr. Shay is one of the control persons of the general partners of Hyperion
Partners and Hyperion Partners II L.P. Prior to joining Ranieri & Co., Inc., Mr.
Shay was a director of Salomon Brothers Inc. where he was employed from 1980 to
1988. Mr. Shay received a B.A. from Northwestern University and a Master of
Management degree from Northwestern's Kellogg Graduate School of Management.
In addition to Messrs. Pollert and Shay, upon completion of the Offering,
the Company expects to elect Messrs. Richard V. Campo, Lawrence Chimerine and
Dan Kearney, which directors will be Unaffiliated Directors.
75
<PAGE>
RICHARD J. CAMPO
Richard J. Campo, age 43, is Chairman of the Board and Chief Executive
Officer of Camden Property Trust (traded CPT on the NYSE) since May 1993. Mr.
Campo was a co-founder of Camden's predecessor companies in 1982. Camden
Property Trust is a fully integrated real estate operating company organized as
a real estate investment trust (REIT) engaged in the ownership, development,
acquisition, marketing, management and disposition of multifamily apartment
communities in the Sunbelt and Midwestern regions of the United States. Camden
currently operates 100 properties containing 34,669 apartment houses. He has
been involved in development, management, acquisition and disposition of real
estate properties valued in excess of $5 billion. As an active participant in
the real estate industry, Mr. Campo is a frequent speaker on real estate and
development related topics. Mr. Campo is a member of the American Institute of
Certified Public Accountants. He is involved in numerous local charitable
organizations and serves on the Boards of the National Multi Housing Council,
the Oregon State University Foundation, First Sierra Financial (NASDAQ) and the
Harris County-Houston Sports Authority. Mr. Campo began his real estate career
after graduating from Oregon State University in 1976.
LAWRENCE CHIMERINE
Dr. Lawrence Chimerine, age 57, has served as President of his own economic
consulting firm, Radnor Consulting Services, since 1990. He is currently also
the Managing Director and Chief Economist of the Economic Strategy Institute in
Washington, D.C. He is currently a member of the board of directors of Bank
United Corp. and Bank United. Dr. Chimerine served as Chairman and Chief
Executive Officer of the WEFA Group from 1987 to 1990 and of Chase Econometrics
from 1979 to 1987, both of which provide economic consulting. He was manager of
economic research for the IBM Corporation from 1965 to 1979. Dr. Chimerine
received a B.S. from Brooklyn College and a Ph.D. from Brown University.
DAN KEARNEY
Dan Kearney, age , retired as Executive Vice President of Investments and
Financial Services of Aetna Inc. on February 28, 1998. Since ,
Mr. Kearney was President of Aetna Retirement Services, Inc. (ARS) in Hartford,
Connecticut and Chief Investment Officer of Aetna Inc. overseeing a $72 billion
portfolio of stock equities, bonds and real estate investments.
Prior to joining Aetna in 1991, Mr. Kearney was President and Chief
Executive Officer of the Resolution Trust Corporation Oversight Board. Before
joining the RTC Oversight Board, he was a principal at Aldrich, Eastman and
Waltch, Inc., a Boston-based pension fund advisor. From 1977 to 1988, Mr.
Kearney was an executive of Salomon Brothers Inc., where he was Managing
Director of its Real Estate Financing Department and one of the founders of its
Mortgage Securities Department.
From 1976 to 1977, Mr. Kearney was Associate Director of the Office of
Management and Budget (OMB) for the U.S. Federal Government. He served as
President of the Government National Mortgage Association (Ginnie Mae) from 1974
to 1976, Deputy Assistant Secretary of the Department of Housing and Urban
Development (HUD) from 1973 to 1974, and as Executive Director of the Illinois
Housing Development Authority from 1969 to 1973. He was in private law practice
in Chicago from 1965 to 1968.
Mr. Kearney is a director of MBIA, Inc., the country's largest provider of
municipal bond insurance. He is also a Director of BioTransplant, a leading
developer of organ transplant technology. Mr. Kearney received a Bachelor of
Business Administration degree in 1961 and his Master of Economics degree in
1963. He received a J.D. from the University of Chicago Law School in 1965.
BOARD OF DIRECTORS
Directors will be elected for a term of three years and will hold office
until their successors are elected and qualified. All officers serve at the
discretion of the Board of Directors. The Board of Directors has been divided
into three classes of directors. The terms of the classes will expire in 1999,
2000 and 2001 respectively. Beginning in 1999, as the term of a class expires,
directors in that class will be elected for a three-year term and the directors
in the other two classes will continue in office. Initially, Mr. Pollert's term
76
<PAGE>
will expire in 2001 and Mr. Shay's term will expire in 2000. The remaining
directors terms will expire on dates to be determined.
The Bylaws of the Company provide that the Board of Directors shall have not
less than 3 or more than 9 members, as determined from time to time by the
existing Board of Directors. The Board of Directors will initially have 5
directors.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Charter of the Company provides for the indemnification of the directors
and officers of the Company and its employees, officers, directors and
controlling persons to the fullest extent permitted by Maryland law. In
addition, the Company has entered into indemnification agreements with each of
its directors and senior officers to the fullest extent permitted by applicable
law and which otherwise reflect the indemnification provisions set forth in the
Company's Charter. Maryland law generally permits indemnification of directors
and officers against certain costs, liabilities and expenses that any such
person may incur by reason of serving in such positions unless it is proved
that: (i) the act or omission of the director or officer was material to the
cause of action adjudicated in the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the director or officer
actually received an improper personal benefit in money, property or services;
or (iii) in the case of criminal proceedings, the director or officer had
reasonable cause to believe that the act or omission was unlawful. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
COMMITTEES OF THE BOARD
The Board of Directors expects to establish an Audit Committee consisting of
two independent directors. The Audit Committee will be responsible for making
recommendations concerning the engagement of independent public accountants,
reviewing the plans and results of the audit engagement with the independent
public accountants, approving professional services provided by the independent
public accountants, reviewing the independence of the independent public
accountants, considering the range of audit and non-audit fees and reviewing the
adequacy of the Company's internal accounting controls.
In addition, the Board of Directors expects to establish a compensation
committee consisting of Mr. Pollert and two non-management directors. The
Compensation Committee will be responsible for recommending to the Board of
Directors the Company's executive compensation policies and for administering
its compensation plans.
COMPENSATION OF DIRECTORS
The Company expects to compensate its Unaffiliated Directors at levels
customary to public companies of its size and nature and to permit such
directors to participate in the Company 1998 Non-Qualified Stock Option Plan.
Directors who are employed by the Company will not be separately compensated by
the Company.
EMPLOYMENT AGREEMENTS
The Company anticipates entering into employment agreements with certain key
employees upon terms and conditions to be negotiated, but which employment
agreements are expected to provide that upon the termination of the employee's
employment: by the Company other than for "cause" (as defined in the employment
agreements); by the employee for certain actions of the Company, such as
effecting a material adverse change in the employee's responsibilities; or upon
a "change in control" of the Company (as defined in the employment agreements),
the employee will be entitled to all compensation and benefits payable under the
employment agreement for the remainder of its term. In addition, the Company
expects these agreements to restrict the ability of such employees to compete
with the Company.
77
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
---------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
RESTRICTED SECURITIES
SHARE AWARDS UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS/SARS (#)
- ----------------------------------------------- --------- ---------- ---------- ------------------- -------------------------
William R. Pollert, 1997 $ 275,000 $ -0- $
Chief Executive Officer and President
Edwin J. Glickman, 1997 $ 260,000 $ 75,000
Executive Vice President, Product Development
Steven L. Maloy, 1997 $ 170,000 $ 130,000
Senior Vice President, Marketing and Sales
Paul H. McDowell, 1997 $ 185,000 $ 145,000
Senior Vice President, General Counsel and
Secretary
Shawn P. Seale, 1997 $ 175,000 $ 135,000
Senior Vice President, Chief Financial Officer
and Assistant Secretary
</TABLE>
STOCK OPTIONS
On , 1998, the Company adopted the 1998 Non-Qualified Stock
Option Plan and 1998 Incentive Stock Option Plan. The Company has authorized
that 11% of the Common Stock outstanding following the Offering be reserved for
issuance pursuant to its 1998 Incentive Stock Option Plan and that 1% of the
Common Stock outstanding following the Offering be reserved for issuance
pursuant to its 1998 Non-Qualified Stock Option Plan. The Company currently has
no stock options outstanding, although at the closing of this Offering, the
Company anticipates that it will have granted a substantial number of options to
purchase shares of Common Stock pursuant to its Stock Option Plans.
MANAGEMENT SHAREHOLDERS' AGREEMENT
The Company expects that it and certain management shareholders will enter
into a shareholders' agreement which will provide, among other things, for
certain restrictions on transfer and the grant of registration rights on terms
to be determined.
EXPENSES
The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, personnel, filing and other expenses)
incurred by the Company or its Affiliates on behalf of the Company in connection
with the Offering, estimated at approximately $1.3 million. This payment will
not be subject to the limitation on expenses to be borne by the Company. The
expenses that will be paid by the Company also will include (but not necessarily
be limited to) issuance and transaction costs incident to the acquisition,
disposition and financing of investments, legal and auditing fees and expenses,
the costs of printing and mailing proxies and reports to stockholders, costs to
obtain liability insurance to indemnify the Company's directors and officers and
the Underwriters, and the compensation and expenses of the Company's custodian
and transfer agent, if any.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
78
<PAGE>
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provisions which eliminates such liability to the
maximum extent permitted by Maryland law.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his status as a present or former director or officer of
the Company. The Bylaws obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the Company' Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a Maryland corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or in any proceeding in which the director was
adjudged to be liable on the bases that personal benefit was improperly received
unless in either case a court orders indemnification and then only for expenses.
In addition, the MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the corporation and (b) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. Indemnification under the provisions of the MGCL is not deemed
exclusive of any other rights, by indemnification or otherwise, to which an
officer or director may be entitled under the Company's Charter or Bylaws,
resolutions of stockholders or directors, contract or otherwise. However, it is
the position of the Commission that indemnification of directors and officers
for liabilities arising under the Securities Act, is against public policy and
is unenforceable pursuant to Section 14 of the Securities Act.
The Company also has purchased and maintains insurance on behalf of all of
its directors and executive officers against lability asserted against or
incurred by them in their official capacities with the Company, whether or not
the Company is required or has the power to indemnify them against the same
liability.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, CLF has relied on advances from its partners to meet
certain capital requirements with respect to loan financing, hedge margin, and
other operating capital needs. In this regard, CLF has engaged in a number of
transactions with Hyperion Partners II, L.P., a limited partner of CLF. Mr.
Scott A. Shay, a director of the Company, is a principal of Hyperion Partners
II, L.P. At December 31, 1996, the Company had issued $15,345,000 in the
aggregate of preferred capital to Hyperion Partners II, L.P. and South Ferry II,
L.P. Such preferred capital accrued at a rate of 30% per annum. In addition, the
Company had issued notes to Hyperion Partners II, L.P. during 1997 that were
payable on demand and bore interest at 20%. Since January 1, 1997, CLF has
issued unsecured notes payable and made repayments of notes payable to Hyperion
Partners II, L.P., and retired certain preferred capital, in amounts and on
dates as follows:
<TABLE>
<CAPTION>
DATE DESCRIPTION AMOUNT($)
- -------------------------------- ---------------------------------------------- -----------
<S> <C> <C>
7/10/97......................... Retire portion of preferred capital (5,445,000)
7/10/97......................... Distribution on retired preferred capital (1,241,341)
9/17/97......................... Issue notes payable 2,500,000
10/3/97......................... Issue notes payable 4,000,000
10/9/97......................... Retire notes payable (including interest) (4,013,333)
11/3/97......................... Issue notes payable 1,000,000
11/18/97........................ Issue notes payable 2,000,000
12/12/97........................ Issue notes payable 2,500,000
12/15/97........................ Issue notes payable 2,500,000
12/30/97........................ Issue notes payable 1,500,000
1/6/98.......................... Issue notes payable 6,500,000
1/12/98......................... Issue notes payable 2,600,000
1/27/98......................... Retire notes payable (including interest) (4,145,000)
2/18/98......................... Issue notes payable 3,000,000
3/5/98.......................... Retire notes payable (including interest) (5,146,610)
3/13/98......................... Issue notes payable 2,500,000
4/6/98.......................... Issue notes payable 4,000,000
4/15/98......................... Retire notes payable (including interest) (2,803,761)
4/30/98......................... Retire notes payable (including interest) (4,053,333)
5/7/98.......................... Issue notes payable 3,000,000
</TABLE>
At December 31, 1996, the Company had issued $129,098 in aggregate principal
amount of notes payable to William R. Pollert, the Company's Chairman of the
Board, Chief Executive Officer and President, which loan bore interest at 10%
per annum, was payable on demand and was repaid in February 1997.
As of December 31, 1997, the common stock of CLF Branson Holdings, Inc. was
distributed to certain of the limited partners of CLF. The principal asset of
such company was a parcel of real property in Branson, Missouri with a carrying
value of approximately $2 million.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 15, 1998,
relating to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to beneficially own more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each executive officer and director
of the Company, and (iii) all executive officers and directors of the Company as
a group. The beneficial ownership data set forth below is determined in
accordance with a formula set forth in the partnership agreement of CLF and
assumes an initial public offering price of $15 per share and the sale of
7,340,000 shares in the Offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR BENEFICIAL OWNERSHIP
TO THE OFFERING AFTER THE OFFERING
----------------------- -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1)(2) SHARES PERCENTAGE SHARES PERCENTAGE
- ---------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
William R. Pollert (3) (4)...................................... 2,120,491 46.7% 2,488,417 20.9%
Edwin J. Glickman (4)........................................... 303,586 6.7% 303,586 2.6%
Paul H. McDowell (4)............................................ 213,866 4.7% 213,866 1.8%
Steven L. Maloy (4)............................................. 194,510 4.3% 194,510 1.6%
Shawn P. Seale (4).............................................. 211,233 4.7% 211,233 1.8%
Scott A. Shay (5)............................................... 1,609,216 35.4% 1,609,216 13.5%
50 Charles Lindbergh Boulevard
Uniondale, New York 11553
Hyperion Partners, II L.P. (5).................................. 1,609,216 35.4% 1,609,216 13.5%
50 Charles Lindbergh Boulevard
Uniondale, New York 11553
South Ferry #2, L.P. (6)........................................ 352,016 7.8% 352,016 3.0%
1 State Street Plaza
New York, New York 10004
Alexander E. Fisher (4) (7)..................................... 289,826 6.4% 289,826 2.4%
A. Fisher Co. Inc.
101 East 52nd Street
New York, New York 10022
CLF Holdings, Inc. (8).......................................... 275,308 6.1% 275,308 2.3%
CLF Investors, LLC (9).......................................... 1,250,094 27.5% -0- 0.00%
All executive officers and directors as a group (9 persons)
(10).......................................................... 2,120,491 46.7% 4,097,633 34.5%
</TABLE>
- ------------------------
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares of
Common Stock owned by them. Unless otherwise indicated, the address of each
beneficial owner set forth below is c/o the Company at 85 John Street, 12th
Floor, New York, New York 10038.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus upon
the exercise of warrants or options. The Company has no outstanding options
or warrants.
(3) Includes 275,308 shares owned by CLF Holdings, Inc. of which Mr. Pollert
owns 60% of the Common Stock. [Include shares deemed owned pursuant to
Management Shareholders' Agreement. Mr. Pollert disclaims beneficial
ownership of these shares.
(4) Includes 715,109, 137,286, 76,270, 16,270, 16,270, and 289,826, shares,
respectively, held beneficially be Messrs. Pollert, Glickman, McDowell,
Maloy, Seale and Fisher as members of CLF Investors, Inc.
(5) Includes 1,569,991 shares of Common Stock owned by Hyperion Partners, II
L.P. and 39,225 shares of Common Stock owned by CLFC HP II, Inc. Mr. Shay
disclaims beneficial ownership of all of these shares. Hyperion Partners, II
L.P. disclaims beneficial ownership of the shares of CLFC HP II, Inc.
(6) Does not include the number of shares of Common Stock which may be
beneficially owned by South Ferry #2, L.P., as a limited partner in Hyperion
Partners II L.P.
(7) Includes 275,308 shares owned by CLF Holdings, Inc. of which Mr. Fisher owns
40% of the Common Stock.
(8) Includes certain shares held by Messrs. Pollert and Fisher. See notes (3)
and (7).
(9) Includes certain shares held by Messrs. Pollert, Glickman, McDowell, Maloy,
Seale and Fisher. See note (4).
(10) Includes all shares to which beneficial ownership is attributed to held by
Messrs. Pollert, Glickman, McDowell, Maloy, Seale and Shay.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences that
may be relevant to a prospective holder of the Common Stock. Cadwalader,
Wickersham & Taft ("Counsel") has acted as counsel to the Company and has
reviewed this summary and has rendered an opinion that the descriptions of the
law and the legal conclusions contained herein are correct in all material
respects, and the discussions hereunder fairly summarize the federal income tax
consequences that are likely to be material to the Company and a holder of the
Common Stock. The discussion contained herein does not address all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws. In addition, this discussion is limited to persons who hold the
Common Stock as a "capital asset" (generally, property held for investment)
within the meaning of Section 1221 of the Code.
The statements in this discussion and the opinion of Counsel are based on
current provisions of the Code, existing, temporary, and currently proposed
Treasury Regulations promulgated under the Code, the legislative history of the
Code, existing administrative rulings and practices of the Internal Revenue
Service (the "IRS"), and judicial decisions. No assurance can be given that
future legislative, judicial, or administrative actions or decisions, which may
be retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMMON
STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP AND SALE, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
DISTRIBUTIONS
Distributions with respect to the Common Stock will be treated as a
dividend, taxable as ordinary income to the recipient thereof, to the extent of
the Company's current or accumulated earnings and profits ("earnings and
profits") as determined under Federal income tax principles. To the extent that
the amount of such distribution exceeds the current and accumulated earnings and
profits of the Company, the excess will be applied against and will reduce the
holder's tax basis in the Common Stock. Any amount by which such distribution
exceeds the amount treated as a dividend and the amount applied against basis
will be treated as short-term or long-term capital gain, as the case may be,
depending upon the holder's holding period for the Common Stock.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, a distribution that is treated as a dividend for federal income
tax purposes and that is made to a corporate shareholder with respect to the
Common Stock will qualify for the 70% dividends-received deduction under Section
243 of the Code. Holders should note, however, that there can be no assurance
that distributions with respect to the Common Stock will not exceed the amount
of current or accumulated earnings and profits of the Company in the future.
Accordingly, there can be no assurance that the dividends-received deduction
will apply to distributions on the Common Stock.
In addition, there are many exceptions and restrictions relating to the
availability of such dividends-received deduction such as restrictions relating
to (i) the holding period of stock the dividends on which are sought to be
deducted, (ii) debt-financed portfolio stock, (iii) dividends treated as
"extraordinary dividends" for purposes of Section 1059 of the Code, and (iv)
taxpayers that pay alternative minimum tax.
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Corporate shareholders should consult their own tax advisors regarding the
extent, if any, to which such exceptions and restrictions (as amended by the
Taxpayer Relief Act of 1997) may apply to their particular factual situation.
TAXATION OF STOCKHOLDERS ON THE DISPOSITION OR REDEMPTION OF THE COMMON STOCK
Upon a sale or other disposition of Common Stock, a holder will generally
recognize gain or loss equal to the difference between the amount of cash and
the fair market value of property received by the holder in such sale or other
disposition and such holder's adjusted tax basis in such shares. In general, any
gain or loss realized upon a taxable disposition of the Common Stock by a
stockholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the Common Stock has been held for more than one year
and otherwise as short-term capital gain or loss. All or a portion of any loss
realized upon a taxable disposition of the Common Stock may be disallowed if
other shares of Common Stock are purchased within 30 days before or after the
disposition.
Any gain or loss recognized by a holder upon redemption of the Common Stock
will be treated as gain or loss from the sale or exchange of Common Stock, if,
taking into account stock that is actually or constructively owned as determined
under Section 318 of the Code, (i) such holder's interest in the Company's
Common Stock is completely terminated as a result of the redemption, (ii) such
holder's percentage ownership in the Company's voting stock immediately after
the redemption is less than 80% of such percentage ownership immediately before
such redemption, or (iii) the redemption is "not essentially equivalent to a
dividend" (within the meaning of Section 302 of the Code).
If a redemption of the Common Stock is treated as a distribution that is
taxable as a dividend, the holder will be taxed on the payment received in the
same manner as described above under "Distributions," and the holder's adjusted
tax basis in the redeemed Common Stock will be transferred to any remaining
shares held by such holder in the Company. If the holder does not retain any
stock ownership in the Company following the redemption, then such holder may
lose such basis completely.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate (which applies to ordinary
income and gain from the sale or exchange of capital assets held for one year or
less) is 39.6%. The maximum regular income tax rate on capital gains derived by
non-corporate taxpayers is 28% for sales and exchanges of capital assets held
for more than one year but not more than eighteen months, and 20% for sales and
exchanges of capital assets held for more than eighteen months. For taxable
years beginning after December 31, 2000, the maximum regular capital gains rate
for assets which are held more than 5 years is 18%. This rate will generally
only apply to assets for which the holding period begins after December 31,
2000. Thus, the tax rate differential between capital gains and ordinary income
for non-corporate taxpayers may be significant. In addition, the
characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against a non-corporate taxpayer's ordinary income only up to a
maximum annual amount of $3,000. Unused capital losses may be carried forward
indefinitely by non-corporate taxpayers. All net capital gain of a corporate
taxpayer is subject to tax at ordinary corporate income tax rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. stockholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption
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from backup withholding, and otherwise complies with the applicable requirements
of the backup withholding rules. A stockholder who does not provide the Company
with his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of Non-U.S. Stockholders
are complex and no attempt will be made herein to provide more than a summary of
such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS
WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Stockholders are treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Stock is treated as effectively connected with the
Non-U.S. Stockholder's conduct of a U.S. trade or business, the Non-U.S.
Stockholder generally will be subject to federal income tax at graduated rates,
in the same manner as U.S. stockholders are taxed with respect to such
distributions (and also may be subject to the 30% branch profits tax in the case
of a Non-U.S. Stockholder that is a corporation). The Company expects to
withhold U.S. income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Stockholder unless (i) a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with the Company or (ii) the Non-U.S. Stockholder files an IRS Form 4224
with the Company claiming that the distribution is effectively connected income.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. However, the Small
Business Job Protection Act of 1996 requires the Company to withhold 10% of any
distribution in excess of the Company's current and accumulated earnings and
profits. Consequently, although the Company intends to withhold at a rate of 30%
on the entire amount of any distribution, to the extent that the Company does
not do so, any portion of a distribution not subject to withholding at a rate of
30% will be subject to withholding at a rate of 10%.
Under FIRPTA, gain from sales of U.S. real property interests ("USRP
Interests") are taxed to a Non-U.S. Stockholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Stockholders thus would be taxed at the
normal capital gains rates applicable to U.S. stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals. Gains subject to FIRPTA also may be
subject to the 30 percent branch profits tax in the hands of a Non-U.S.
corporate stockholder not entitled to treaty relief or exemption.
An interest in a domestic corporation is itself a USRP interest subject to
U.S. taxation under FIRPTA if the corporation was a U.S. real property holding
corporation ("USRPHC") at any time during the five years preceding the
taxpayer's disposition of his interest in the corporation. A domestic
corporation is a
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USRPHC if it holds USRP interests having an aggregate fair market value that
equals or exceeds 50 percent of the fair market value of the corporation's real
property and business assets wherever located. While an interest in real
property solely as a creditor is generally not considered a USRP interest, a
creditor relationship that involves any direct or indirect right to share in the
appreciation in the value of, or in the gross or net proceeds or profits
generated by the real property is such a USRP interest. Whether the Company will
be a USRPHC is currently unknown and will depend on the future operations and
activities of the Company. Non-U.S. Stockholders are strongly urged to consult
their own tax advisors with regard to the potential impact of FIRPTA on an
investment in the Common Stock.
Any gain on the disposition of Common Stock which is not subject to FIRPTA
will be taxable to a Non-U.S. Stockholder if (i) investment in the Common Stock
is effectively connected with the Non-U.S. Stockholder's U.S. trade or business,
in which the case the Non-U.S. Stockholder will be subject to the same treatment
as U.S. stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder
is a nonresident alien individual who was present in the U.S. for 183 days or
more during the taxable year and certain other conditions apply, in which case
the nonresident alien individual will be subject to a 30 percent tax on the
individual's capital gains.
TAXATION OF THE COMPANY
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its Taxable Income. For example, the Company will
recognize Taxable Income in excess of its cash receipts when, as frequently
happens, OID accrues with respect to certain of its subordinated MBS interests,
including POs and certain IOs. OID generally will be accrued using a methodology
that does not allow credit losses to be reflected until they are actually
incurred. In addition, the Company may recognize taxable market discount income
upon the receipt of proceeds from the disposition of, or principal payments on,
MBS that are Market Discount Bonds, but will have resulting disposable cash
because such income proceeds may be used to make non-deductible principal
payments on related borrowings. Market discount income is treated as ordinary
income and not as capital gain. The Company also may recognize Excess Inclusion
or other Taxable Income in excess of cash flow from REMIC Residual Interests or
its retained interests from non-REMIC securitization transactions. It is also
possible that, from time to time, the Company may recognize net capital gain
attributable to the sale of depreciated property that exceeds its cash receipts
from the sale. In addition, pursuant to certain Treasury Regulations, the
Company may be required to recognize the amount of any payment to be made
pursuant to a shared appreciation provision over the term of the related loan
using the constant yield method. Finally, the Company may recognize taxable
income without receiving a corresponding cash distribution if it forecloses on
or makes a "significant modification" (as defined in Treasury Regulations
section 1.1001-3(e)) to a loan, to the extent that the fair market value of the
underlying property or the principal amount of the modified loan, as applicable,
exceeds the Company's basis in the original loan.
As a result of securitization or resecuritization of Mortgage Loans or other
debt instruments, and the subsequent sale of the senior (or most secure)
securities created in the securitization, the Company may retain subordinated
securities or a residual interest in the assets being securitized on which
interest or discount income will be accrued without the current payment of cash.
This situation could arise because cash payments received on the assets are
required to be paid to the holders of senior securitized interests. In addition,
the Company would recognize income but receive no cash ("phantom income") to the
extent of the market discount attributable to debt securities held by a REMIC in
which the Company holds a REMIC Residual Interest.
If the Company owns REMIC Residual Interests, it is possible that the
Company would not be permitted to offset certain portions of the income it
derives from such interests with its current deductions or net operating loss
carryovers or carrybacks. The portion of the income that would be subject to
this limitation would equal the amount of any Excess Inclusion income derived by
the Company with respect to
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the REMIC Residual Interests. The Company's Excess Inclusion income for any
calendar quarter will equal the excess of its income from each REMIC Residual
Interest over its "daily accruals" with respect to such REMIC Residual Interest
for the calendar quarter. Daily accruals for a calendar quarter are computed by
allocating to each day on which a REMIC Residual Interest is owned a ratable
portion of the product of (i) the "adjusted issue price" of the REMIC Residual
Interest at the beginning of the quarter and (ii) 120% of the long-term federal
interest rate (adjusted for quarterly compounding) on the date of issuance of
the REMIC Residual Interest. The adjusted issue price of a REMIC Residual
Interest at the beginning of a calendar quarter equals the original issue price
of the REMIC Residual Interest, increased by the amount of daily accruals for
prior quarters and decreased by all prior distributions to the Company with
respect to the REMIC Residual Interest. To the extent provided in future
Treasury Regulations, the Excess Inclusion income with respect to any REMIC
Residual Interests owned by the Company that do not have significant value will
equal the entire amount of the income derived from such REMIC Residual
Interests.
STATE AND LOCAL TAXES
The Company or the Company's stockholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The state and local
tax treatment of the Company and its stockholders in such jurisdictions may
differ from the federal income tax treatment described above. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws upon an investment in the Common Stock.
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ERISA CONSIDERATIONS
In considering an investment in the Common Stock, a fiduciary of a
governmental plan, a profit-sharing, pension, or stock bonus plan, a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the prohibited transaction provisions of the Code, the fiduciary
responsibility provisions of ERISA, or materially similar applicable laws or
regulations, including for this purpose individual retirement accounts
(collectively, "Plans"), should consider (a) whether the ownership of the Common
Stock is in accordance with the documents and instruments governing such Plan,
(b) whether the ownership of the Common Stock is consistent with the fiduciary's
responsibilities and (where applicable) satisfies the requirements of Part 4 of
Subtitle B of Title I of ERISA and, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA, (c) ERISA or other
prohibitions regarding improper delegation of control over, or responsibility
for, "plan assets" and the possible imposition of co-fiduciary liability on a
fiduciary who participates in, permits (by action or inaction) the occurrence
of, or fails to remedy a known breach of duty by another fiduciary and (d) the
need to value the assets of an ERISA Plan annually.
In regard to the "plan assets" issue noted in clause (c) above, the Company
believes that, effective as of the date of the closing of the Offering and the
listing of the shares of the Common Stock on Nasdaq, the Common Stock should
qualify as a "publicly offered security," and, therefore, the acquisition of
such Common Stock by ERISA Plans should not cause the Company's assets to be
treated as assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Code. Fiduciaries of Plans should consult with and rely upon their own
advisors in evaluating in light of their own circumstances the consequences of
an investment in the Common Stock under the fiduciary responsibility provisions
of ERISA, under the Code, and under any materially similar applicable laws or
regulations.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value, and 5,000,000 shares of preferred stock, $.01 par
value, issuable in one or more series. Each share of Common Stock is entitled to
participate equally in dividends when and as authorized and declared by the
Board of Directors and in the distribution of assets of the Company upon
liquidation. Each share of Common Stock is entitled to one vote and will be
fully paid and nonassessable by the Company upon issuance. Shares of the Common
Stock of the Company have no preference, conversion, exchange, sinking fund,
redemption, appraisal preemptive or cumulative voting rights. The Charter
authorizes the Board of Directors to reclassify any unissued shares of Common
Stock into other classes or series of classes of stock and to establish the
number of shares in each class or series and to set the preferences, conversion
and other rates, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications or terms or conditions of redemption for
each such class or series. The authorized capital stock of the Company may be
increased and altered from time to time as permitted by Maryland law.
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Shares and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors. Prior to
the issuance of shares of each series, the Board is required by the MGCL and the
charter of the Company to set, subject to the provisions of the charter
regarding the restrictions on transfer of stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such series. Preferred stock would be available for possible
future financings of, or acquisitions by, the Company and for general corporate
purposes without any legal or regulatory requirement that stockholder
authorization for issuance be obtained, unless such approval is required by
applicable law or the rules of any stock exchange or automated quotation system
or which the Company's securities may be listed or traded. The
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issuance of preferred stock could have the effect of making an attempt to gain
control of the Company more difficult by means of a merger, tender offer, proxy
contest or otherwise. The preferred stock, if issued, would have a preference on
dividend payments that could affect the ability of the Company to make dividend
distributions to the common stockholders.
Meetings of the stockholders of the Company are to be held annually and
special meetings may be called by the Chief Executive Officer, President, or
Board of Directors. The Charter reserves to the Company the right to amend any
provision thereof in the manner prescribed by law.
Presently, there is no established trading market for the Common Stock. The
Common Stock has been approved for trading on the Nasdaq under the symbol
"CLFI," subject to compliance with certain final conditions.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Prior to consummation of the Offering, the Company expects to enter into
registration rights agreements with each of its existing investors (holding an
aggregate of 4,540,000 shares of Common Stock upon consummation of the Offering)
upon terms to be negotiated.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE
COMPANY'S CHARTER AND BYLAWS DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO
AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND TO THE COMPANY'S
CHARTER AND BYLAWS, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION STATEMENT
OF WHICH THIS PROSPECTUS IS A PART.
The Charter and the Bylaws of the Company contain certain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Board of Directors. The Company believes that the benefits of these
provisions outweigh the potential disadvantages of discouraging such takeover
proposals because, among other things, negotiation of such takeover proposals
might result in an improvement of their terms.
NUMBER OF DIRECTORS; CLASSIFICATION OF THE BOARD OF DIRECTORS
The Charter and Bylaws provide that the number of directors will consist of
not fewer than three or more than nine persons. The Bylaws require that at all
times at least a majority of the directors shall be Unaffiliated Directors,
except that upon the death, removal, incapacity or resignation of an
Unaffiliated Director, such requirement shall not be applicable for 60 days.
Following the Offering, there will be five directors, three of whom will be
Unaffiliated Directors. The holders of shares of Common Stock are entitled to
vote on the election or removal of directors, with each share entitled to one
vote. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining directors.
Pursuant to the Charter, the Board of Directors is divided into three
classes of directors. The initial terms of the first, second and third classes
will expire in the years 1999, 2000, and 2001, respectively. As the term of each
class expires, directors in that class will be elected by the stockholders of
the Company for a term of three years and until their successors are duty
elected and qualify. Classification of the Board of Directors is intended to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors. Because holders of shares of
Common Stock will have no right to cumulative voting in the election of
directors, at each annual meeting of stockholders, the holders
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of a majority of the shares of Common Stock will be able to elect all of the
successors of the class of directors whose terms expire at that meeting.
The staggered board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult, which
could delay, defer or prevent an attempt by a third party to obtain control of
the Company or the implementation of another transaction, even though such an
attempt or other transaction might be beneficial to the Company and its
stockholders. At least two annual meetings of stockholders, instead of one, will
generally be required to effect a change in a majority of the Board of
Directors. Thus, the staggered terms of directors could increase the likelihood
that incumbent directors will retain their positions.
REMOVAL; FILLING VACANCIES
The Bylaws provide that any vacancies on the Board of Directors for any
cause will be filled by the affirmative vote of a majority of the remaining
directors, even if such majority is insufficient to constitute a quorum. Any
director so elected shall hold office until the term of his office expires and
until his successor is elected and qualifies. The Charter provides that
directors may be removed, only for cause, by the affirmative vote of the holders
of shares of at least two-thirds of the votes entitled to be cast in the
election of directors. This provision, when coupled with the provision of the
Bylaws authorizing the remaining members of the Board of Directors to fill
vacant directorships, precludes stockholders from removing incumbent directors
except for cause and filling the vacancies created by such removal with their
own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any Interested Stockholder or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. An "Interested Stockholder" is any
person who beneficially owns 10% or more of the voting power of the
corporation's shares or an affiliate of the corporation who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then-outstanding voting stock of the
corporation. Thereafter, any such Business Combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (a) 80.0% of the votes entitled to be cast by holders of outstanding
shares of voting stock of such corporation and (b) two-thirds of the votes
entitled to be cast by holders of shares of such corporation other than shares
held by the Interested Stockholder with whom (or with whose affiliate) the
Business Combination is to be effected, unless, among other conditions, the
corporation's stockholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to Business Combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder became an Interested Stockholder. The Board of Directors
has resolved to opt out of the Business Combination provisions of the MGCL. See
"--Control Share Acquisition Statute" below. There can be no assurance that the
Board of Directors will not opt into such provisions at any time in the future.
CONTROL SHARE ACQUISITION STATUTE
The MGCL provides that "Control Shares" of a Maryland corporation acquired
in a "Control Share Acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, by officers or by directors who are
employees of the corporation.
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A person who has made or proposes to make a Control Share Acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of shareholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the Control Shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the Control Shares, as of the date of the last Control Share
Acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the Control Share Acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a Control Share Acquisition.
The Control Share Acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation and adopted at any time before the acquisition of the
Control Shares.
The Bylaws of the Company contain a provision exempting from the Control
Share Acquisition statute any and all acquisitions by any person of the
Company's shares of Common Stock. There can be no assurance that such provision
will not be amended or eliminated at any time in the future. Such provision can
be amended or eliminated by the Board of Directors without consent of the
shareholders of the Company.
AMENDMENT TO THE CHARTER
The Company reserves the right from time to time to make any amendment to
its Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in the Charter, of any shares
of outstanding stock. The Charter of the Company may be amended upon the
recommendation of the Board of Directors in accordance with Section 2-604 of the
MGCL and the Charter and the approval of the amendment by a majority of all
votes entitled to be cast on the matter by the shareholders.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of shares entitled to cast not less than a majority of all of the
votes entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by shareholders may be made only
(i) pursuant to the Company's notice of the meeting; (ii) by or at the direction
of the Board of Directors; or (iii) by a shareholder who is entitled to vote at
the meeting and has complied with the advance notice procedures set forth in the
Bylaws and (b) with respect to special meetings of shareholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of shareholders and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of the meeting;
(ii) by or at the direction of the Board
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of Directors; or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by a shareholder who is
entitled to vote at the meeting and who has complied with the advance notice
provisions set forth in the Bylaws.
MEETINGS OF SHAREHOLDERS
The Company's Bylaws provide that annual meetings of shareholders shall be
held on a date and at the time set by the Board of Directors during the month of
May of each year (commencing in May 1999). Special meetings of the shareholders
may be called by (i) the Chief Executive Officer of the Company, (ii) the
President, or (iii) the Board of Directors. As permitted by the MGCL, the Bylaws
provide that special meetings must be called by the Secretary of the Company
upon the written request of the holders of shares entitled to cast not less than
a majority of all votes entitled to be cast at the meeting.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The Business Combination provisions, and, if the applicable provision in the
Bylaws is rescinded, the Control Share Acquisition provisions of the MGCL, the
provisions of the charter on classification of the Board of Directors and
removal of directors and the advance notice provisions of the Bylaws could
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for holders of shares of Common Stock or otherwise
be in their best interest.
TRANSFER AGENT AND REGISTRAR
The Company intends to appoint The Bank of New York as its transfer agent
and registrar for the Common Stock.
REPORTS TO SHAREHOLDERS
The Company will furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as it may determine
to furnish or as may be required by law.
AMENDMENT TO THE CHARTER
The Charter may be amended only by the affirmative vote of holders of shares
entitled to cast not less than a majority of all of the votes entitled to be
cast on the matter; provided, however, that provisions on removal of directors
may be amended only by the affirmative vote of holders of shares entitled to
cast not less than two-thirds of all of the votes entitled to be cast in the
election of directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 11,880,000 shares of
Common Stock outstanding. Of these shares, the 7,340,000 shares offered hereby
(8,441,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 described below. The remaining 4,540,000 shares of Common
Stock outstanding upon closing of the Offering are "restricted securities" as
that term is defined in Rule 144. All of the remaining shares are subject to
lock-up agreements.
Upon expiration of the lock-up agreements, an aggregate of 4,540,000 shares
will become immediately eligible for sale subject to the timing, volume, and
manner of sale restrictions of Rule 144.
In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
such shares were purchased) is entitled to sell in "broker's transactions" or to
market makers, within any three-month period commencing 90 days after the date
of this Prospectus, a
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number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 118,800 shares
immediately after the completion of the Offering) or (ii) generally, the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are subject to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner other than an affiliate from
whom such shares were purchased), is entitled to sell such shares without having
to comply with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Pursuant to the lock-up agreements, all investors holding equity interests
in the Company on the date hereof (including Hyperion Partners II L.P., South
Ferry II, L.P., all of the Company's officers and directors and substantially
all of the Company's employees) have agreed not, directly or indirectly, to
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of, any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for shares of Common Stock directly or
indirectly, for a period of one year after the date of this Prospectus without
the prior written consent of Prudential Securities Incorporated on behalf of the
Underwriters. After such one-year period, this restriction will expire and will
be shares would be eligible for sale under Rule 144, provided that the Company
shall have been subject to the reporting requirements of the Exchange Act for at
least 90 days and the relevant holding period under Rule 144 shall have expired
(which period will expire on the first anniversary of the closing of the
Offering). Prudential Securities Incorporated may, in its sole discretion, at
any time and without prior notice, release all or any portion of the shares of
Common Stock subject to such lock-up agreements.
Pursuant to registration rights agreements to be negotiated it is expected
that the holders of an aggregate of 4,540,000 shares of Common Stock or their
transferees will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. See "Description of Capital Stock--
Registration Rights of Certain Holders."
The Company currently intends to file one or more registration statements on
Form S-8 with the Commission in order to register the 1,425,600 shares of Common
Stock subject to the 1998 Stock Option Plans.
Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
UNDERWRITING
The underwriters named below (the "Underwriters") for whom Prudential
Securities Incorporated, NationsBanc Montgomery Securities LLC, Stifel, Nicolaus
& Company, Incorporated are acting as representatives (the "Representatives"),
and each of the Underwriters has severally agreed to purchase from CLF, Inc.,
the number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated...............................................
NationsBanc Montgomery Securities LLC............................................
Stifel, Nicolaus & Company, Incorporated.........................................
----------
Total:........................................................................... 7,340,000
----------
----------
</TABLE>
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CLF, Inc. is obligated to sell and the Underwriters are obligated to
purchase all of the shares of Common Stock being offered hereby.
The Underwriters, through the Representatives, have advised CLF, Inc. that
they propose to offer the Common Stock offered hereby to the public initially at
the public offering price set forth on the cover page of this Prospectus; that
the Underwriters may allow to selected dealers a concession of $ per
share, and that such dealers may reallow, a concession of $ per share to
certain other dealers. After the initial public offering, the public offering
price and the concessions may be changed by the Representative.
CLF, Inc. has granted the Underwriters an over-allotment option exercisable
for 30 days from the date of this Prospectus to purchase up to 1,101,000
additional shares of Common Stock at the initial public offering price, less
underwriting discounts and commissions as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of shares of Common Stock offered
hereby. To the extent that such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to 7,340,000.
CLF, Inc. has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act and to contribute to
payments the Underwriters may be required to make in respect thereof.
The Representatives of the Underwriters has advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The officers and directors of CLF, Inc. and all investors holding equity
interests in the Company on the date hereof (including Hyperion Partners II
L.P., South Ferry #2, L.P. and substantially all of the Company's employees)
have agreed not, directly or indirectly, to offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of, any shares of Common Stock
or any securities convertible into or exercisable or exchangeable for shares of
Common Stock directly or indirectly, for a period of one year after the date of
this Prospectus without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters, except pursuant to the Company's
1998 Stock Option Plans. Prudential Securities Incorporated may at its sole
discretion, at any time and without notice, release all or any portion of the
securities subject to such lock up agreements.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representative. Among the factors to be
considered in making such determination will be prevailing market conditions,
are the Company's future prospects, the experience of its management, the
economic condition of the financial services industry in general and the demand
for similar securities of companies considered comparable to the Company. The
initial public offering price set forth on the cover page of this Prospectus
should not, however, be considered an indication of the actual value of the
Common Stock.
The Common Stock has applied for inclusion in the Nasdaq National Market
under the symbol "CLFI," subject to official notice of issuance.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from CLF, Inc., and in such case may purchase
Common Stock in the open market
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following the closing of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 1,101,000 shares of Common Stock, by exercising the
Underwriters' over-allotment options referred to above. In addition, Prudential
Securities Incorporated, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter or dealer participating in the Offering for the
account of the other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
The Company will pay to the Representatives advisory fees equal, in the
aggregate, to 0.75% of the gross proceeds received by the Company in the
Offering, for investment banking services relating to, among other things, the
structuring of the Formation Transactions and the Offering.
Certain of the Underwriters have performed, and may continue to perform,
investment banking, broker-dealer and financial advisory services for the
Company and certain of its Affiliates and have received and will receive
customary compensation therefor. Prudential Credit, an affiliate of Prudential
Securities Incorporated, the Representative and lead underwriter in this
Offering, is the lender of both the Prudential Warehouse and the Mezzanine
Construction Loan to the Company. In addition, Prudential Life Insurance Company
of America, the parent company of Prudential Securities Incorporated, is a less
than 5% limited partner in Hyperion Partners II L.P., an investor in the
Company. See "Security Ownership of Certain Beneficial Owners and Management."
NationsBank is the lender of the NationsBank Warehouse to the Company and one of
the Company's correspondent mortgage brokers. An affiliate of NationsBank was
the lead manager for the securitization completed by the Company in January
1997.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cadwalader, Wickersham & Taft, New York, New York, who
will rely on the opinion of Ballard, Spahr, Andrews & Ingersoll, LLP with
respect to matters of Maryland law, and certain legal matters will be passed
upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York. W. Christopher White, a partner at Cadwalader, Wickersham & Taft,
purchased in 1995 and 1996 a 9% interest in CLF Investors LLC, a 42.875% limited
partner in CLF. Mr. White represents the Company on an ongoing basis, in his
capacity as a partner at Cadwalader, Wickersham and Taft. Following the
Offering, Mr. White will own less than 5% of the Common Stock. In addition,
certain other partners in Cadwalader, Wickersham & Taft, who also represent the
Company on an ongoing basis, will beneficially own, at the consummation of the
Offering, less than 0.15%, in the aggregate, of the then outstanding shares of
Common Stock.
EXPERTS
The statement of financial condition of Capital Lease Funding, Inc., at
April 30, 1998 and the consolidated financial statements of Capital Lease
Funding L.P., and Subsidiaries (a Limited Partnership) at December 31, 1997 and
1996, and for each of the two years in the period ended December 31, 1997 and
for the period September 29, 1995 (commencement of operations) to December 31,
1995, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
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ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission upon
request to the Commission and inspected, without charge, at the offices of the
Commission. The Company will be subject to the informational requirements of the
Exchange Act, and in accordance therewith, will periodically file reports and
other information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048, and at 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to 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 respect by such reference. The Commission
maintains a Website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
The Company intends to furnish the holders of Common Stock with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.
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GLOSSARY
Here follows an abbreviated definition of certain capitalized terms used in
this Prospectus.
"Affiliate" or "affiliate" means, when used with reference to a specified
person, (i) any person that directly or indirectly controls or is controlled by
or is under common control with the specified person, (ii) any person that is an
officer of, partner in or trustee of, or serves in a similar capacity with
respect to, the specified person or of which the specified person is an officer,
partner or trustee, or with respect to which the specified person serves in a
similar capacity, and (iii) any person that, directly or indirectly, is the
beneficial owner of 5% or more of any class of equity securities of the
specified person or of which the specified person is directly or indirectly the
owner of 5% or more of any class of equity securities.
"Affiliated Director" means directors of the Company who are Affiliates of
the Company.
"Articles of Incorporation" shall mean the Articles of Incorporation of the
Company.
"Audit Committee" means the committee of the Board of Directors, comprised
entirely of independent directors, that will perform specified duties related to
accounting and audit issues of the Company.
"Bankruptcy Code" means the United States Bankruptcy Code, as amended.
"BB Grade" means a rating less than Investment Grade but, respectively: (i)
a rating by Standard & Poor's equal to or higher than BB-; (ii) a rating by
Moody's Investors Service, Inc. equal to or higher than Ba3; (iii) a rating by
Duff & Phelps Credit Rating Co. equal to or higher than BB-; or (iv) rating by
Fitch IBCA, Inc. higher than BB-.
"Board of Directors" shall mean the Board of Directors of the Company.
"bond lease" means a lease with a Credit Tenant under which the tenant is
responsible for every monetary obligation associated with managing, owning,
developing and operating the leased premises including, but not limited to, the
costs associated with utilities, taxes, insurance, maintenance, repairs and
losses due to casualty or condemnation.
"Business Combinations" shall have the meaning specified in the MGCL.
"Bylaws" shall mean the Bylaws of the Company.
"Charter" shall mean the Articles of Incorporation of the Company, as
amended.
"Closing Price" on any date for shares of the Common Stock shall mean the
last sale price for such shares, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
for such shares, in either case as reported on the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the Nasdaq or, if such shares are not listed or admitted to trading
on the Nasdaq, as reported on the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which such shares are listed or admitted to trading or, if such
shares are not listed or admitted to trading on any national securities
exchange, the last quoted price, or, if transaction prices are not reported, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System, or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in such shares
selected by the Board of Directors or, in the event that no trading price is
available for such shares, the fair market value of the shares, as determined in
good faith by the Board of Directors.
"CMBS" shall mean commercial or multi-family MBS.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Commission" means the Securities and Exchange Commission.
"Committed Loans" means loans for which the Company has issued funding
commitments, subject to completion of its underwriting procedures.
"Common Stock" means the Company's shares of Common Stock, $.01 par value
per share.
"Company" means Capital Lease Funding, Inc., a Maryland corporation and its
predecessor, Capital Lease Funding, L.P., a Delaware limited partnership.
"Compensation Committee" means the committee of the Board of Directors,
comprised entirely of Unaffiliated Directors, that will perform specified duties
related to compensation issues of the Company.
"construction loans" shall mean a loan the proceeds of which are to be used
to finance the costs of construction, expansion or rehabilitation of real
property.
"Construction/Permanent Loans" are as defined under "Prospectus Summary--The
Company-- Credit Tenant Loan Business" and "The Company--Credit Tenant Loan
Business."
"CPI Loans" are as defined under "Prospectus Summary--The Company--Credit
Tenant Loan Business" and "The Company--Credit Tenant Loan Business."
"Control Shares" means voting shares of stock which, if aggregated with all
other shares of stock previously acquired by the acquirer or in respect of which
the acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more but
less than a majority or (iii) a majority or more of all voting power. Control
Shares do not include shares if the acquiring person is then entitled to vote as
a result of having previously obtained stockholder approval.
"Control Share Acquisition" means the acquisition of Control Shares under
the MGCL, subject to certain exceptions.
"Counsel" means Cadwalader, Wickersham & Taft.
"Counterparty" means a third-party financial institution with which the
Company enters into an agreement.
"Credit Tenant" means a tenant whose long-term, senior unsecured debt: (i)
has received an Investment Grade or BB Grade rating from any Rating Agency (and
which has not received a Non-Investment Grade rating less than BB Grade from any
Rating Agency); or (ii) has been determined by the Company (generally after
consultation with one or more Rating Agencies) as likely to meet the standards
required to receive the ratings described in clause (i) (an "Internal
Classification").
"Credit Tenant Lease" means a long-term lease made to a Credit Tenant.
"Credit Tenant Loan" means a mortgage loan secured by a first lien on a
commercial property net leased to a Credit Tenant.
"CTL Securitizations" involve the formation and utilization of a special
single-purpose entity into which is placed a pool of multiple borrower Credit
Tenant Loans involving multiple Credit Tenants. The Credit Tenant Loans in CTL
Securitization pools are either "bond" leases or enhanced to "bond" status so
that these loans are rated on the quality of the Credit Tenant rather than on
the value of the underlying real estate. The ratings received for any pool will
be dependent in part, on the size of the pool and the diversity of the
underlying credits.
"Dark Value" means the liquidation value of real property without a tenant
in place.
"DCR" means Duff & Phelps Credit Rating Company.
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"debt service coverage" means the rent from the applicable Mortgaged
Property (net of any applicable ground lease payments) divided by the required
payments of principal and interest on the Underlying Mortgage Loans.
"Enhancement Insurer" or "enhancement insurer" means, collectively,
insurance companies with a claims paying rating of between AAA and A from S&P,
which issue certain non-cancelable Lease Enhancement insurance policies to
secure Existing Loans.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement or other employee
benefit plan that is subject to ERISA.
"Excess Inclusion" shall have the meaning specified in Section 860E(c) of
the Code.
"Excess Servicing Rights" means contractual rights to receive a portion of
monthly mortgage payments of interest remaining after those payments of interest
have already been applied, to the extent required, to Pass-Through Certificates
and the administration of mortgage servicing.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Loans" means the loans held by the Company which have closed but
have not yet been securitized.
"Extended Amortization Policies" are certain Credit Tenant Lease insurance
policies that protect against losses due to the failure of the Credit Tenant to
renew the Credit Tenant Lease followed by a subsequent default by the borrower
of its obligations under the associated Credit Tenant Loan or the failure of the
borrower to pay a balloon balance at the maturity of the associated Credit
Tenant Loan, which policies are issued by an insurer with a claims paying rating
of between AAA and A by S&P.
"Extended-Term Loans" are as defined under "Prospectus Summary--The
Company--Credit Tenant Loan Business" and "The Company--Credit Tenant Loan
Business."
"FASIT" means financial asset securitization investment trust.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Fitch" means Fitch IBCA.
"Formation Transactions" means the series of integrated transactions which
will establish the structure of the Company, as more fully described under
"Prospectus Summary-Formation Transactions" and "Formation Transactions."
"GAAP" means generally accepted accounting principles.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a corporation's shares or an Affiliate of a corporation
who, at any time within the ten-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of the corporation.
"IO" means Mortgage Derivative Securities representing the right to receive
interest only or a disproportionately large amount of interest in relation to
principal payments.
"Internal Classification" or "IC" has the meaning set forth in the
definition of Credit Tenant.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Grade" means: (i) a rating by Standard & Poor's equal to or
higher than BBB-; (ii) a rating by Moody's Investors Service, Inc. equal to or
higher than Baa3; (iii) a rating by Duff & Phelps
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Credit Rating Co. equal to or higher than BBB-; or (iv) a rating by Fitch IBCA,
Inc. equal to or higher than BBB-.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation.
"Invested Portfolio" means the investments portfolio of the Company.
"IRS" means the Internal Revenue Service.
"Lease Enhancements" means certain mechanisms, including insurance policies,
agreements with third-party servicer providers, lock-box accounts and other cash
control procedures and certain other mechanisms, procedures or products which
are designed to ensure the continuity of a stream of rental payments under a
Credit Tenant Lease and payment of a Credit Tenant Loan, notwithstanding any
rights of a tenant under a Credit Tenant Lease to abate rent or terminate the
lease under certain circumstances.
"Lease Enhancement Policies" means certain non-cancelable Lease Enhancement
insurance policies which insure against losses on Credit Tenant Loans due to
abatement of rent or cancellation of a Credit Tenant Lease as a result of a
casualty or condemnation, issued by an insurer with a claims paying rating of
AAA from S&P.
"LIBOR" means London-Inter-Bank Offered Rate.
"Lockout Period" means, for commercial mortgage loans originated by the
Company, a period during which prepayment is generally prohibited for a period
of years, and for which prepayment is thereafter permitted only in conjunction
with payment of a prepayment premium designed to maintain the yield to
investors.
"MGCL" means the Maryland General Corporation Law, as amended.
"Market Discount Bonds" means obligations with a stated redemption price at
maturity that is greater than the Company's tax basis in such obligations.
"Market Price" or "market price" on any date shall mean, with respect to a
class or series of outstanding shares of the Company's stock, the Closing Price
for such stock on such date.
"Master Servicer" shall mean an entity acceptable to the Rating Agencies
that regularly engages in the business of servicing Mortgage Loans.
"MBS" shall mean Mortgage-Backed Securities (including CMBS and RMBS).
"Mezzanine Construction Loan" or "Mezzanine Construction Lending" means the
Company's "Mezzanine Construction" product as described in "Prospectus
Summary--The Company--Related Business Lines--Mezzanine Construction Loans" and
"The Company--Related Business Lines--Mezzanine Construction Loans."
"Mezzanine Loan" shall mean a loan secured by a lien on real property that
is subordinate to a lien on such real property securing another loan. The
Company's "Mezzanine Construction" loan product is a Mezzanine Loan.
"Mortgage Assets" means (i) Mortgage-Backed Securities and (ii) Mortgage
Loans.
"Mortgage Derivative Securities" means mortgage securities that provide for
the holder to receive interest only, principal only, or interest and principal
in amounts that are disproportionate to those payable on the underlying Mortgage
Loans and may include other derivative instruments.
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"Mortgage Loans" means loans secured by real property, including without
limitation, Credit Tenant Loans.
"Mortgage-Backed Securities" means (i) Pass-Through Certificates, and (ii)
other securities representing interests in, or obligations backed by pools of
Mortgage Loans.
"Nasdaq" means the Nasdaq Stock Market's National Market.
"NationsBank" means NationsBank, N.A.
"NationsBank Warehouse" means the Warehouse Credit Facility between the
Company and NationsBank.
"Net Income" or "net income" means the net income of the Company under GAAP.
"Net Leased Real Estate" or "net leased real estate" means real estate that
is net leased (including double- and triple-net leased) on a long-term basis
(ten years or more) to tenants who are customarily responsible for paying all or
many of the costs of owning, operating, and maintaining the leased property
during the term of the lease, in addition to the payment of a monthly net rent
to the landlord for the use and occupancy of the premises.
"Non-Investment Grade" means a credit rating from a Rating Agency which is
lower than Investment Grade.
"Non-U.S. Stockholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.
"Offering" means the shares of Common Stock offered through the Underwriters
in connection with this Prospectus.
"Offering Price" shall mean the offering price per share of Common Stock
offered hereby.
"OID" shall mean original issue discount.
"Pass-Through Certificates" means securities (or interests therein)
evidencing undivided ownership interests in a pool of mortgage loans, the
holders of which receive a "pass-through" of the principal and interest paid in
connection with the underlying Mortgage Loans in accordance with the holders
respective, undivided interests in the pool. Pass-Through Certificates include
Agency Certificates, as well as other certificates evidencing interests in loans
secured by single family properties.
"Preferred Stock" or "Preferred Shares" shall mean the preferred stock of
the Company.
"Prospectus" means the Prospectus by which the Common Stock is offered
hereby.
"Prudential Credit" means Prudential Securities Credit Corporation.
"Prudential Warehouse" means the Warehouse Credit Facility between the
Company and Prudential Credit.
"Rating Agency" means, with respect to securities of U.S. issuers, any
nationally recognized statistical rating organization and, with respect to
non-U.S. issuers, any of the foregoing or any equivalent organization operating
in the jurisdiction where the issuer's principal operations are located,
including Standard & Poor's, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. and Fitch IBCA, Inc.
"Real Estate Asset" or "real estate asset" shall mean interests in real
property, mortgages on real property to the extent the principal balance of the
mortgage does not exceed the fair market value of the associated real property,
regular or residual interests in a REMIC (except that, if less than 95% of the
assets of a REMIC consists of "real estate assets" (determined as if the Company
held such assets), the Company will be treated as holding directly its
proportionate share of the assets of such REMIC), and shares of REITs.
100
<PAGE>
"REIT" means a real estate investment trust as defined under Section 856 of
the Code.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Residual Interests" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs or the Company's ownership in the
residual of a pool of Mortgage Loans used to back Pass-Through Certificates as
to which REMIC status is elected.
"Rent" or "rent" shall have the meaning given under "Federal Income Tax
Consequences."
"Representative" shall mean each Underwriter that is acting as a
representative for other Underwriters, and with respect to the Offering shall
mean Prudential Securities.
"RMBS" shall mean a series of one- to four-family residential MBS.
"Securities Act" means the Securities Act of 1933, as amended.
"securitization" means the process of pooling mortgage loans and other fixed
income assets in a trust or other special purpose vehicle and issuing
securities, such as MBS or other debt securities, from the special purpose
vehicle.
"Service" means the Internal Revenue Service.
"Servicers" means those entities that perform the servicing functions with
respect to Mortgage Loans, Mortgage Securities or Excess Servicing Rights owned
by the Company.
"S&P" means Standard & Poor's.
"Share" means a share of Common Stock of the Company offered pursuant to the
Offering.
"Stock Option Plans" means the stock option plans adopted by the Company in
1998.
"Subordinate Interest" means a class of CMBS that is junior to one or more
other classes of CMBS in the right to receive payments from the underlying
Mortgage Loans and the retained interests in Mortgage Loans securitized by the
Company.
"Transfer" means any issuance, sale, transfer, gift, assignment, devise,
bequest or other disposition, as well as any other event that causes any person
to acquire direct, indirect, beneficial or constructive ownership, or any
agreement to take any such actions or cause any such events, of Common Stock or
the right to vote or receive dividends on Common Stock, including (a) the
granting or exercise of any option (or any disposition of any option), (b) any
disposition of any securities or rights convertible into or exchangeable for
Common Stock or any interest in Common Stock or any exercise of any such
conversion or exchange right, and (c) Transfers of interests in other entities
that result in changes in the direct, indirect, beneficial or constructive
ownership of Common Stock; in each case, whether voluntary or involuntary,
whether owned of record, indirectly owned, constructively owned, or beneficially
owned, and whether by operation of law or otherwise.
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code, including proposed regulations to the extent that by reason of
their effective dates they are proposed to apply to the Company or a transaction
entered into by the Company.
"Trust" or "trust" means a trust that is the transferee of that number of
shares of Common Stock the beneficial or constructive ownership of which
otherwise would cause a person to acquire or hold, directly or indirectly,
shares of Common Stock in an amount that violates the Charter, which trust shall
be for the exclusive benefit of one or more Charitable Beneficiaries.
"Trustee" or "trustee" means the trustee of a Trust for the exclusive
benefit of one or more charitable beneficiaries.
101
<PAGE>
"Unaffiliated Directors" shall mean a director who (a) does not own greater
than a DE MINIMIS interest in the Company or any of its Affiliates, and (b)
within the last two years, has not (i) directly or indirectly been employed by
the Company or any of its Affiliates, (ii) been an officer or director of the
Company or any of its Affiliates, (iii) performed services for the Company or
any of its Affiliates, or (iv) had any material business or professional
relationship with the Company or any of its Affiliates.
"UBTI" means unrelated trade or business income as defined in Section 512 of
the Code.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Underwriters" shall mean Prudential Securities Incorporated as well the
other underwriters of the Offering and each of the underwriters for whom they
are acting as Representative.
"Warehouse Credit Facilities" means the credit facilities entered into by
the Company that are used for the purposes of funding and holding up to 100% of
the loan proceeds to a borrower under the Company's credit tenant lease program
prior to securitization, to support major requirements related to the Company's
hedging positions, and for mezzanine financing to minimize the equity required
to support the loans financed through the warehouse credit facilities. The
Warehouse Credit Facilities consist of the NationsBank Warehouse, the Prudential
Warehouse and the Mezzanine Construction Loan Facility (each as defined under
"The Company--Credit Facilities").
"Yield" or "yield to maturity" is the discount rate that will cause the net
present value of the future cash flow from an investment equal to its price.
102
<PAGE>
FINANCIAL STATEMENTS AND INFORMATION
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
PRO FORMA COMPANY:
Capital Lease Funding, Inc. (a Maryland corporation) Unaudited Pro Forma Financial Statements.............. F-2
Pro Forma Statement of Financial Condition as of March 31, 1998.......................................... F-3
Pro Forma Statement of Operations for the Three Months Ended March 31, 1998.............................. F-4
Pro Forma Statement of Operations for the Year Ended December 31, 1997................................... F-5
Notes to Pro Forma Financial Statements.................................................................. F-6
HISTORICAL COMPANY:
Capital Lease Funding, Inc. (a Maryland corporation) Historical Financial Statements
Report of Independent Auditors........................................................................... F-8
Statement of Financial Condition as of April 30, 1998.................................................... F-9
Notes to Financial Statements............................................................................ F-10
HISTORICAL CAPITAL LEASE FUNDING, L.P.:
Capital Lease Funding, L.P. (a Delaware partnership) Historical Financial Statements
Report of Independent Auditors........................................................................... F-12
Consolidated Statements of Financial Condition as of March 31, 1998 (unaudited) and December 31, 1997 and
1996..................................................................................................... F-13
Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997 (unaudited) and
the Years Ended December 31, 1997 and 1996 and for the period from September 29, 1995 (commencement of
operations) to December 31, 1995....................................................................... F-14
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) and
the Years Ended December 31, 1997 and 1996 and for the period from September 29, 1995 (commencement of
operations) to December 31, 1995....................................................................... F-15
Consolidated Statement of Partners' Capital (Deficit) for the Three Months Ended March 31, 1998
(unaudited) and the Years Ended December 31, 1997 and 1996 and for the period from September 29, 1995
(commencement of operations) to December 31, 1995...................................................... F-16
Notes to Consolidated Financial Statements............................................................... F-17
Schedule of Mortgage Loans on Real Estate as of December 31, 1997........................................ F-23
</TABLE>
F-1
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma statement of financial condition of the Company as of March
31, 1998 has been prepared as if the Offering and Formation Transactions had
been consummated on March 31, 1998. The pro forma statements of operations for
the three months ended March 31, 1998 and the year ended December 31, 1997 are
presented as if the completion of the Offering and Formation Transactions
occurred at January 1, 1997 and the effect thereof was carried forward through
the three months ended March 31, 1998.
The pro forma financial statements do not purport to represent what the
Company's financial position or results of operations would have been assuming
the completion of the Formation Transactions and the Offering on such date or at
the beginning of the period indicated, nor do they purport to project the
Company's financial position or results of operations at any future date or for
any future period. The pro forma financial statements should be read in
conjunction with the consolidated financial statements of CLF, L.P. included
elsewhere herein.
F-2
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL CONDITION
AS OF MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CONTRIBUTION
PREDECESSOR OF FINANCING PRO FORMA
HISTORICAL THE OFFERING PARTNERSHIP ADJUSTMENTS COMPANY
CLF, LP (A) INTERESTS (B) (C)(D) AS ADJUSTED
------------- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................. $ 6,579,425 $ 101,478,000 $ (290,000) $ (95,803,000) $ 11,964,425
Mortgages held for sale................... 323,509,279 -- -- -- 323,509,279
Deferred securitization costs............. 1,840,943 -- -- -- 1,840,943
Deferred registration costs............... 385,000 (385,000) -- -- --
Hedge account margin deposit.............. 3,727,876 -- -- -- 3,727,876
Accrued interest income................... 1,094,000 -- -- -- 1,094,000
Prepaid expenses.......................... 192,596 -- -- -- 192,596
Furniture, fixtures and equipment (net of
accumulated depreciation of $76,521).... 94,516 -- -- -- 94,516
------------- --------------- -------------- ------------- -------------
Total Assets.............................. $ 337,423,635 $ 101,093,000 $ (290,000) $ (95,803,000) $ 342,423,635
------------- --------------- -------------- ------------- -------------
------------- --------------- -------------- ------------- -------------
LIABILITIES
Accounts payable and accrued expenses..... $ 3,717,787 $ -- $ -- $ -- $ 3,717,787
Repurchase agreement obligations.......... 315,266,832 -- -- (55,709,820) 259,557,012
Notes payable to partner.................. 18,507,023 -- -- (18,507,023) --
------------- --------------- -------------- ------------- -------------
Total Liabilities......................... 337,491,642 -- -- (74,216,843) 263,274,799
Commitments and contingencies
PARTNERS' CAPITAL (DEFICIT)/STOCKHOLDERS' EQUITY
Partners' capital (deficit)............... (68,007) -- 68,007 -- --
Common stock.............................. -- 73,400 45,400 -- 118,800
Paid-in capital........................... -- 101,019,600 (403,407) (21,586,157) 79,030,036
------------- --------------- -------------- ------------- -------------
Retained earnings......................... -- -- -- -- --
------------- --------------- -------------- ------------- -------------
Total Partners' Capital (Deficit)/
Stockholders' Equity.................... (68,007) 101,093,000 (290,000) (21,586,157) 79,148,836
------------- --------------- -------------- ------------- -------------
Total Liabilities and Equity.............. $ 337,423,635 $ 101,093,000 $ (290,000) $ (95,803,000) $ 342,423,635
------------- --------------- -------------- ------------- -------------
------------- --------------- -------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMPANY
ADJUSTMENTS ADJUSTED
FOR OFFERING FOR OFFERING
HISTORICAL ------------ ------------
CLF, LP
-----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Interest income from mortgages.................................................. $ 5,279,888 $ -- $ 5,279,888
Loss on sales of mortgages...................................................... -- -- --
Other revenue from mortgages.................................................... 20,787 -- 20,787
----------- ------------ ------------
Total Revenues.................................................................. 5,300,675 -- 5,300,675
----------- ------------ ------------
LOAN EXPENSES:
Interest on repurchase agreements............................................... 4,899,369 (1,611,088 (a) 3,288,281
Servicer fees................................................................... 40,721 -- 40,721
----------- ------------ ------------
Total Loan Expenses............................................................. 4,940,090 (1,611,088) 3,329,002
----------- ------------ ------------
Gross Profit.................................................................... 360,585 1,611,088 1,971,673
----------- ------------ ------------
OPERATING EXPENSES:
Personnel....................................................................... 736,176 25,000(b) 761,176
General and administrative...................................................... 203,387 62,500(c) 265,887
Marketing and advertising....................................................... 165,844 -- 165,844
----------- ------------ ------------
Total Operating Expenses........................................................ 1,105,407 87,500 1,192,907
----------- ------------ ------------
Operating Income................................................................ (744,822) 1,523,588 778,766
OTHER INCOME (EXPENSE):
Other interest income........................................................... 38,956 -- 38,956
Interest expense on notes payable............................................... (924,315) 924,315(d) --
----------- ------------ ------------
Total Other Income (Expense).................................................... (885,359) 924,315 38,956
----------- ------------ ------------
PRO FORMA INCOME (LOSS) BEFORE PROVISION FOR FEDERAL AND STATE INCOME TAX....... (1,630,181) 2,447,903 817,722
PROVISION FOR FEDERAL AND STATE INCOME TAX...................................... -- (327,100 (e) (327,100)
----------- ------------ ------------
PRO FORMA NET INCOME (LOSS)..................................................... $(1,630,181) $ 2,120,803 $ 490,622
----------- ------------ ------------
----------- ------------ ------------
PRO FORMA NET INCOME PER SHARE.................................................. $ -- $ --(f) $ 0.04
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS ADJUSTED
CLF, LP FOR OFFERING FOR OFFERING
----------- ------------- ------------
<S> <C> <C> <C>
REVENUES:
Interest income from mortgages.................................................. $ 9,859,768 $ -- $ 9,859,768
Loss on sales of mortgages...................................................... (160,782) -- (160,782)
Other revenue from mortgages.................................................... 43,326 -- 43,326
----------- ------------- ------------
Total Revenues.................................................................. 9,742,312 -- 9,742,312
----------- ------------- ------------
LOAN EXPENSES:
Interest on repurchase agreements............................................... 8,829,548 (5,166,917 (a) 3,662,631
Servicer fees................................................................... 76,328 -- 76,328
----------- ------------- ------------
Total Loan Expenses............................................................. 8,905,876 (5,166,917) 3,738,959
----------- ------------- ------------
Gross Profit.................................................................... 836,436 5,166,917 6,003,353
----------- ------------- ------------
OPERATING EXPENSES:
Personnel....................................................................... 2,880,307 100,000(b) 2,980,307
General and administrative...................................................... 727,642 250,000(c) 977,642
Marketing and advertising....................................................... 501,091 -- 501,091
----------- ------------- ------------
Total Operating Expenses........................................................ 4,109,040 350,000 4,459,040
----------- ------------- ------------
Operating Income................................................................ (3,272,604) 4,816,917 1,544,313
OTHER INCOME (EXPENSE):
Other interest income........................................................... 169,889 -- 169,889
Interest expense on notes payable............................................... (292,827) 292,827(d) --
----------- ------------- ------------
Total Other Income (Expense).................................................... (122,938) 292,827 169,889
----------- ------------- ------------
PRO FORMA INCOME (LOSS) BEFORE PROVISION FOR FEDERAL AND STATE INCOME TAX....... (3,395,542) 5,109,744 1,714,202
PROVISION FOR FEDERAL AND STATE INCOME TAX...................................... -- (685,700)(e) (685,700)
----------- ------------- ------------
PRO FORMA NET INCOME (LOSS)..................................................... $(3,395,542) $ 4,424,044 $ 1,028,502
----------- ------------- ------------
----------- ------------- ------------
PRO FORMA NET INCOME PER SHARE.................................................. $ -- $ --(f) $ 0.09
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. ADJUSTMENTS TO THE PRO FORMA STATEMENT OF FINANCIAL CONDITION:
To record the Predecessor historical balance sheet as of March 31, 1998,
including the assets, assumption of liabilities and deficits, of the Predecessor
at their historical amounts in accordance with purchase accounting. The
accompanying unaudited statement of financial condition as of March 31, 1998 has
been prepared as if the following transactions had been consummated as of March
31, 1998:
<TABLE>
<S> <C> <C> <C>
(a) Sale of 7,340,000 shares of Common Stock in the Offering
at $15 per share:
Proceeds from the Offering.............................. $110,100,000
Less, costs associated with the Offering................
Underwriting fees..................................... $(7,707,000)
Legal and professional fees, net of
$385,000 deferred registration costs................ (815,000)
Other miscellaneous costs............................. (100,000) (8,622,000)
---------- -----------
Net proceeds............................................ $101,478,000
-----------
-----------
Par value of Common Stock to be issued in the
Offering.............................................. $ 73,400
Additional paid-in capital from the net proceeds of the
Offering.............................................. 101,019,600
-----------
$101,093,000
-----------
-----------
</TABLE>
<TABLE>
<S> <C> <C>
(b) Issuance of 4,540,000 shares of Common Stock and cash of $290,000 in
exchange for various partnership interests of the Predecessor:
Partners' deficit................................................... $ (68,007)
Par value of Common Stock........................................... 45,400
Additional paid-in capital from issuance of Common Stock............ 1,204,839
Cash................................................................ 290,000
(c) Use of a portion of net proceeds of the Offering to redeem Notes
Payable and Preferred Capital for cash as follows:
Notes payable....................................................... $18,507,023
Cash redemption amount of Preferred Capital......................... 21,586,157
-----------
$40,093,180
-----------
-----------
(d) Use of a portion of net proceeds of the Offering to retire debt
related to
Credit facility..................................................... $55,709,820
-----------
-----------
</TABLE>
F-6
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
1. ADJUSTMENTS TO THE PRO FORMA STATEMENT OF FINANCIAL CONDITION: (CONTINUED)
The number of shares of the Company and the cash that each equity ownership
class of the Partnership will receive in conjunction with this transaction, in
accordance with the Partnership agreement, is as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES CASH
---------- -------------
<S> <C> <C>
General partners:
CLF Holdings, Inc................................................................... 275,308 --
CLFC HP II, Inc..................................................................... 39,225 $ 215,862
Limited partners:
Preferred........................................................................... -- 21,370,295
Class A............................................................................. 1,922,007 290,000
Class B............................................................................. 1,250,094 --
Class C............................................................................. 1,053,366 --
---------- -------------
4,540,000 $ 21,876,157
---------- -------------
---------- -------------
</TABLE>
2. ADJUSTMENTS TO THE PRO FORMA STATEMENT OF OPERATIONS:
The accompanying unaudited statement of operations for the three months
ended March 31, 1998 and the year ended December 31, 1997 presents results as if
the transactions described in Note 1 (above) had been consummated on January 1,
1997:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER
1998 31, 1997
---------- ----------
<S> <C> <C> <C>
(a) Reduce interest expense to reflect debt retired by the
Company..................................................... $(1,611,088) $(5,166,917)
---------- ----------
---------- ----------
(b) Increase personnel expense to reflect additional costs
related to operating as a public company.................... $ 25,000 $ 100,000
---------- ----------
---------- ----------
(c) Increase general and administrative expenses to reflect
additional costs related to operating as a public Company... $ 62,500 $ 250,000
---------- ----------
---------- ----------
(d) Eliminate interest expense to reflect debt retired by the
Company..................................................... $ (924,315) $ (292,827)
---------- ----------
---------- ----------
(e) To provide for federal and state income taxes (40% effective
rate)....................................................... $ (327,100) $ (685,700)
---------- ----------
---------- ----------
(f) Weighted average outstanding Common Stock is as follows:
Shares issued in exchange for partnership interests in
Capital Lease Funding, L.P.................................. 4,540,000 4,540,000
Shares issued in the Offering............................... 7,340,000 7,340,000
---------- ----------
----------
11,880,000 11,880,000
---------- ----------
---------- ----------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Capital Lease Funding, Inc.
We have audited the accompanying statement of financial condition of Capital
Lease Funding, Inc. as of April 30, 1998. This statement of financial condition
is the responsibility of Capital Lease Funding, Inc. Our responsibility is to
express an opinion on the statement of financial condition based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of financial condition is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of financial condition.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of
financial condition presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of financial condition presents fairly, in all
material respects, the financial position of Capital Lease Funding, Inc. at
April 30, 1998 in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
New York, New York
May 20, 1998
F-8
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
STATEMENT OF FINANCIAL CONDITION
AS OF APRIL 30, 1998
<TABLE>
<S> <C>
ASSETS
Cash (Note 1)....................................................................... $ 1,000
---------
Total Assets........................................................................ $ 1,000
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Commitments and Contingencies (Note 4)
Common Stock, $.01 par value, 1,000 shares authorized, 100 shares issued and
outstanding (Notes 1, 2 and 4).................................................... $ 1
Additional paid-in capital.......................................................... 999
Retained earnings (Note 2) --
---------
Total Liabilities and Stockholder's Equity.......................................... $ 1,000
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
NOTES TO STATEMENT OF FINANCIAL CONDITION
AS OF APRIL 30, 1998
1. ORGANIZATION AND FORMATION TRANSACTIONS
FORMATION AND INITIAL PUBLIC OFFERING
Capital Lease Funding, Inc. (a Maryland corporation) (the "Company") was
formed in March 1998, for the purpose of continuing and expanding the existing
business of Capital Lease Funding, L.P. (the "Predecessor"). The Company intends
to pursue an initial public offering (the "Offering") to expand the capital base
of the Predecessor, and to retire certain debt obligations. The Company will
receive a contribution of the partnership interests in the Predecessor as part
of the formation transactions.
The Company's principal activity is the origination and securitization of
commercial mortgage loans. The Company also intends to purchase properties which
are net leased to credit tenants.
The Company expects that it will originate all of its future loans through a
newly-formed subsidiary limited partnership (a Delaware limited partnership
which, upon conclusion of the Formation Transactions will be renamed "Capital
Lease Funding, L.P.") of which the Company will directly own 100% of the general
partnership interests. In addition, the Company expects that it will purchase
real estate though individual Delaware business trusts of which it will be the
sole beneficiary.
The Company has authorized the issuance of up to 1,000 shares of Common
Stock, $.01 par value per share. In connection with the formation of the
Company, the Company issued 100 shares of Common Stock to William R. Pollert,
the Company's President, for $1,000. At the conclusion of the Offering, such
shares of stock will be repurchased by the Company at cost. The Company expects
to issue 7,340,000 shares of its Common Stock to the public through the
Offering. In addition, the Company expects to issue 4,540,000 to the existing
partners of the Predecessor in exchange for their respective partnership
interests. Note 2.
INITIAL PUBLIC OFFERING AND USE OF PROCEEDS
The net cash proceeds to be received by the Company from the Offering (after
deducting underwriting discounts) are expected to be approximately $102.4
million. Of this amount, the Company expects to use approximately $55.7 million
to reduce outstanding repurchase agreement obligations related to the underlying
mortgage assets, $21.6 million to redeem the preferred partnership interests of
the Predecessor, $18.5 million to pay off notes payable outstanding of the
Predecessor, $1.3 million to pay expenses incurred in the Offering, $.3 million
to a general partner of the Predecessor and $5.3 million to fund general working
capital needs.
If the underwriters' over-allotment option to purchase 1,101,000 shares of
Common Stock is exercised, the Company will use the additional net proceeds
(estimated to be approximately $15.4 million if the option is exercised in full)
to reduce outstanding repurchase agreement obligations and/or for working
capital.
F-10
<PAGE>
CAPITAL LEASE FUNDING, INC.
(A MARYLAND CORPORATION)
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
AS OF APRIL 30, 1998
2. STOCKHOLDER'S EQUITY
COMMON STOCK
The authorized capital stock of the Company will consist of 55,000,000
shares of capital stock, $0.01 par value, of which 50,000,000 shares will be
designated as shares of Common Stock. Each share of Common Stock is entitled to
participate equally in dividends when and as declared by the Board of Directors
and in the distribution of assets of the Company upon liquidation. Each share of
Common Stock is entitled to one vote and will be fully paid and nonassessable by
the Company upon issuance. Shares of the Common Stock of the Company have no
preference, conversion, exchange, preemptive or cumulative voting rights. The
authorized capital stock of the Company may be increased and altered from time
to time as permitted by Maryland law.
RETAINED EARNINGS
The Company has not engaged in any operations from inception in 1998.
3. CREDIT FACILITIES/REPURCHASE AGREEMENTS
The Company expects to have, as of the closing of its initial public
offering, warehouse credit facilities provided by NationsBank ("NationsBank
Warehouse") and Prudential Credit ("Prudential Warehouse"). The facilities are
expected to total $930 million, and will be used primarily to fund the Company's
mortgage loans. The NationsBank facility will decrease by $200 million on
September 1, 1998. The Company expects to enter into the Prudential Warehouse in
the amount of $100 million in May 1998, which will increase to $350 million upon
closing of the Offering. These facilities are more fully described under the
caption "The Company--Credit Facilities".
4. COMMITMENTS AND CONTINGENCIES
STOCK OPTION AND INCENTIVE PLAN
The Company intends to adopt a stock option plan and incentive stock option
plan designed to attract, retain and motivate executive officers of the Company
and other key employees and the plan will authorize the issuance of shares of
Common Stock pursuant to options granted under these plans.
INCENTIVE COMPENSATION PLAN
The Company intends to establish an incentive compensation plan for key
employees of the Company. This plan will provide for payment of cash bonuses to
participating employees after an evaluation of the employee's performance and
the overall performance of the Company. The Compensation Committee of the Board
of Directors will make the determination for the award of the bonuses.
EMPLOYMENT AGREEMENTS
The Company expects to enter into employment agreements with certain of its
officers, as described further under the caption "Directors And Executive
Officers--Employment Agreements".
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Capital Lease Funding L.P.
We have audited the accompanying consolidated statements of financial
condition of Capital Lease Funding L.P. and subsidiaries (the "Partnership") as
of December 31, 1997 and 1996, and the related consolidated statements of
operations and partners' capital and cash flows for each of the two years in the
period ended December 31, 1997 and for the period September 29, 1995
(commencement of operations) to December 31, 1995. We have also audited the
financial statement schedule listed in the Index to financial statements
included in the Prospectus. These financial statements and financial statement
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Capital Lease Funding L.P. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and cash flows for each of the
two years in the period ended December 31, 1997 and for the period September 29,
1995 (commencement of operations) to December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
January 23, 1998 except for Note 9,
as to which the date is March 17, 1998
F-12
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
------------- ------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... 6,579,425 $ 4,408,194 $ 2,140,230
Mortgage loans held for sale (Notes 4 and 5)...... 323,509,279 263,473,373 157,719,912
Deferred securitization costs..................... 1,840,943 1,647,515 2,566,019
Deferred registration costs....................... 385,000 -- --
Hedge account margin deposit...................... 3,727,876 3,755,926 3,271,005
Accrued interest income........................... 1,094,000 797,483 513,013
Prepaid expenses.................................. 192,596 192,250 86,956
Property held for sale (Note 7)................... -- -- 1,968,682
Furniture, fixtures and equipment (net of
accumulated depreciation of $76,521 (unaudited),
$66,521 and $25,691, respectively).............. 94,516 103,317 83,536
------------- ----------- -----------
Total Assets...................................... $ 337,423,635 $274,378,058 $168,349,353
------------- ----------- -----------
------------- ----------- -----------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued expenses............. $ 3,717,787 $ 4,770,873 $ 3,279,379
Repurchase agreement obligations (Note 5)......... 315,266,832 255,770,693 150,904,908
Notes payable..................................... -- -- 358,461
Notes payable to partner and officer (Note 6)..... 18,507,023 12,274,318 129,098
------------- ----------- -----------
Total Liabilities................................. 337,491,642 272,815,884 154,671,846
Commitments and contingencies (Notes 4 and 5)
Partners' Capital (Deficit)....................... (68,007) 1,562,174 13,677,507
------------- ----------- -----------
Total Liabilities and Partners' Capital
(Deficit)....................................... $ 337,423,635 $274,378,058 $168,349,353
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-13
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT
OF
THREE MONTHS ENDED MARCH OPERATIONS)--
31, DECEMBER 31 DECEMBER 31
--------------------------- ---------------------------- ---------------
1998 1997 1997 1996 1995
------------- ------------ ------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Interest income from mortgages.......... $ 5,279,888 $ 1,498,770 $ 9,859,768 $ 5,060,676 $ 224,313
Loss on sales of mortgages.............. -- (160,782) (160,782) (923,611) --
Other revenue from mortgages............ 20,787 8,081 43,326 16,520 --
------------- ------------ ------------- ------------- ---------------
Total Revenues.......................... 5,300,675 1,346,069 9,742,312 4,153,585 224,313
------------- ------------ ------------- ------------- ---------------
LOAN EXPENSES:
Interest on repurchase agreements....... 4,899,369 1,146,617 8,829,548 4,048,601 221,400
Loss on loan in foreclosure
(Note 7) -- -- -- -- 717,359
Servicer fees........................... 40,721 13,341 76,328 50,320 --
------------- ------------ ------------- ------------- ---------------
Total Loan Expenses..................... 4,940,090 1,159,958 8,905,876 4,098,921 938,759
------------- ------------ ------------- ------------- ---------------
GROSS PROFIT (LOSS)..................... 360,585 186,111 836,436 54,664 (714,446)
------------- ------------ ------------- ------------- ---------------
Operating Expenses:
Personnel............................... 736,176 466,949 2,880,307 2,100,932 313,916
General and administrative.............. 203,387 200,096 727,642 1,298,368 736,461
Marketing and advertising............... 165,844 85,766 501,091 405,930 36,943
------------- ------------ ------------- ------------- ---------------
Total Operating Expenses................ 1,105,407 752,811 4,109,040 3,805,230 1,087,320
------------- ------------ ------------- ------------- ---------------
OPERATING LOSS.......................... (744,822) (566,700) (3,272,604) (3,750,566) (1,801,766)
OTHER INCOME (EXPENSE):
Other interest income................... 38,956 66,756 169,889 155,781 136,789
Interest expense on notes payable....... (924,315) (5,175) (292,827) (68,881) --
------------- ------------ ------------- ------------- ---------------
Total Other Income (Expense)............ (885,359) 61,581 (122,938) 86,900 136,789
------------- ------------ ------------- ------------- ---------------
NET LOSS $ (1,630,181) $ (505,119) $ (3,395,542) $ (3,663,666) $ (1,664,977)
------------- ------------ ------------- ------------- ---------------
------------- ------------ ------------- ------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-14
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 29
(COMMENCEMENT
THREE MONTHS ENDED OF OPERATIONS)-
MARCH 31, DECEMBER 31 DECEMBER 31
---------------------------- ------------------------------ ---------------
1998 1997 1997 1996 1995
------------- ------------- -------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,630,181) $ (505,119) $ (3,395,542) $ (3,663,666) $ (1,664,977)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization........... 10,000 10,208 40,830 23,737 1,954
Loss on sale of mortgages............... -- 160,782 160,782 -- --
Reduction in provision for loss on sale
of mortgage loans..................... -- (923,611) (923,611) -- --
Provision for loss on sale of mortgage
loans................................. -- -- -- 923,611 --
Loss on loan in foreclosure............. -- -- -- -- 717,359
Changes in operating assets and
liabilities:
Proceeds from sale of mortgages....... -- 128,061,471 128,061,471 -- --
Net principal advanced to borrowers... (59,784,648) (50,354,913) (216,887,135) (132,578,616) (34,754,952)
Borrowing under repurchase
agreements.......................... 59,496,139 (78,043,982) 104,865,785 119,559,139 31,124,371
Funds used in portfolio hedging
activities.......................... (262,942) 5,986,427 (14,767,460) (4,699,791) (837,714)
Loan origination costs and deferred
securitization expenses............. (539,044) 1,261,362 (963,925) (3,883,577) --
Recoveries against property held for
sale/troubled loans................. -- 53,402 2,771 9,763,780 --
Increase in other assets.............. (296,863) 242,982 (389,764) (496,250) (34,380)
Increase in accounts payable and
accrued expenses.................... (1,052,736) (1,264,387) 1,491,494 1,420,994 1,036,436
------------- ------------- -------------- -------------- ---------------
Net Cash (Used in) Provided by
Operating Activities.............. (4,060,275) 4,684,622 (2,704,304) (13,630,639) (4,411,903)
------------- ------------- -------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................. (1,198) (12,968) (60,612) (77,581) --
------------- ------------- -------------- -------------- ---------------
Net Cash Used in Investing
Activities........................ (1,198) (12,968) (60,612) (77,581) --
------------- ------------- -------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Partner contributions (distributions)..... -- -- (6,753,880) 7,500,000 13,385,100
Borrowings under notes payable............ 6,232,704 (487,559) 11,786,760 46,214 (670,961)
------------- ------------- -------------- -------------- ---------------
Net Cash Provided by (Used in)
Financing Activities.............. 6,232,704 (487,559) 5,032,880 7,546,214 12,714,139
------------- ------------- -------------- -------------- ---------------
Net increase (decrease) in cash......... 2,171,231 4,184,095 2,267,964 (6,162,006) 8,302,236
Cash and cash equivalents at beginning
of period............................. 4,408,194 2,140,230 2,140,230 8,302,236 --
------------- ------------- -------------- -------------- ---------------
Cash and Cash Equivalents at End of
period................................ $ 6,579,425 $ 6,324,325 $ 4,408,194 $ 2,140,230 $ 8,302,236
------------- ------------- -------------- -------------- ---------------
------------- ------------- -------------- -------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest.................... $ 5,448,073 $ 1,245,113 $ 7,517,304 $ 3,251,437 $ --
------------- ------------- -------------- -------------- ---------------
------------- ------------- -------------- -------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW
INFORMATION
Book value of stock distribution to
partners (Note 7)....................... $ -- $ -- $ 1,965,911 $ -- $ --
------------- ------------- -------------- -------------- ---------------
------------- ------------- -------------- -------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-15
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
GENERAL PARTNERS LIMITED PARTNERS
------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
CLF CLF PREFERRED
HOLDINGS, HPII, LIMITED
INC. INC. CLASS A CLASS B PARTNERS TOTAL
------------- ---------- ------------- ----------- ------------- -------------
Capital Contribution................ $ (1,723,950) $ 160,100 $ 2,940,000 $ 230,000 $ 9,900,000 $ 11,506,150
Net loss............................ (1,537,273) -- -- (127,704) -- (1,664,977)
------------- ---------- ------------- ----------- ------------- -------------
Partners' Capital at
December 31, 1995................. (3,261,223) 160,100 2,940,000 102,296 9,900,000 9,841,173
------------- ---------- ------------- ----------- ------------- -------------
Capital contribution................ -- 85,000 1,470,000 500,000 5,445,000 7,500,000
Net loss............................ (770,248) (48,260) (2,364,743) (480,415) -- (3,663,666)
Partners' Capital at
December 31, 1996................. (4,031,471) 196,840 2,045,257 121,881 15,345,000 13,677,507
------------- ---------- ------------- ----------- ------------- -------------
Distributions (Note 7).............. -- (67,539) (1,105,825) (860,086) (6,686,341) (8,719,791)
Net loss............................ (462,479) (61,259) (939,432) -- (1,932,372) (3,395,542)
------------- ---------- ------------- ----------- ------------- -------------
Partners' Capital at
December 31, 1997................. (4,493,950) 68,042 -- (738,205) 6,726,287 1,562,174
Net loss (unaudited)................ -- (16,302) -- -- (1,613,879) (1,630,181)
------------- ---------- ------------- ----------- ------------- -------------
Partners' Capital (Deficit) at March
31, 1998 (unaudited).............. $ (4,493,950) $ 51,740 $ -- $ (738,205) $ 5,112,408 $ (68,007)
------------- ---------- ------------- ----------- ------------- -------------
------------- ---------- ------------- ----------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-16
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
1. ORGANIZATION
Capital Lease Funding, L.P. (a Delaware limited partnership) (the
"Partnership"), was formed in September 1995, with CLFC HPII Inc. and CLF
Holdings, Inc. as general partners and other investors as limited partners.
The Partnership's principal activity is the origination and securitization
of commercial mortgage loans. Since 1995, the Partnership has been primarily
engaged in the business of originating, underwriting and securitizing mortgage
loans secured by first liens on commercial properties which are long-term net
leased to investment grade and near investment grade credit tenants ("Credit
Tenants," and loans to owners of real property subject to Credit Tenant Leases,
"Credit Tenant Leases").
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
HEDGING ACTIVITIES
The Partnership enters into hedging transactions in order to reduce exposure
that a change in interest rates will result in a decrease in the value of the
Partnership's current mortgage loan portfolio which it has originated or loans
it has committed to originate. Specifically, the Partnership enters into short
sales of U.S. Treasury futures contracts, which typically require initial margin
deposits and margin calls depending on changes in interest rates. These forward
sale agreements generally have terms of not more than 90 days. Such hedging
transactions are entered into for purposes other than trading.
The Partnership accounts for its hedging transactions in accordance with
Statement of Financial Accounting Standards No. 80, ACCOUNTING FOR FUTURES
CONTRACTS ("SFAS 80"). SFAS 80 requires that changes in the market value of a
futures contract be recognized as a gain or loss in the period of the change
unless the contract meets certain criteria in order to qualify as a hedge. The
Partnership has determined that such transactions qualify as hedges since i) the
mortgage loan portfolio exposes the Partnership to interest rate risk until the
loans are securitized and ii) the futures contracts entered into reduce the
Partnership's exposure to such interest rate risk and are designated as a hedge.
In addition, the correlation between the price performance of the mortgage loan
portfolio being hedged and the hedge instruments is very high due to the
similarity of the assets and liabilities being hedged and the related hedge
instruments. Accordingly, gains and losses on these hedging transactions are
deferred as an adjustment to the carrying value of the related mortgage loans
and are recognized upon the securitization or sale of the mortgage loans.
Further, gains and losses on hedging transactions related to anticipated
transactions that are no longer likely to occur are recognized currently in the
statement of operations. Note 4.
ALLOCATION OF INCOME AND DISTRIBUTIONS
Partnership income, losses and distributions are allocated in accordance
with the provisions of the Partnership agreement.
F-17
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED ORIGINATION AND SECURITIZATION COSTS
The Partnership defers the recognition of expenses associated with the
origination and securitization of its commercial loans. These costs include
certain legal fees, insurance costs, rating agency fees and certain other
expenses. Deferred costs will be recognized upon the sale of the mortgages.
PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN LIMITED PARTNERSHIP
The Partnership has a 99% limited partnership interest in Capital Lease
Funding, L.P. ("Securitization L.P.") which it accounts for using the equity
method. Securitization L.P. holds no assets or liabilities at December 31, 1997.
In addition, there were no operations of Securitization L.P. during 1997. For
the years ended December 31, 1997 and 1996 and as of December 31, 1996, the
accompanying consolidated financial statements include the assets, liabilities,
revenues and expenses of CLF Branson Holdings, Inc. ("Branson"). As of December
31, 1997, the stock of Branson was distributed to certain of the limited
partners of the Partnership. See Note 7. All significant intercompany
transactions, balances and accounts have been eliminated.
INCOME TAXES
No provision for federal or state income taxes is included in the
accompanying financial statements as partners are individually responsible for
including their share of the Partnership's income or loss on their respective
income tax returns.
INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
may have been condensed or omitted pursuant to such rules and regulations,
although management believes that the disclosures are adequate to make the
information presented not misleading. The unaudited financial statements as of
March 31, 1998 and for the three month periods ended March 31, 1998 and 1997
include, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial information set
forth herein.
3. CASH AND CASH EQUIVALENTS
The Partnership defines cash equivalents as highly liquid investments
purchased with original maturities of three months or less. The account balance
at the financial institution exceeds Federal Depository Insurance Corporation
("FDIC") insurance coverage and as a result, there is a concentration of credit
risk related to the balance on deposit in excess of FDIC insurance coverage. The
Partnership believes that the risk is not significant as the Partnership does
not anticipate non-performance.
F-18
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
4. MORTGAGES HELD FOR SALE
Mortgage loans held for sale consists of:
<TABLE>
<CAPTION>
($ THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
(UNAUDITED)
Principal.................................................. $ 310,695 $ 249,983 $ 159,204
Unearned discount.......................................... (6,847) (5,919) (4,729)
-------------- -------- --------
Carrying amount of mortgages............................... 303,849 244,064 154,475
Deferred loan costs (net).................................. 2,971 3,011 2,052
Provision for loss on securitization transaction........... -- -- (924)
Deferred hedging losses.................................... 16,690 16,398 2,117
-------------- -------- --------
Total mortgage loans held for sale....................... $ 323,509 $ 263,473 $ 157,720
-------------- -------- --------
-------------- -------- --------
</TABLE>
Mortgage loans held for sale are secured by corporate leases (the majority
of which are investment grade) and mortgages on the underlying real estate and
are reported at the lower of cost (unpaid principal balance adjusted for
unearned discount and deferred expenses) or market, on an aggregate basis.
Mortgage origination fees, net of direct costs in connection with closing a
loan, are deferred and are reported as part of the cost of the loan balance to
which they relate. The aggregate cost is adjusted for deferred hedging gains or
losses prior to the lower of cost or market valuation.
During January 1997, the Partnership transferred a pool of mortgage loans
with an aggregate face amount of $129.4 million to a 99% owned limited
partnership (the "Depositor") in connection with a securitization of the
mortgage loans by the Depositor. The securitization was accounted for as a sale
in accordance with Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which is effective for transactions occurring subsequent to
December 31, 1996. In connection with the sale, the Partnership received $128.1
million in gross proceeds and realized a loss of approximately $1.2 million, of
which approximately $924,000 was accrued as of and for the year ended December
31, 1996 and included in the accompanying consolidated statement of operations
and partners' capital. Borrowings under the Partnership's repurchase agreement
obligations were reduced by approximately $118 million after completion of the
sale.
At March 31, 1998, the Partnership had entered into short sales under which
it sold short $390 million (unaudited) of futures contracts on U.S. Treasury
obligations. The unrealized (losses) on the short sales of U.S. Treasury futures
contracts at March 31, 1998 was ($1.3 million) (unaudited). At December 31,
1997, the Partnership had entered into short sales under which it sold short
$361.8 million of futures contracts on U.S. Treasury obligations. The unrealized
(losses) on the short sales of U.S. Treasury futures contracts at December 31,
1997 was ($4.4 million). At December 31, 1996, the Partnership had entered into
short sales under which it sold short $59.0 million of U.S. Treasury obligations
and $102.4 million of futures contracts on U.S. Treasury obligations. The
unrealized gains (losses) on the short sales of U.S. Treasury obligations and
futures contracts at December 31, 1996 was ($1.5 million) and $1.3 million,
respectively. As of December 31, 1996, the Partnership has accounted for the
securitization which occurred in January 1997. Accordingly, the unrealized gains
and losses on the short sales of U.S. Treasury obligations has been charged to
expense as part of the provision for loss on securitization. Unrealized gains
and losses of short sales of U.S. Treasury obligations and U.S. Treasury futures
contracts are computed as the difference
F-19
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
4. MORTGAGES HELD FOR SALE (CONTINUED)
between the contract value of the short sales and the current prevailing market
value of U.S. Treasury obligations or futures contracts with similar terms or
remaining maturities.
The Partnership had hedged the following assets, liabilities and firm
commitments under rate lock agreements:
<TABLE>
<CAPTION>
($ THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
(UNAUDITED)
Mortgage loans held for sale (principal amount)............ $ 310,695 $ 249,982 $ 159,204
Firm commitments under rate lock agreements................ 126,394 143,154 7,800
-------------- -------- --------
Total assets and liabilities hedged...................... $ 437,089 $ 393,136 $ 167,004
-------------- -------- --------
-------------- -------- --------
</TABLE>
Mortgages held for sale are subject to changes in value because of changes
in interest rates. Management believes that the fair value of the loans at March
31, 1998 (unaudited) and December 31, 1998 exceeds their carrying value.
For certain of its loans, the Partnership obtains non-cancelable lease
enhancement insurance policies as additional security for its mortgage loans.
Certain of these policies protect the mortgage holder against losses due to
termination of or abatement of rent from the underlying leases as the result of
a casualty or condemnation event at the mortgaged property. Certain other of
these policies protect the mortgage holder against losses due to the failure of
the underlying tenant to renew its lease followed by a subsequent default by the
borrower of its obligations under the associated mortgage loan, or the failure
of the borrower to pay a balloon balance at the maturity of the mortgage loan.
At March 31, 1998, and December 31, 1997 and 1996, $3.8 million (unaudited),
$3.5 million and $1.6 million of such lease enhancement insurance costs,
respectively, are included in deferred loan costs as part of the carrying value
of mortgage loans held for sale. The Partnership believes that these types of
policies will continue to be available in the future. The Partnership is unaware
of any limitations by the insurance providers at the present time.
At December 31, 1997 and March 31, 1998, the Partnership had issued
outstanding commitments to fund $169 million and $224 million (unaudited) of
loans, respectively.
5. REPURCHASE AGREEMENTS
The Partnership has entered into repurchase agreements with NationsBank,
N.A. ("NationsBank"), to finance the mortgage loans originated by the
Partnership. The repurchase agreements have a maturity date of July 19, 1998,
and are secured by the mortgage loans. The repurchase agreements are to be
repaid upon sale or securitization of the mortgage loans. At maturity of the
repurchase agreement the Partnership may enter into new agreements. The
outstanding repurchase agreement balances accrue interest at variable rates,
ranging from LIBOR + 1% to LIBOR + 6%, and are paid on a monthly basis. The
aggregate outstanding repurchase agreements may not exceed $350 million. If the
borrowings under the repurchase agreements exceed the market value of the
mortgage loans, determined based on such factors as the debt rating of the
underlying credit tenants, mortgage defaults, or other factors determined by
NationsBank, NationsBank may require either the repayment of a portion of the
borrowings prior to maturity, or the delivery of additional collateral.
NationsBank may not, however, require additional collateral due to
F-20
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
5. REPURCHASE AGREEMENTS (CONTINUED)
fluctuations in interest rates. Management believes that the carrying amounts of
the repurchase agreements approximate fair market value.
The Partnership had entered into repurchase agreements maturing on demand
with NationsBank for mortgages held for sale and associated repurchase
liabilities as follows:
<TABLE>
<CAPTION>
($ THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
(UNAUDITED)
Carrying amount of mortgages held for sale................. $ 303,849 $ 244,064 $ 154,475
Approximate market value of mortgages held for sale........ 329,000 264,000 160,000
Repurchase liability--LIBOR + 1%........................... 290,278 233,486 146,883
Repurchase liability--LIBOR + 3%........................... 9,974 9,972 4,022
Repurchase liability--LIBOR + 6%........................... 15,015 12,313 --
</TABLE>
Interest expense incurred with respect to the repurchase agreements for the
years ended December 31, 1997 and 1996 was $8.9 million and $4.0 million,
respectively. For the three months ended March 31, 1998, interest expense
incurred with respect to the repurchase agreements was $4.9 million (unaudited).
As of March 31, 1998, (unaudited) and December 31, 1997 the Partnership was in
compliance with the terms of the repurchase agreements.
6. RELATED PARTY TRANSACTIONS
During 1998 and 1997, the Partnership issued unsecured notes payable to a
limited partner of the Partnership. The notes carry an interest rate of 20%, and
are payable on demand. As of December 31, 1996, the Partnership owed $129,098
for a note payable issued to an officer of the Partnership. The note payable to
officer was repaid during January 1997.
7. PROPERTY HELD FOR SALE AND LOSS ON LOAN IN FORECLOSURE
Property held for sale as of December 31, 1996 consisted of land held from
the receipt of a deed in lieu of foreclosure. In February 1996, the Partnership
became aware that a loan with an outstanding balance of $12.9 million was in
default. On February 26, 1996 the Partnership received a deed in lieu of
foreclosure on the property and subsequently recovered approximately $10.2
million in cash. The recovered property had an appraised value of approximately
$2.0 million, and the Partnership recognized a loss during 1995 of approximately
$717,000 from the defaulted loan. The property was held in a wholly-owned
subsidiary of the Partnership until December 31, 1997. On December 31, 1997, the
Partnership distributed the stock of the subsidiary corporation to certain of
the limited partners of the Partnership. Note 2.
8. CONCENTRATION RISKS
The Partnership relies on its repurchase agreement with NationsBank to
provide the majority of its cash for loan fundings. A deterioration in the
financial condition of NationsBank could have a negative impact on the
Partnership's ability to continue funding loans. However, management is
confident that alternative funding sources could be obtained with substantially
similar terms. As of March 31, 1998, (unaudited) and December 31, 1997
NationsBank carried an A+ rating from Standard & Poor's.
F-21
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
9. SUBSEQUENT EVENT
Through March 17, 1998, the Partnership had issued net additional notes
payable of $5.5 million for cash advances from a limited partner of the
Partnership.
10. SUBSEQUENT EVENTS - SUBSEQUENT TO AUDITOR'S REPORT DATE (UNAUDITED)
In April 1998, the NationsBank facility was increased to $550 million. The
facility will decrease to $350 million on September 1, 1998.
As of May 15, 1998, the Partnership has issued commitments to fund
additional Credit Tenant Loans with an aggregate committed principal balance of
approximately $402 million. In addition, as of May 15, 1998, the Partnership has
purchased or committed to purchase real property net leased to tenants with an
aggregate purchase price of approximately $12 million.
In May 1998, the Company executed a sublease for 12,000 square feet of
office space in New York, New York at an estimated annual lease payment of
approximately $300,000.
F-22
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COL D
------------------------
AMOUNT OF PRINCIPAL
COL A UNPAID AT CLOSE OF COL E
- -------------------------------------------------------- COL C PERIOD -----------
COL B ------------ ------------------------ AMOUNT OF
LIST BY CLASSIFICATION ------------- CARRYING SUBJECT TO MORTGAGE
- -- COMMERCIAL PRIOR AMOUNT OF DELINQUENT BEING
LOAN # GUARANTOR LOCATION LIENS MORTGAGES(1) TOTAL INTERESTS FORECLOSED
- --------- ----------------- -------------------------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1059 Ahold Howland, OH $ -- $5,976,175 $ 5,976,175 $ -- $ --
1652 Ahold White Plains, NY -- 10,260,267 10,260,267 -- --
1017 Amoco Bronx, NY -- 952,737 952,737 -- --
865NB Blue Cross/Shield Richardson, TX -- 21,703,961 21,703,961 -- --
838 Boston Gas Waltham, MA -- 1,420,125 1,478,188 -- --
1386 Bridgestone Branford, CT -- 930,087 967,741 -- --
727 Bridgestone Richmond, VA -- 1,252,355 1,276,925 -- --
1501 Chase Westfield, NJ -- 2,019,197 2,033,432 -- --
1012 Circuit City Omaha, NE -- 5,411,410 5,612,030 -- --
854 Circuit City South Portland, ME -- 2,456,391 2,557,357 -- --
1076 Circuit City Tampa, FL -- 12,235,577 12,734,477 -- --
1699 CVS Braintree, MA -- 8,078,836 8,280,291 -- --
870 CVS Dedham, MA -- 2,544,059 2,648,005 -- --
1212 CVS East Rockaway, NY -- 1,555,708 1,619,439 -- --
1322 CVS Easthampton, MA -- 1,391,941 1,448,544 -- --
554 CVS Little Rock, AR -- 3,885,080 4,026,425 -- --
842 CVS Medford, MA -- 1,990,944 2,079,758 -- --
1240 CVS New Bedford, MA -- 2,464,692 2,563,156 -- --
1930 CVS Philadelphia, PA -- 2,065,000 2,065,000 -- --
1323 CVS Queensbury, NY -- 1,348,047 1,402,330 -- --
1889 CVS Randolph, MA -- 2,118,225 2,118,225 -- --
841 CVS Rochester, NY -- 1,605,985 1,678,547 -- --
1324 CVS Rochester, NY -- 1,278,228 1,329,977 -- --
1071 CVS West Babylon, NY -- 1,217,636 1,270,782 -- --
1887 Eckerd Vero Beach, FL -- 2,654,481 2,654,481 -- --
1805 Exxon Hauppauge, NY -- 1,500,774 1,500,774 -- --
1213NB Georgia Baptist Atlanta, GA -- 11,962,509 12,166,133 -- --
742NB Home Depot Bel Air, MD -- 4,620,419 4,802,216 -- --
1945 Home Depot Dallas, TX -- 15,229,529 15,767,896 -- --
1877 John Harland Glen Burnie, MD -- 9,213,872 9,586,176 -- --
467 Key Bank Newburgh, NY -- 11,031,084 11,415,382 -- --
356 McDonald's Fair Lakes, VA -- 869,557 904,567 -- --
1965 McDonald's Mineola, NY -- 1,463,976 1,463,976 -- --
543 McDonald's Philadelphia, PA -- 1,068,091 1,111,346 -- --
1133 MedPartners Amarillo, TX -- 5,642,691 5,725,970 -- --
610 Pep Boys Ridgewood, NY -- 2,519,511 2,650,858 -- --
1533 Pep Boys Springfield Gardens, NY -- 1,732,742 1,732,743 -- --
1734 Revco Clarksville, TN -- 945,907 977,093 -- --
1736 Revco Richmond, VA -- 1,226,260 1,274,904 -- --
1577 Revco Richmond, VA -- 1,796,686 1,868,004 -- --
1037 Rite Aid Buffalo, NY -- 1,425,037 1,460,764 -- --
1320 Rite Aid Castle Shannon, PA -- 1,687,274 1,755,716 -- --
412 Rite Aid Flint, MI -- 2,042,823 2,125,328 -- --
859 Rite Aid Kalkaska, MI -- 1,753,376 1,823,661 -- --
1585 Rite Aid Pearisburg, VA -- 1,767,953 1,808,045 -- --
1014 Rite Aid Pittston, PA -- 2,066,918 2,108,806 -- --
961 Rite Aid Portland, MI -- 1,570,987 1,616,583 -- --
943 Rite Aid Pulaski, VA -- 1,530,342 1,591,203 -- --
784 Rite Aid Ridgewood, NY -- 2,666,568 2,777,912 -- --
1525 Rite Aid Saginaw, MI -- 2,638,085 2,693,227 -- --
1036 Rite Aid Tonawanda, NY -- 1,246,915 1,277,941 -- --
1556 Rite Aid Wytheville, VA -- 2,100,447 2,184,139 -- --
1365 State of NJ Jersey City, NJ -- 3,938,326 4,045,846 -- --
</TABLE>
F-23
<PAGE>
CAPITAL LEASE FUNDING, L.P. AND SUBSIDIARIES
(A LIMITED PARTNERSHIP)
SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COL D
------------------------
AMOUNT OF PRINCIPAL
COL A UNPAID AT CLOSE OF COL E
- -------------------------------------------------------- COL C PERIOD -----------
COL B ------------ ------------------------ AMOUNT OF
LIST BY CLASSIFICATION ------------- CARRYING SUBJECT TO MORTGAGE
- -- COMMERCIAL PRIOR AMOUNT OF DELINQUENT BEING
LOAN # GUARANTOR LOCATION LIENS MORTGAGES(1) TOTAL INTERESTS FORECLOSED
- --------- ----------------- -------------------------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1929 Tandy King of Prussia, PA -- $3,940,242 $ 3,940,242 -- --
1803 TJX Encino, CA -- 5,592,855 5,707,947 -- --
1199NB Wal-Mart Dahlonega, GA -- 10,356,861 10,653,682 -- --
1686 Wal-Mart Uniondale, NY -- 8,507,590 8,507,590 -- --
444 Walgreen Clark County, NV -- 2,834,596 2,949,953 -- --
938 Walgreen Kerrville, TX -- 1,968,879 2,049,490 -- --
937 Walgreen Pennsauken, NJ -- 2,664,418 2,772,827 -- --
1347 Walgreen Plano, TX -- 1,755,904 1,797,328 -- --
667 Walgreen Port Orange, FL -- 2,058,275 2,140,949 -- --
967A Wegmans Wilkes-Barre, PA -- 8,308,336 8,506,939 -- --
------ ------------ ----------- ----------- -----------
Total $ -- 2$44,063,759 $249,982,406 $ -- $ --
------ ------------ ----------- ----------- -----------
------ ------------ ----------- ----------- -----------
</TABLE>
<TABLE>
<S> <C>
(1) Balance at beginning of period:........................................... $154,475,266
Additions during period:
New mortgage loans...................................................... 219,141,829
Other (describe)........................................................ --
-----------
219,141,829
Deductions during period:
Collections of principal................................................ 4,683,610
Foreclosures............................................................ --
Cost of mortgages sold.................................................. 124,869,726
Amortization of premium................................................. --
Other (describe)........................................................ --
-----------
129,553,336
-----------
Balance at close of period.................................................... $244,063,759
-----------
-----------
</TABLE>
- ------------------------
Footnotes:
(1) A reconciliation of the carrying amount of the mortgages is as follows: Face
amount ($249,982,406) less unearned discount ($5,918,647) equals carrying
amount ($244,063,759).
(2) The aggregate cost of the carrying amount of the mortgages for federal
income tax purposes is $244,063,759.
(3) See the footnotes to the consolidated financial statements (Note 5) for
discussion of the repurchase agreement which are secured by the mortgage
loans.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY THE SHARES
OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 15
Use of Proceeds................................. 31
Dividend and Distribution Policy................ 31
Capitalization.................................. 32
Dilution........................................ 33
Selected Historical and Proforma Financial
Information................................... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 36
The Company..................................... 42
Formation Transactions.......................... 60
Yield Considerations Related to the Company's
Investments................................... 63
Description of Existing Real Estate Interests... 66
Targeted Investments............................ 71
Directors and Executive Officers................ 74
Certain Relationships and Related
Transactions.................................. 80
Security Ownership of Certain Beneficial Owners
and Management................................ 81
Federal Income Tax Consequences................. 82
ERISA Considerations............................ 87
Description of Capital Stock.................... 87
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws.................. 88
Shares Eligible for Future Sale................. 91
Underwriting.................................... 92
Legal Matters................................... 94
Experts......................................... 94
Additional Information.......................... 95
Glossary........................................ 96
Financial Statements and Information............ F-1
</TABLE>
SHARES
CAPITAL LEASE FUNDING, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
PRUDENTIAL SECURITIES INCORPORATED
NATIONS BANC MONTGOMERY SECURITIES LLC
STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
for the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
TO BE PAID
- --------------------------------------------------------------------------------
<S> <C>
SEC Registration fee............................................................ $ 36,369
Nasdaq listing fee.............................................................. 79,875
NASD filing fee................................................................. 12,790
Printing and engraving expenses.................................................
Legal fees and expenses.........................................................
Accounting fees and expenses....................................................
Transfer agent and custodian fees...............................................
Miscellaneous...................................................................
------------
Total..................................................................... $ 1,300,000
------------
------------
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
Not Applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Formation Transactions and pursuant to a Contribution
Agreement, dated as of March 12, 1998, among CLF, Inc. and holders of direct or
indirect partnership interests in CLF (the "Partners"), the Partners agreed to
transfer their interests in CLF to CLF, Inc. in return for such number of shares
of Common Stock of CLF, Inc. and/or cash as will be determined pursuant to a
stated formula which transactions will close simultaneously with the Offering.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the MGCL, the Articles of Incorporation obligate the Company
to indemnify its present and former directors and officers and its employees and
controlling persons and to pay or reimburse reasonable expenses for such persons
in advance of the final disposition of a proceeding, to the maximum extent
permitted from time to time by Maryland law. The MGCL permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities, unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to such proceeding and (i) was committed in bad faith,
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services, or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. The
Bylaws implement the provisions relating to indemnification contained in the
Articles of Incorporation. The MGCL permits the charter of a Maryland
corporation to include a provision limiting the ability of its directors and
officers to the corporation and its stockholders for money damages, except to
the extent that (i) the person actually received an improper benefit or profit
in money, property or services, or (ii) a judgment or other final adjudication
is entered in a proceeding based on a finding that
II-1
<PAGE>
the person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Articles of Incorporation contain a provision providing for
elimination of the liability of its directors or officers to the Company or its
stockholders for money damages to the maximum extent permitted by Maryland law
from time to time. In addition, the officers, directors, and controlling persons
of the Company are indemnified against certain liabilities by the Company under
the Underwriting Agreement relating to this Offering. The Company will maintain
for the benefit of its officers and directors, officers' and directors'
insurance.
The Underwriting Agreement (Exhibit 1.1) also provides for the
indemnification by the Underwriters of the Company, its directors and officers
and persons who control the Company within the meaning of Section 15 of the
Securities Act with respect to certain liabilities, including liabilities
arising under the Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in the Prospectus are:
PRO FORMA COMPANY:
Capital Lease Funding, Inc. (a Maryland corporation) Unaudited Pro
Forma Financial Statements
Pro Forma Statement of Financial Condition as of March 31, 1998
Pro Forma Statement of Operations for the Three Months Ended March
31, 1998
Pro Forma Statement of Operations for the Year Ended December 31,
1997
Notes to Pro Forma Financial Statements
HISTORICAL COMPANY:
Capital Lease Funding, Inc. (a Maryland corporation) Historical
Financial Statements
Report of Independent Auditors
Statement of Financial Condition as of April 30, 1998
Notes to Financial Statements
HISTORICAL CAPITAL LEASE FUNDING, L.P.:
Capital Lease Funding, L.P. (a Delaware partnership) Historical
Financial Statements
Report of Independent Auditors
Consolidated Statements of Financial Condition as of March 31, 1998
(unaudited) and December 31, 1997 and 1996
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and 1997 (unaudited) and the Years Ended December 31,
1997 and 1996 and for the period from September 29, 1995
(commencement of operations) to December 31, 1995)
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 (unaudited) and the Years Ended December 31, 1997 and
1996 and for the period from September 29, 1995 (commencement of
operations) to December 31, 1995
II-2
<PAGE>
Consolidated Statement of Partners' Capital for the Three Months
Ended March 31, 1998 (unaudited) and the Years Ended December 31,
1997 and 1996 and for the period from September 29, 1995
(commencement of operations) to December 31, 1995
Notes to Consolidated Financial Statements
Schedule of Mortgage Loans on Real Estate as of December 31, 1997
(b) Exhibits
<TABLE>
<C> <S>
***1.1 Form of Underwriting Agreement
***3.1 Articles of Incorporation
***3.2 Charter
***3.3 Bylaws
***3.4 Amended and Restated Bylaws
***5.1 Opinion of Cadwalader, Wickersham & Taft
***9.1 Management Shareholder Agreement
**10.1 Contribution Agreement, dated as of March 12, 1998, among the
Company and the other signatories thereto.
*10.2 Amended and Restated Repurchase Agreement Governing Purchases and
Sales of Mortgage Loans between NationsBank, N.A. and Capital
Lease Funding, L.P., dated April 1, 1998.
***10.3 Registration Rights Agreement
***10.4 Form of Indemnification Agreement
***10.5 1998 Non-Qualified Stock Option Plan
***10.6 1998 Incentive Stock Option Plan
***10.7 Employment Agreement, dated , 1998 between William R.
Pollert and the Company.
***10.8 Employment Agreement, dated , 1998 between Edward J.
Glickman and the Company.
***10.9 Employment Agreement, dated , 1998 between Steven J.
Maloy and the Company.
***10.10 Employment Agreement, dated , 1998 between Paul H.
McDowell and the Company.
***10.11 Employment Agreement, dated , 1998 between Shawn P. Seale
and the Company.
*23.1 Consent of Ernst & Young LLP
***23.2 Consent of Cadwalader, Wickersham & Taft (included in Exhibits 5.1
and 8.1)
**24.1 Power of Attorney (included on page II-5)
***27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
II-3
<PAGE>
ITEM 37. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issues.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<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. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on May
22, 1998.
CAPITAL LEASE FUNDING, INC.
By: /S/ WILLIAM R. POLLERT
-----------------------------------------
Name: William R. Pollert
Title: President
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
/s/ WILLIAM R. POLLERT Chief Executive Officer,
- ------------------------------ President and Director May 22, 1998
William R. Pollert (principal executive
officer)
* Senior Vice President and
- ------------------------------ Chief Financial Officer May 22, 1998
Shawn P. Seale
* Director
- ------------------------------ May 22, 1998
Scott A. Shay
/S/ WILLIAM R. POLLERT
----------------------------------------
William R. Pollert
*By: Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
***1.1 Form of Underwriting Agreement
***3.1 Articles of Incorporation
***3.2 Charter
***3.3 Bylaws
***3.4 Amended and Restated Bylaws
***5.1 Opinion of Cadwalader, Wickersham & Taft
***9.1 Management Shareholder Agreement
**10.1 Contribution Agreement, dated as of March 12, 1998, among the Company and the
other signatories thereto.
*10.2 Amended and Restated Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans between NationsBank, N.A. and Capital Lease Funding, L.P., dated
April 1, 1998.
***10.3 Registration Rights Agreement
***10.4 Form of Indemnification Agreement
***10.5 1998 Non-Qualified Stock Option Plan
***10.6 1998 Incentive Stock Option Plan
***10.7 Employment Agreement, dated , 1998 between William R. Pollert and the
Company.
***10.8 Employment Agreement, dated , 1998 between Edward J. Glickman and the
Company.
***10.9 Employment Agreement, dated , 1998 between Steven J. Maloy and the
Company.
***10.10 Employment Agreement, dated , 1998 between Paul H. McDowell and the
Company.
***10.11 Employment Agreement, dated , 1998 between Shawn P. Seale and the
Company.
*23.1 Consent of Ernst & Young LLP
***23.2 Consent of Cadwalader, Wickersham & Taft (included in Exhibits 5.1 and 8.1)
**24.1 Power of Attorney (included on page II-5)
***27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
II-6
<PAGE>
Exhibit 10.2
AMENDED AND RESTATED
REPURCHASE AGREEMENT GOVERNING
PURCHASES AND SALES OF MORTGAGE LOANS
Dated as of April 1, 1998
Between:
NationsBank, N.A., as Buyer
and
Capital Lease Funding, L.P., as Seller
RECITALS
WHEREAS, the parties hereto entered into that certain Repurchase Agreement
Governing Purchases and Sales of Mortgage Loans dated as of July 19, 1996, as
amended by that certain First Amendment dated as of March 1, 1997 (the "ORIGINAL
AGREEMENT"); and
WHEREAS, the parties hereto have agreed to amend and restate the Original
Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, the Original Agreement is hereby amended and restated in
its entirety to read as follows:
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which
Capital Lease Funding, L.P. ("SELLER") agrees to transfer to NationsBank,
N.A. ("BUYER") Mortgage Loans against the transfer of funds by Buyer, with
a simultaneous agreement by Seller to purchase from Buyer such Mortgage
Loans at a date certain not later than one (1) year after the date of
transfer or on demand, as specified in the Confirmation, against the
transfer of funds by Seller. Each such transaction shall be referred to
herein as a "TRANSACTION" and shall be governed by this Agreement and the
related Confirmation, unless otherwise agreed in writing.
2. DEFINITIONS
"ACT OF INSOLVENCY" means, with respect to any party, and its Affiliates,
(i) the filing of a petition, commencing or authorizing the commencement of
any case or proceeding under any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar law
<PAGE>
relating to the protection of creditors, or suffering any such petition or
proceeding to be commenced by another which is consented to or not timely
contested by such party or Affiliate or results in entry of an order for
relief; (ii) seeking the appointment of a receiver, trustee, custodian or
similar official for such party or an Affiliate or any substantial part of
the property of either; (iii) the appointment of a receiver, conservator,
or manager for such party or an Affiliate by any governmental agency or
authority having the jurisdiction to do so; (iv) the making or offering by
such party or an Affiliate of a composition with its creditors or a general
assignment for the benefit of creditors; (v) the admission by such party,
or an Affiliate, of such party's, or such Affiliate's, inability to pay its
debts or discharge its obligations as they become due or mature; or (vi)
any governmental authority or agency or any person, agency or entity acting
or purporting to act under governmental authority shall have taken any
action to condemn, seize or appropriate, or to assume custody or control
of, all or any substantial part of the property of such party or of any of
its Affiliates, or shall have taken any action to displace the management
of such party or of any of its Affiliates or to curtail its authority in
the conduct of the business of such party or of any of its Affiliates.
"ADDITIONAL FUNDS" means cash provided by Seller to Buyer or its designee
pursuant to Section 4(a).
"ADJUSTED PURCHASE PRICE" means, with respect to any Purchased Mortgage
Loan, the original Purchase Price of the Purchased Mortgage Loan less the
sum of (i) all the amounts actually received by the Buyer pursuant to
Section 4(a) and (ii) any principal payments made by the Mortgagor thereof
and received by the Buyer pursuant to Section 5(a).
"AFFILIATE" means an affiliate of a party as such term is defined in the
United States Bankruptcy Code in effect from time to time; PROVIDED,
HOWEVER, as applied to the Seller such term shall not include any entity
that would otherwise be included based solely on its relationship with a
general partner of the Seller.
"AGGREGATE OUTSTANDING AMOUNT" means the amount equal to the sum of each
Adjusted Purchase Price.
"AGREEMENT" means this Amended and Restated Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans, as amended from time to time.
"AVERAGE AGGREGATE OUTSTANDING AMOUNT" means, with respect to any
applicable time period, the average Aggregate Outstanding Amount during
such period.
"BUSINESS DAY" means a day other than (i) a Saturday or Sunday, or (ii) a
day in which the New York Stock Exchange, the Buyer, or the Custodian is
authorized or obligated by law or executive order to be closed.
"BUYER" has the meaning specified in Section 1.
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"COLLATERAL" has the meaning specified in Section 6.
"COLLATERAL DEFICIT" has the meaning specified in Section 4(a).
"COMMERCIAL MORTGAGE LOAN" means a loan secured by a Mortgage on Mortgaged
Property and related loan documents that is generally characterized as
commercial in nature and which is zoned for commercial use, such as an
office building, a shopping center, a warehouse, an
office/warehouse/showroom combination building, a hotel, a mobile home
park, or other property zoned for commercial use.
"CONFIRMATION" has the meaning specified in Section 3(a).
"CREDIT MARKET VALUE" has the meaning specified in Section 4(b).
"CUSTODIAN" means LaSalle National Bank, as custodian under the Custodial
Agreement.
"CUSTODIAL AGREEMENT" means that custodial agreement, dated as of July 19,
1996, by and among Buyer, Seller and LaSalle National Bank, as custodian.
"CUSTODIAL DELIVERY" means the form executed by Seller in order to deliver
the Mortgage File to Buyer or its designee (including the Custodian)
pursuant to Section 7(c), a form of which is attached hereto as EXHIBIT II.
"ENVIRONMENTAL LAW" means any present or future federal, state or local
law, statute, rule, regulation or ordinance, and any judicial or
administrative order or judgment thereunder, pertaining to health and
safety, industrial hygiene, Hazardous Substances, underground or
above-ground tanks or the environment, pollution or contamination.
"EURODOLLAR RATE" means a per annum interest rate determined pursuant to
the following formula:
Eurodollar Rate = Interbank Offered Rate
---------------------------------
1 - Eurodollar Reserve Percentage
"EURODOLLAR RESERVE PERCENTAGE" means, for any day, that percentage
(expressed as a decimal) which is in effect from time to time under
Regulation D of the Board of Governors of the Federal Reserve System (or
any successor), as such regulation may be amended from time to time or any
successor regulation, as the maximum reserve requirement (including,
without limitation, any basic, supplemental, emergency, special, or
marginal reserves) applicable with respect to Eurocurrency liabilities as
that term is defined in Regulation D (or against any other category of
liabilities that includes deposits by reference to which the interest rate
of Eurodollar Loans is determined), whether or not Buyer has any
Eurocurrency liabilities subject to such reserve requirement at that time.
The Aggregate Outstanding Amount shall be deemed to constitute a
Eurocurrency
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liability and as such shall be deemed subject to reserve requirements
without benefits of credits for proration, exceptions or offsets that may
be available from time to time to the Buyer. The Eurodollar Rate shall be
adjusted automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage.
"EVENT OF DEFAULT" has the meaning specified in Section 12.
"HAZARDOUS SUBSTANCE" means any material, liquid, gas or other substance
that is:
(a) included within the definition of "hazardous substances," "hazardous
materials," "toxic substances," or "solid waste" in or pursuant to any
Environmental Law, or subject to regulation under any Environmental Law;
(b) listed in the United States Department of Transportation Optional
Hazardous Materials Table, 49 C.F.R. Section 172.101, as enacted as of the
date hereof or as hereafter amended, or in the United States Environmental
Protection Agency List of Hazardous Substances and Reportable Quantities,
40 C.F.R. Part 302, as enacted as of the date hereof or as hereafter
amended; or
(c) explosive, radioactive, asbestos, radon, a polychlorinated biphenyl,
urea formaldehyde foam insulation, oil or a petroleum product or similar
product.
"INITIAL PUBLIC OFFERING" means an underwritten public offering of the
common stock of the Seller pursuant to an effective registration statement
filed with the United States Securities and Exchange Commission in
accordance with the Securities Act of 1933, as amended.
"INTERBANK OFFERED RATE" means with respect to any Interest Period the
average (rounded upward to the nearest one-sixteenth (1/16) of one percent)
per annum rate of interest determined by the Buyer (each such determination
to be conclusive and binding) as of two Business days prior to the first
day of such Interest Period, as the effective rate at which deposits in
immediately available funds in U.S. dollars are being, have been, or would
be offered or quoted by the Buyer to major banks in the applicable
interbank market for Eurodollar deposits at any time during the Business
Day which is the second Business Day immediately preceding the first day of
such Interest Period, for a term of one month and in the amount of the sum
of the Adjusted Purchase Prices for all Purchased Mortgage Loans with such
Interest Period. If no such offers or quotes are generally available for
such amount, then the Buyer shall be entitled to determine the Eurodollar
Rate by estimating in its reasonable judgment the per annum rate (as
described above) that would be applicable if such quote or offers were
generally available.
"INTEREST PERIOD" means, with respect to a Purchased Mortgage Loan, a one
month period commencing on the first (1st) day of the calendar month in
which the Purchase Date occurs and ending at the close of business on the
last day of such calendar month and each subsequent one month period
thereafter; PROVIDED, HOWEVER, with respect to the first
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Interest Period related to a Purchased Mortgage Loan, unless the Purchase Date
is the first day of the month, the Interest Period shall be deemed to have begun
on the first day of the calendar month for purposes of determining the
applicable Interbank Offered Rate only; PROVIDED, FURTHER, that any Purchased
Mortgage Loan outstanding on the date hereof shall have its current Interest
Period end on the last day of April 1, 1998, and the first day of its next
Interest Period shall begin on May 1, 1998.
"LEASE ENHANCEMENT POLICY" means any lease enhancement insurance policy issued
by National Fire & Marine Insurance Company (or any replacement insurer approved
by the Buyer) in favor of the Seller.
"MAXIMUM AGGREGATE OUTSTANDING AMOUNT" means (i) from the date hereof until
September 1, 1998 (or such later date to which the Buyer, in its sole
discretion, may agree), $550,000,000; and (ii) from September 1, 1998 (or such
later date to which the Buyer, in its sole discretion, may agree) until the date
on which this Agreement terminates, $350,000,000.
"MORTGAGE" means a mortgage, deed of trust, deed to secure debt or other
instrument, creating a valid and enforceable first or second lien on or first or
second priority ownership interest in an estate in fee simple in real property
and the improvements thereon, securing a mortgage note or similar evidence of
indebtedness.
"MORTGAGE FILE" means all documents and other materials specified as the
"Mortgage File" in Section 7(c), together with any additional documents and
information required to be delivered to Buyer or its designee (including the
Custodian) pursuant to this Agreement.
"MORTGAGE LOAN" means (a) non-securitized Commercial Mortgage Loans relating to
Mortgage Properties which are owned in fee simple and are single tenant,
long-term lease occupied and (b) such other types of (i) non-securitized whole
loans or (ii) participation interests in Commercial Mortgage Loans originated by
Seller and which otherwise satisfy the requirements of clause (a), in each case
as may be agreed upon by the parties hereto from time to time.
"MORTGAGE LOAN SCHEDULE" means a schedule of Mortgage Loans attached to each
Trust Receipt, Confirmation and Custodial Delivery.
"MORTGAGE NOTE" means, with respect to each Mortgage Loan, a note or other
evidence of indebtedness of a Mortgagor secured by a Mortgage.
"MORTGAGED PROPERTY" means the real property, improvements, personalty and other
property described in and subject to a Mortgage or otherwise securing repayment
of the debt evidenced by a Mortgage Note.
"MORTGAGEE" means the record holder of a Mortgage Note secured by a Mortgage.
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"MORTGAGOR" means the obligor under a Mortgage Note and the grantor of the
related Mortgage.
"PERIODIC PAYMENT" has the meaning specified in Section 5(b).
"PRICE DIFFERENTIAL" means with respect to any Transaction hereunder as of any
date, the aggregate amount obtained by daily application of the applicable
Pricing Rate for such Transaction to the Adjusted Purchase Price for such
Transaction on a three hundred sixty (360) day per year basis for the actual
number of days in an Interest Period during the period commencing on (and
including) the Purchase Date for such Transaction and ending on (but excluding)
the Repurchase Date (reduced by any amount of such Price Differential previously
paid by Seller to Buyer with respect to such Transaction).
"PRICING RATE" means (i) prior to the date on which the Seller consummates an
Initial Public Offering in an amount not less than $75,000,000, the Eurodollar
Rate plus 1.00%; and (ii) on and after the date on which the Seller consummates
an Initial Public Offering in an amount not less than $75,000,000, the
Eurodollar Rate plus 0.85%.
"PRIME RATE" means, for any day, the rate of interest published by THE WALL
STREET JOURNAL, northeast edition, as the "prime rate."
"PURCHASE DATE" means, with respect to any Transaction, the date on which a
Purchased Mortgage Loan is transferred by Seller to Buyer or its designee
(including the Custodian) as specified in the Funding Certificate.
"PURCHASE PRICE" means on each Purchase Date, the price at which Purchased
Mortgage Loans are transferred by Seller to Buyer or its designee (including the
Custodian) as specified in the Confirmation and in accordance with Section 3(b).
"PURCHASE PRICE GRID" has the meaning specified in Section 3(b).
"PURCHASE RATE" has the meaning specified in Section 3(b).
"PURCHASED MORTGAGE LOANS" means the Mortgage Loans sold by Seller to Buyer in a
Transaction and not yet repurchased by Seller in accordance with the terms
hereof.
"REMITTANCE" means, with respect to any Mortgage Loan at any time, any principal
thereof then payable and all interest, dividends or other distributions payable
thereon.
"REPURCHASE DATE" means, with respect to any Transaction, the date on which
Seller is to repurchase any Purchased Mortgage Loan related to such Transaction
from Buyer, which date shall be the earliest to occur of (a) (i) if set forth in
the related Confirmation, December 31 of the year in which the Buyer purchased
the Mortgage Loan (unless such day is not a Business Day, in which case the
Repurchase Date shall be the Business Day
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preceding December 31) and (ii) if not set forth in the Confirmation, shall be
upon demand of the Buyer, (b) such earlier date as may be required pursuant to
the terms of this Agreement and (c) such earlier date as the Seller may request
in writing to the Buyer.
"REPURCHASE PRICE" means the price at which a Purchased Mortgage Loan is to be
transferred from Buyer or its designee (including the Custodian) to Seller upon
termination of a Transaction, which will be, in each case (including
Transactions terminable upon demand), equal to the sum of the related Adjusted
Purchase Price and the related Price Differential as of the date of such
determination.
"SECURITIZATION" means any securitization by the Seller of a pool or pools of
Mortgage Loans.
"SELLER" has the meaning specified in Section 1.
"SERVICER" has the meaning specified in Section 23.
"SERVICING AGREEMENT" means the Amended and Restated Interim Servicing
Agreement, dated as of July 19, 1996, among the Seller, Midland Loan Services,
L.P., LaSalle National Bank and ABN AMRO Bank N.V., or any successor agreement
thereto.
"TRANSACTION" has the meaning specified in Section 1.
"TRUST RECEIPT" means a trust receipt issued by Custodian to Buyer confirming
the Custodian's possession of certain Mortgage Loan Files which are the property
of and held by Custodian for the benefit of Buyer or the registered holder
thereof.
"UNUSED AVERAGE BALANCE" means, with respect to any Unused Fee Payment Date, an
amount equal to (i) the average Maximum Aggregate Outstanding Amount during the
Unused Fee Period MINUS (ii) the average Aggregate Outstanding Amount during the
Unused Fee Period.
"UNUSED FEE" means a fee payable to Buyer by Seller on the Unused Fee Payment
Date, in an amount equal to the product of (i) the Unused Average Balance and
(ii) the Unused Fee Percentage.
"UNUSED FEE PAYMENT DATE" means (i) any date on which Seller consummates a
Securitization and (ii) on October 1 and April 1 of each year (excluding April
1, 1998) unless Seller has consummated a Securitization in the six month period
preceding such date.
"UNUSED FEE PERCENTAGE" means, with respect to any Unused Fee Payment Date, an
amount equal to: (i) if the Average Aggregate Outstanding Amount is less than
or equal to 50% of the average Maximum Aggregate Outstanding Amount for the
Unused Fee Period, 0.25% per annum on a three hundred sixty (360) day year basis
for the actual number of days during the Unused Fee Period; (ii) if the Average
Aggregate Outstanding Amount is greater than 50% and less than or equal to 75%
of the average Maximum Aggregate Outstanding Amount for the Unused Fee Period,
0.15% per annum on a three hundred sixty (360) day year basis for the actual
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number of days during the Unused Fee Period; and (iii) if the Average
Aggregate Outstanding Amount is greater than 75% of the average Maximum
Aggregate Outstanding Amount for the Unused Fee Period, 0.10% per annum on
a three hundred sixty (360) day year basis for the actual number of days
during the Unused Fee Period.
"UNUSED FEE PERIOD" means (i) with respect to the initial Unused Fee
Payment Date, the period commencing on (and including) the date hereof and
ending on (but excluding) the initial Unused Fee Payment Date, and (ii)
with respect to each subsequent Unused Fee Payment Date, the period
commencing on (and including) the date of the last Unused Fee Payment Date
and ending on (but excluding) such subsequent Unused Fee Payment Date.
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be entered into orally or
in writing at the initiation of Buyer after receipt of a request of sale
from the Seller, which request shall be in the form of a proposed
Confirmation. If Buyer agrees to the proposed sale, then Seller shall
confirm the terms of the Transaction by issuing a written confirmation in
the form of EXHIBIT I attached hereto (a "CONFIRMATION") to Buyer promptly.
Such Confirmation shall describe the Purchased Mortgage Loans, identify
Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase
Price, (iii) the Repurchase Date, unless the Transaction is to be
terminable on demand by Buyer, (iv) the Purchase Rate applicable to the
Transaction, (v) the rating of the lessee or such Mortgaged Property, (vi)
whether the lease is a bond, triple net/ground or double net lease and
(vii) may contain additional terms or conditions not inconsistent with this
Agreement. After a Transaction has been agreed to by Buyer and after
receipt of the Confirmation, Buyer shall sign the Confirmation and return a
copy to Seller.
(b) The Purchase Price for a Mortgage Loan shall be calculated in
accordance with the applicable purchase rate (the "PURCHASE RATE")
determined in accordance with the purchase price grid (the "PURCHASE PRICE
GRID") and based upon the information provided in the Confirmation and the
related footnotes attached hereto as Schedule A; PROVIDED, HOWEVER, that
the Purchase Price Grid may be revised and replaced at any time in the
Buyer's sole discretion. The Purchase Price for triple and double net
lease related Mortgage Loans shall include the cost of any insurance policy
related to such Mortgage Loan, including, without limitation, any casualty
and condemnation policy. Without limiting the foregoing, the Purchase
Price for a Mortgage Loan shall include the cost of any Lease Enhancement
Policy related to such Mortgage Loan.
(c) Any Confirmation by Buyer shall be deemed to have been received by
Seller on the date actually received by Seller.
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(d) Upon execution by Buyer of a Confirmation, such Confirmation, together
with this Agreement, shall be conclusive evidence of the terms of the
Transaction covered thereby.
(e) Notwithstanding any provision to the contrary contained herein or in a
Confirmation, the Buyer may require the Seller to immediately repurchase
any Mortgage Loan, in accordance with Section 3(f), after review by the
Buyer and its counsel of the Mortgage File and related documentation,
including, but not limited to, any related hedge agreement or instrument
and the discovery of any non-conformity that Buyer determines could have an
adverse affect on the Buyer's interest between (a) any item required to be
included in the Mortgage File and any related documentation and (b) (i) the
representations and warranties set forth in Exhibit V, (ii) the
underwriting standards of the Seller agreed to by the Buyer, (iii) the
terms of the Confirmation, (iv) the Seller's hedging policy as agreed to by
the Buyer and (v) the terms of this Agreement (each such Mortgage Loan, a
"NON-CONFORMING LOAN"). The Buyer and its counsel shall complete such
review within 5 Business Days after receipt of all Mortgage File items.
Upon notice to the Seller of a Non-Conforming Loan, Buyer may, in its sole
discretion, defer Seller's obligation to repurchase such Mortgage Loan and
allow Seller an opportunity to cure such non-conformity; PROVIDED, HOWEVER,
that Buyer shall continue to have the right to require the Seller to
repurchase such Non-Conforming Loan if such cure is not accomplished in a
timely and satisfactory manner as determined in Buyer's sole discretion.
(f) In the case of Transactions terminable upon demand by the Buyer or in
the case of the repurchase of Non-Conforming Loans, such demand for
repurchase shall be made by Buyer by telephone or otherwise, no later than
10:00 a.m. New York City time on the Business Day prior to the day on which
the Buyer desires such repurchase to take place. Unless the Repurchase
Date is expressly stated in the Confirmation, each Transaction shall be
terminable upon demand by the Buyer.
(g) In the case of Transactions with a specified Repurchase Date set forth
in the related Confirmation, such Repurchase Date may be extended in the
Buyer's sole discretion at the written request of the Seller. Such notice
shall be delivered to Buyer not more than 60 days prior to such specified
Repurchase Date. Buyer shall notify Seller of Buyer's determination
whether to extend the Repurchase Date within 30 days prior to such
specified Repurchase Date. Buyer reserves the right to agree to any such
extension at any time prior to such specified Repurchase Date.
(h) On the Repurchase Date, termination of the Transaction will be
effected by transfer to Seller or its designee of the Purchased Mortgage
Loans against the simultaneous transfer of the Repurchase Price to an
account of Buyer. Buyer or its designee (including the Custodian) shall
return the Mortgage Files to Seller within three Business Days of the
receipt of the Repurchase Price by the Buyer. Provided, however, that the
Mortgage Files will be returned to Seller simultaneously with receipt by
Buyer of
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the Repurchase Price provided Seller gives Buyer at least three Business
Days prior written notice of its desire for a simultaneous transfer.
(i) The Aggregate Outstanding Amount shall at no time exceed the Maximum
Aggregate Outstanding Amount.
4. COLLATERAL AMOUNT MAINTENANCE
(a) If at any time the Credit Market Value of any Purchased Mortgage Loan
is less than the Adjusted Purchase Price for such Mortgage Loan (a
"COLLATERAL DEFICIT"), then Buyer may, by notice to Seller, require Seller
to transfer to Buyer or its designee (including the Custodian) cash
("ADDITIONAL FUNDS") so that the cash and Credit Market Value of the
Purchased Mortgage Loan, will thereupon equal or exceed the Adjusted
Purchase Price for such Mortgage Loan; PROVIDED, HOWEVER, that any such
Collateral Deficit will be offset to the extent there exists any Collateral
Excess with respect to any other Purchased Mortgage Loan held by the Buyer.
"COLLATERAL EXCESS" shall mean, with respect to any Purchased Mortgage
Loan, the amount, if any, by which the Credit Market Value exceeds the
Adjusted Purchase Price of such Purchased Mortgage Loan.
(b) The "Credit Market Value" of a Purchased Mortgage Loan shall be
determined by the Buyer in its sole discretion and shall be based on
factors such as, and not limited to, (1) a change in the debt rating of a
tenant of a lease related to such Purchased Mortgage Loan, (2) defaults in
a Purchased Mortgage Loan or (3) other supplemental adjustments deemed
necessary or prudent by the Buyer; PROVIDED, HOWEVER, that such
determination shall not be based on fluctuations in interest rates. Each
such determination shall be conclusive evidence of the Credit Market Value.
(c) Notice required pursuant to subsection (a) above may be given by any
means of telecopier or telegraphic transmission. A notice for the payment
in respect of a Collateral Deficit received before 5:00 p.m. New York City
time on a Business Day, must be met not later than 5:00 p.m. New York City
time on the fifteenth day following the Business Day on which the notice
was given. Any notice given on a Business Day after 5:00 p.m. New York
City time shall be deemed received on the following Business Day. The
failure, of Buyer, on any one or more occasions, to exercise its rights
under subsection (a) of this Section shall not change or alter the terms
and conditions to which this Agreement is subject or limit the right of
Buyer to do so at a later date. Buyer and Seller agree that a failure or
delay to exercise Buyer's rights under subsection (a) of this Section shall
not limit Buyer's rights under this Agreement or otherwise existing by law
or in any way create additional rights for the Seller.
5. REMITTANCE PAYMENTS
(a) In the event that a particular Transaction's term extends over a
Remittance payment date under the Purchased Mortgage Loans subject to that
Transaction, such Remittance shall be the property of Buyer and shall be
paid to the Buyer immediately
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upon receipt thereof. Notwithstanding the foregoing, Buyer agrees that the
Servicer shall remit to Seller an amount equal to the excess of any
interest received from the Mortgagor with respect to a Purchased Mortgage
Loan over the Periodic Payment due and owing to the Buyer.
(b) Notwithstanding that Buyer and Seller intend that the Transactions
hereunder be sales to Buyer of the Purchased Mortgage Loans, Buyer shall be
entitled to receive from Seller (i) the accreted value of the Price
Differential (each such payment, a "PERIODIC PAYMENT") in accordance with
the terms of Section 8.02 of the Servicing Agreement, but in any case no
less frequently than on a monthly basis, and (ii) the Unused Fee.
(c) On September 1, 1998, Seller shall take such actions as are necessary,
including, without limitation, the repurchase of a sufficient amount of
Purchased Mortgage Loans, to ensure that the Aggregate Outstanding Amount
does not exceed the Maximum Aggregate Outstanding Amount; PROVIDED,
HOWEVER, that if Buyer in its sole discretion has granted a written
extension of the date on which Seller is required to consummate a
Securitization as provided in Section 11(f) hereof, such extension shall be
deemed automatically to extend the date set forth in the definition of
Maximum Aggregate Outstanding Amount and in this Section 5(c) to such later
date UNLESS such written extension expressly provides to the contrary.
6. SECURITY INTEREST
Buyer and Seller intend that the Transactions hereunder be sales to Buyer
of the Purchased Mortgage Loans and not loans from Buyer to Seller secured by
the Purchased Mortgage Loans. However, in order to preserve Buyer's rights
under this Agreement in the event that a court or other forum recharacterizes
any one or more of the Transactions hereunder as loans and as security for the
performance by Seller of all of Seller's obligations to Buyer under this
Agreement and the Transactions entered into pursuant to this Agreement, Seller
grants Buyer a first priority security interest in the Purchased Mortgage Loans,
Mortgage Files, Servicing Agreements, servicing records, any assignments of
rents and leases, insurance relating to the Mortgage Loans (including, but not
limited to, any insurance policies covering casualty and condemnation losses,
any title insurance policies and any Lease Enhancement Policies), Remittances,
hedging agreements or instruments related to the Mortgage Loans, custodial
accounts and escrow accounts relating to the Mortgage Loans and any other
contract rights, general intangibles and other assets relating to the Mortgage
Loans or any interest in the Mortgage Loans, the servicing of the Mortgage
Loans, and securities backed by or representing an interest in such Mortgage
Loans and all products and proceeds of the foregoing (collectively, the
"COLLATERAL").
7. PAYMENT, TRANSFER AND CUSTODY
(a) Unless otherwise mutually agreed in writing, all transfers of funds
hereunder shall be in immediately available funds.
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(b) The Seller shall deliver to the Buyer a written funding certificate in
the form of EXHIBIT IV attached hereto (a "FUNDING CERTIFICATE") one
Business Day before the intended Purchase Date. On the Purchase Date for
each Transaction, ownership of the Purchased Mortgage Loans and related
Collateral shall be transferred to Buyer or its designee (including the
Custodian) against the simultaneous transfer of the Purchase Price as
directed by Buyer. Seller, simultaneously with the delivery to Buyer or
its designee (including the Custodian) of the Purchased Mortgage Loans
relating to each Transaction, hereby sells, transfers, conveys and assigns
to Buyer or its designee (including the Custodian) without recourse, but
subject to the terms of this Agreement, all the right, title and interest
of Seller in and to the Purchased Mortgage Loans together with all right,
title and interest in and to the proceeds of any related insurance
policies, assignments of rents and leases and hedging agreements and
instruments.
(c) In connection with such sale, transfer, conveyance and assignment,
Seller shall deliver or cause to be delivered and released to Buyer or its
designee (including the Custodian), within two Business Days after the
related Purchase Date, the following documents (the "MORTGAGE FILE"),
pertaining to each of the Purchased Mortgage Loans identified in the
Custodial Delivery delivered therewith:
(i) the original Mortgage Note bearing all intervening
endorsements, endorsed "Pay to the order of ____________,
without recourse" and signed in the name of the last
endorsee (the "LAST ENDORSEE") by an authorized officer (in
the event that the Mortgage Loan was acquired by the Last
Endorsee in a merger, the signature must be in the following
form: "[the Last Endorsee], successor by merger to [name of
predecessor]"; in the event that the Mortgage Loan was
acquired or originated while doing business under another
name, the signature must be in the following form: "[insert
name of the Last Endorsee], formerly known as [previous
name]";
(ii) the original of any guarantee executed in connection with the
Mortgage Note (if any);
(iii) the recorded original of the Mortgage, or in the event such
original has not yet been received from the applicable
recording office, a duplicate original of the Mortgage
certified by an officer of the Seller as a true and correct
copy of the Mortgage delivered for recording;
(iv) the recorded original of all assumption, modification,
consolidation or extension agreements with respect to the
Mortgage (if any), or in the event such original has not yet
been received from the applicable recording office, duplicate
originals of all assumption, modification, consolidation or
extension agreements with respect to the Mortgage (if any)
certified by an officer of the Seller as a true and correct
copy thereof delivered for recording;
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(v) the original Assignment of Mortgage in blank for each Mortgage
Loan, in form and substance acceptable for recording and
signed in the name of the Last Endorsee (in the event that the
Mortgage Loan was acquired by the Last Endorsee in a merger,
the signature must be in the following form: "[insert name of
the last Endorsee], successor by merger to [name of
predecessor]"; in the event that the Mortgage Loan was
acquired or originated while doing business under another
name, the signature must be in the following form: "[insert
name of the Last Endorsee], formerly known as [previous
name]";
(vi) duplicate originals of all intervening assignments of mortgage
(if any);
(vii) a duplicate original of the assignment of leases and rents (if
any);
(viii) the original assignment of assignment of leases and rents (if
any), from Seller in blank, in form and substance acceptable
for recording;
(ix) originals of the file stamped and/or recorded UCC-1 Financing
Statements or in the event such original has not yet been
received from the applicable recording office, duplicate
originals of such UCC-1 Financing Statements certified by an
officer of the Seller as a true and correct copy thereof
delivered for recording;
(x) the original assignments of the UCC-1 Financing Statements in
blank, in form and substance acceptable for filing;
(xi) the original mortgagee title insurance policy, or if the
original mortgagee title insurance policy has not been issued,
the pro forma policy, the preliminary title report, binder or
commitment to insure;
(xii) a duplicate original of any security agreement, chattel
mortgage or equivalent document executed in connection with
the Mortgage;
(xiii) with respect to a Mortgage that does not allow the Mortgagor
to self-insure, original binders and copies of related
insurance policies with original insurance polices or
certified copies thereof to be delivered within forty-five
days of the related Purchase Date and with respect to all
other Mortgages, original binders with respect to any
insurance policies;
(xiv) binders with respect to any insurance policies or similar
agreements insuring against losses resulting from any failure
by a lessee of the Mortgaged Property to make any payment to
the Mortgagor as a result of a casualty or condemnation or
otherwise;
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(xv) duplicate originals of any hedging agreement, instrument or
confirmation as it relates to the Transaction;
(xvi) an original assignment to the Buyer of any such hedging
agreement or instrument in form and substance acceptable to
the Buyer unless previously delivered pursuant to this
Agreement;
(xvii) any other documents, instruments or papers relating to the
Mortgage Loans delivered by or on behalf of mortgagor; and
(xviii) an original of any Lease Enhancement Policy.
(d) With respect to each Purchased Mortgage Loan delivered by Seller to
Buyer or its designee (including the Custodian), Seller shall execute
irrevocable letters of instructions to the Servicer, substantially in the
form of EXHIBIT III attached hereto.
(e) Buyer may deposit the Mortgage Files representing the Purchased
Mortgage Loans, or direct that the Mortgage Files be deposited directly,
with a designee acting in the capacity of bailee for Buyer. If the
Mortgage Files are delivered to Buyer or its designee, Buyer or its
designee shall during the term of this Agreement exercise reasonable and
prudent care in the maintenance thereof. If the Mortgage Loan Files are
delivered to Custodian, the Mortgage Files shall be maintained in
accordance with the Custodial Agreement. Seller understands and agrees
that the Custodian shall have no responsibility to Seller, including
without limitation any responsibility to keep Seller informed of any
changes in the status of such Mortgage Files or in Buyer's instructions
with respect thereto, except as explicitly set forth in the Custodial
Agreement.
8. HYPOTHECATION OR PLEDGE OF PURCHASED MORTGAGE LOANS
Title to each Purchased Mortgage Loan, and related Collateral shall pass to
Buyer immediately upon payment of the Purchase Price therefor and Buyer shall
have free and unrestricted use of all Purchased Mortgage Loans and related
Collateral. Nothing in this Agreement shall preclude Buyer from engaging in
repurchase transactions with the Purchased Mortgage Loans and related Collateral
or otherwise pledging, repledging, hypothecating, or rehypothecating the
Purchased Mortgage Loans and related Collateral. Nothing contained in this
Agreement shall obligate Buyer to segregate any Purchased Mortgage Loans
delivered to Buyer by Seller.
9. REPRESENTATIONS
(a) The Seller represents and warrants to the Buyer that (i) it is duly
authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations
hereunder and has taken all necessary action to authorize such execution,
delivery and performance; (ii) it will engage in such Transactions as
principal (or, if agreed in writing in advance of any Transaction by the
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Buyer, as agent for a disclosed principal); (iii) the person signing this
Agreement on its behalf is duly authorized to do so (on its behalf or on
behalf of any such disclosed principal); (iv) no approval, consent or
authorization of the Transactions contemplated by this Agreement from any
federal, state, or local regulatory authority having jurisdiction over it
is required or, if required, such approval, consent or authorization has
been obtained; (v) the execution, delivery, and performance of this
Agreement and the Transactions hereunder will not violate any law,
regulation, order, judgment, decree, ordinance, charter, by-law, or rule
applicable to it or its property or constitute a default (or an event
which, with notice or lapse of time, or both would constitute a default)
under or result in a breach of, any agreement or other instrument by which
it is bound or by which any of its assets are affected; (vi) it has
received approval and authorization to enter into this Agreement and each
and every Transaction actually entered into hereunder pursuant to its
internal policies and procedures; and (vii) neither this Agreement nor any
Transaction pursuant hereto are entered into in contemplation of insolvency
or with intent to hinder, delay or defraud any creditor.
(b) Seller represents and warrants to Buyer that as of the Purchase Date
for the purchase of any Purchased Mortgage Loans by Buyer from Seller and
as of the date of this Agreement and any Transaction hereunder and at all
times while this Agreement and any Transaction thereunder is in full force
and effect:
(i) ORGANIZATION. Seller is duly organized, validly existing and
in good standing under the laws and regulations of the state
of Seller's organization and is duly licensed, qualified, and
in good standing in every state where Seller transacts
business and in any state where any Mortgaged Property is
located if the laws of such state require licensing or
qualification in order to conduct business of the type
conducted by Seller.
(ii) NO LITIGATION. There is no action, suit, proceeding,
investigation, or arbitration pending or threatened against
Seller which may result in any material adverse change in the
business, operations, financial condition, properties, or
assets of Seller, or which may have an adverse effect on the
validity of this Agreement or the Purchased Mortgage Loans or
any action taken or to be taken in connection with the
obligations of Seller contemplated herein.
(iii) NO BROKER. Except as disclosed in writing to the Buyer,
Seller has not dealt with any broker, investment banker,
agent, or other person, except for Buyer, who may be entitled
to any commission or compensation in connection with the sale
of Purchased Mortgage Loans pursuant to this Agreement. In
the case of any such disclosed broker, investment banker,
agent or other person, Seller has paid all amounts owed to or
earned by such person and such person has no claim for the
payment of any further amounts.
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(iv) GOOD TITLE TO COLLATERAL. Purchased Mortgage Loans shall be
free and clear of any lien, encumbrance or impediment to
transfer, and Seller represents and warrants the foregoing to
Buyer and represents and warrants that it has good, valid and
marketable title or right to sell and transfer such Purchased
Mortgage Loans to Buyer.
(v) DELIVERY OF MORTGAGE FILES. The Mortgage Files (including,
without limitation, the Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other documents required to be
delivered under this Agreement with respect to the Mortgage
Loans) will be delivered by the Seller to the Custodian within
two Business Days after the related Purchase Date. Seller or
its designee is in possession of a complete, true and accurate
Mortgage File, except for such documents the originals of
which have been delivered to the Custodian.
(vi) SELECTION PROCESS. The Purchased Mortgage Loans were selected
from among the outstanding Mortgage Loans in Seller's
portfolio as to which the representations and warranties set
forth in this Agreement could be made and such selection was
not made in a manner so as to affect adversely the interests
of Buyer.
(vii) OTHER REPRESENTATIONS. The other representations and
warranties, if any, set forth in the related Confirmation are
true and correct.
(c) Seller represents and warrants to Buyer that each Mortgage Loan sold
hereunder and each pool of Mortgage Loans sold in a Transaction hereunder,
as of the related Purchase Date conform to the representations and
warranties set forth in EXHIBIT V attached hereto.
(d) On the Purchase Date for any Transaction, Seller shall be deemed to
have made all the foregoing representations with respect to itself as of
such Purchase Date.
10. NEGATIVE COVENANTS OF SELLER
On and as of the date of this Agreement and each Purchase Date and until
this Agreement is no longer in force with respect to any Transaction, Seller
covenants that it will not:
(a) take any action which would directly or indirectly impair or adversely
affect Buyer's title to or the value of the Purchased Mortgage Loans; or
(b) pledge, assign, convey, grant, bargain, sell, set over, deliver or
otherwise transfer any interest in the Purchased Mortgage Loans to any
person not a party to this Agreement, nor will Seller create, incur or
permit to exist any lien, encumbrance or security interest in or on the
Purchased Mortgage Loans except as described in Section 6 of this
Agreement.
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11. AFFIRMATIVE COVENANTS OF SELLER
(a) Seller shall provide Buyer with copies of such documentation as Buyer
may reasonably request evidencing the truthfulness of the representations
set forth in Section 9, including but not limited to a copy of Seller's
partnership agreement and such other documents authorizing Seller to engage
in this Agreement and the Transactions contemplated by this Agreement.
(b) Seller shall, at Buyer's request, take all action reasonably necessary
to ensure that Buyer will have a first priority security interest in the
Purchased Mortgage Loans and related Collateral, including, among other
things, the execution of such UCC financing statements as Buyer may
reasonably request.
(c) Seller covenants that it will not create, incur or permit to exist any
lien, encumbrance or security interest in or on any of the Collateral
without the prior express written consent of Buyer.
(d) Seller shall maintain a hedging program with respect to the Purchased
Mortgage Loans which shall be satisfactory to the Buyer and subject to the
Buyer's review and revision on a daily basis. If Buyer shall determine in
its sole discretion that Seller's hedging program is unsatisfactory with
respect to a particular Purchased Mortgage Loan or with respect to all
Purchased Mortgage Loans as a whole, the Seller shall adjust its hedging
program within one Business Day of notice from the Buyer.
(e) The Seller shall provide Buyer with monthly compliance letters in such
form and containing such information as the Buyer shall require including,
but limited to, current status of Purchased Mortgage Loans and debt ratings
of tenants under leases related to Purchased Mortgage Loans.
(f) Seller shall deliver to Buyer no later than April 10, 1998, an opinion
of counsel to Seller in form and substance satisfactory to Buyer.
(g) Seller shall use its best efforts to consummate a Securitization on or
before September 1, 1998 (or such later date to which Buyer, in its sole
discretion, may agree).
12. EVENTS OF DEFAULT
If any of the following events (each an "EVENT OF DEFAULT") occur, Buyer
shall have the rights set forth in Section 13, as applicable:
(a) Seller fails to (i) deliver any Mortgage File within two Business Days
after the Purchase Date for the related Mortgage Loan, (ii) deliver
Additional Funds in the amount or by the time required by Section 4 or
(iii) repurchase any Mortgage Loan on the related Repurchase Date,
PROVIDED, HOWEVER, that with respect to a Mortgage Loan that is to be
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repurchased on demand, as set forth herein, such repurchase shall be made
within 15 days after receipt by it of written notice from Buyer;
(b) Seller fails to comply with any of the provisions of
Sections 3, 4 or 5;
(c) Seller fails to adjust its hedging program within one Business Day of
notice from Buyer pursuant to Section 11(d);
(d) Seller fails to satisfy or perform any other material obligation or
covenant under this Agreement;
(e) any change in the Servicer or the terms of the Servicing Agreement
without the prior written approval of the Buyer;
(f) an Act of Insolvency occurs with respect to Seller or Servicer;
(g) any representation made by Seller shall have been incorrect or untrue
in any material respect when made or repeated or deemed to have been made
or repeated;
(h) Seller dissolves, merges or consolidates with another entity unless it
is the surviving party; or sells, transfers, or otherwise disposes of a
material portion of its business or assets;
(i) this Agreement shall for any reason cease to create a valid, first
priority security interest in any of the Purchased Mortgage Loans or other
Collateral purported to be covered hereby; or
(j) any default by the Seller occurs under the Amended and Restated
Promissory Note and Security Agreement dated April 1, 1998 by and between
the Buyer and the Seller or under the Fifth Amended and Restated Promissory
Note dated April 1, 1998 by and between the Buyer and the Seller.
13. REMEDIES
If an Event of Default occurs, the following rights and remedies are
available to Buyer:
(i) At the option of Buyer, exercised by written notice to Seller
(which option shall be deemed to have been exercised, even if
no notice is given, immediately upon the occurrence of an Act
of Insolvency), the Repurchase Date for each Transaction
hereunder shall be deemed immediately to occur.
(ii) If Buyer exercises or is deemed to have exercised the option
referred to in subsection (i) of this Section:
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(A) Seller's obligations hereunder to (I) repurchase all
Purchased Mortgage Loans in such Transactions at their
respective Repurchase Prices and (II) pay the aggregate
accreted Price Differentials shall thereupon become
immediately due and payable; and
(B) to the extent permitted by applicable law, the
Repurchase Price with respect to each such Transaction
shall be increased by the aggregate amount obtained by
daily application of, on a three hundred sixty (360)
day per year basis for the actual number of days during
the period from and including the date of the exercise
or deemed exercise of such option to but excluding the
date of payment of the Repurchase Price as so
increased, (x) the greater of the Prime Rate or the
Pricing Rate for each such Transaction to (y) the
Repurchase Price for such Transaction as of the
Repurchase Date as deemed pursuant to subsection (i) of
this Section.
(iii) After delivery to the Seller of any required notice and the
expiration of any applicable cure period, Buyer may (A)
immediately sell, without notice or demand of any kind, at one
or more public or private sales and at such price or prices as
Buyer may reasonably deem satisfactory, any or all Purchased
Mortgage Loans and related Collateral and all related
Collateral subject to a Transaction hereunder or (B) in its
sole discretion elect, in lieu of selling all or a portion of
such Purchased Mortgage Loans, to give Seller credit for such
Purchased Mortgage Loans in an amount equal to the Credit
Market Value of the Purchased Mortgage Loans against the
aggregate unpaid Repurchase Price and any other amounts owing
by Seller hereunder.
(iv) The parties recognize that it may not be possible to purchase
or sell all of the Purchased Mortgage Loans on a particular
Business Day, or in a transaction with the same purchaser, or
in the same manner because the market for such Purchased
Mortgage Loans may not be liquid. In view of the nature of
the Purchased Mortgage Loans, parties agree that liquidation
of a Transaction or underlying Purchased Mortgage Loans and
related Collateral does not require a public purchase or sale
and that any good faith private purchase or sale shall be
deemed to have been made in a commercially reasonable manner.
Accordingly, Buyer may elect, in its sole discretion, the time
and manner of liquidating any Purchased Mortgage Loan and
nothing contained herein shall (A) obligate Buyer to liquidate
any Purchased Mortgage Loan on the occurrence of an Event of
Default or to liquidate all Purchased Mortgage Loans in the
same manner or on the same Business Day or (B) constitute a
waiver of any right or remedy of Buyer.
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(v) Buyer shall, without regard to the adequacy of the security
for Seller's obligations under this Agreement, be entitled to
the appointment of a receiver by any court having
jurisdiction, without notice, to take possession of and
protect, collect, manage, liquidate, and sell the Collateral
or any portion thereof, and collect the payments due with
respect to the Collateral or any portion thereof.
(vi) Seller shall be liable to Buyer for the amount of all
expenses, including reasonable legal or other expenses
incurred by Buyer in connection with or as a consequence of an
Event of Default. Seller shall be liable, with respect to
each Purchased Mortgage Loan, for the positive difference, if
any, between the Repurchase Price of any Purchased Mortgage
Loan and the actual net sale proceeds reviewed by Buyer after
selling any Purchased Mortgage Loan pursuant to this Section
13 and interest shall accrue thereon from the date of such
sale at a rate per annum equal to the Prime Rate plus 5%.
(vii) Buyer shall have all the rights and remedies provided herein,
provided by applicable federal, state, foreign, and local laws
(including, without limitation, the rights and remedies of a
secured party under the Uniform Commercial Code of the State
of New York, to the extent that the Uniform Commercial Code is
applicable in equity, and under any other agreement between
Buyer and Seller).
(viii) Buyer may exercise one or more of the remedies available to
Buyer immediately upon the occurrence of an Event of Default
and, except to the extent provided in subsections (i) and
(iii) of this Section, at any time thereafter without notice
to Seller. All rights and remedies arising under this
Agreement as amended from time to time hereunder are
cumulative and not exclusive of any other rights or remedies
which Buyer may have.
14. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered into this Agreement and
will enter into each Transaction hereunder in consideration of and in reliance
upon the fact that, all Transactions hereunder constitute a single business and
contractual relationship and that each has been entered into in consideration of
the other Transactions. Accordingly, the Seller agrees (i) to perform all of
its obligations in respect of each Transaction hereunder, and that a default in
the performance of any such obligations shall constitute a default by it in
respect of all Transactions hereunder, (ii) that the Buyer shall be entitled to
set off claims and apply property held by the Buyer in respect of any
Transaction against obligations owing to it in respect of any other Transactions
hereunder and (iii) that payments, deliveries, and other transfers made by the
Seller in respect of any Transaction shall be deemed to have been made in
consideration of payments, deliveries, and other transfers in respect of any
other Transactions hereunder, and the obligations
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to make any such payments, deliveries, and other transfers may be applied
against each other and netted.
15. NOTICES AND OTHER COMMUNICATIONS
Unless another address is specified in writing by the respective party to
whom any written notice or other communication is to be given hereunder, all
such notices or communications shall be in writing or confirmed in writing and
delivered at the respective addresses set forth in the Confirmation.
16. ENTIRE AGREEMENT; SEVERABILITY
This Agreement together with the applicable Confirmation constitutes the
entire understanding between Buyer and Seller with respect to the subject matter
it covers and shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions involving
Purchased Mortgage loans. By acceptance of this Agreement, Buyer and Seller
acknowledge that they have not made, and are not relying upon, any statements,
representations, promises or undertakings not contained in this Agreement. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
17. ASSIGNMENT
The rights and obligations of the parties under any Agreement and under any
Transaction shall not be assigned by either party without the prior written
consent of the other party. Subject to the foregoing, this Agreement and any
Transactions shall be binding upon and shall inure to the benefit of the parties
and their respective successors and assigns. Nothing in this Agreement express
or implied, shall give to any person, other than the parties to this Agreement
and their successors hereunder, any benefit or any legal or equitable right,
power, remedy or claim under this Agreement.
18. TERMINATION
This Agreement shall have a term of two years from the date hereof;
PROVIDED, HOWEVER, that this Agreement may be terminated by either party upon
giving of 120 days prior written notice to the other, except that this Agreement
shall, notwithstanding such notice, remain applicable to any Transaction then
outstanding. Notwithstanding any such termination or the occurrence of an Event
of Default, all of the representations, warranties and covenants hereunder shall
continue and survive.
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19. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
20. CONSENT TO JURISDICTION
The parties irrevocably agree to submit to the personal jurisdiction of the
United States District Court for the Southern District of New York, the parties
irrevocably waiving any objection thereto. If, for any reason, federal
jurisdiction is not available, and only if federal jurisdiction is not
available, the parties irrevocably agree to submit to the personal jurisdiction
of the Supreme Court of the State of New York, the parties irrevocably waiving
any objection thereto.
21. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by the Buyer shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Any such waiver or modification shall be effective only in the
specific instance and for the specific purpose for which it was given.
22. INTENT
The parties understand and intend that this Agreement and each Transaction
hereunder constitute a "securities contract" as that term is defined in Section
741 of Title II of the United States Code, as amended; provided, however, that
if Seller is an "insured depository institution" as that term is defined in
Section 1813(a) of Title 12 of the United States Code, as amended, the parties
understand and intend that this Agreement and each Transaction hereunder
constitute a "qualified financial contract" as that term is defined in Section
1821 of Title 12 of the United States Code, as amended.
23. SERVICING
(a) Seller covenants to maintain or cause the servicing of the Purchased
Mortgage Loans to be maintained in conformity with accepted servicing
practices in the industry and in a manner at least equal in quality to the
servicing Seller provides to mortgage loans which it owns. All servicing
fees and compensation with respect to the servicing of the Purchased
Mortgage Loans shall be customary, reasonable and consistent with industry
practice.
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(b) The Seller represents and warrants that the Purchased Mortgage Loans
are serviced by Midland Loan Services L.P., a third party servicer (the
"SERVICER"). Seller (i) shall provide a copy of the Servicing Agreement to
Buyer; and (ii) hereby irrevocably assigns to Buyer and Buyer's successors
and assigns all right, title, interest and the benefits of the Servicing
Agreement with respect to the Purchased Mortgage Loans.
24. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that in the case of
Transactions in which one of the parties is an "insured depository institution"
as that term is defined in Section 1831(a) of Title 12 of the United States
Code, as amended, funds held by the financial institution pursuant to a
Transaction hereunder are not a deposit and therefore are not insured by the
Federal Deposit Insurance Corporation, the Savings Association Insurance Fund or
the Bank Insurance Fund, as applicable.
25. NETTING
If Buyer and Seller are "financial institutions" as now or hereinafter
defined in Section 4402 of Title 12 of the United States Code ("SECTION 4402")
and any rules or regulations promulgated thereunder:
(a) All amounts to be paid or advanced by one party to or on behalf of the
other under this Agreement or any Transaction hereunder shall be deemed to
be "payment obligations" and all amounts to be received by or on behalf of
one party from the other under this Agreement or any Transaction hereunder
shall be deemed to be "payment entitlements" within the meaning of Section
4402, and this Agreement shall be deemed to be a "netting contract" as
defined in Section 4402.
(b) The payment obligations and the payment entitlements of the parties
hereto pursuant to this Agreement and any Transaction hereunder shall be
netted as follows. In the event that either party (the "DEFAULTING PARTY")
shall fail to honor any payment obligation under this Agreement or any
Transaction hereunder, the other party (the "NONDEFAULTING PARTY") shall be
entitled to reduce the amount of any payment to be made by the
Nondefaulting Party to the Defaulting Party by the amount of the payment
obligation that the Defaulting Party failed to honor.
26. MISCELLANEOUS
(a) Seller agrees to pay to NationsBanc Montgomery Securities LLC on the
date hereof (i) an origination fee in the amount of $50,000.00 and (ii) all
reasonable costs and expenses of Buyer in connection with the negotiation,
preparation, execution and delivery of this Agreement and any related
documents, including without limitation, the reasonable fees and expenses
of counsel to Buyer.
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(b) Time is of the essence under this agreement and all Transactions and
all references to a time shall mean New York time in effect on the date of
the action unless otherwise expressly stated in this Agreement.
(c) Buyer shall be authorized to accept orders and take any other action
affecting any accounts of Seller in response to instructions given in
writing or orally by telephone or otherwise by any person with apparent
authority to act on behalf of Seller, and Seller shall indemnify Buyer,
defend, and hold Buyer harmless from and against any and all liabilities,
losses, damages, costs, and expenses of any nature arising out of or in
connection with any action taken by Buyer in response to such instructions
received or reasonably believed to have been received from Seller.
(d) If there is any conflict between the terms of this Agreement or any
Transaction entered into hereunder and the Custodial Agreement, this
Agreement shall prevail.
(e) If there is any conflict between the terms of a Confirmation or a
corrected Confirmation issued by Buyer and this Agreement, the Confirmation
shall prevail.
(f) This Agreement may be executed in counterparts, each of which so
executed shall be deemed to be an original, but all of such counterparts
shall together constitute but one and the same instrument.
(g) The headings in this Agreement are for convenience of reference only
and shall not affect the interpretation or construction of this Agreement.
[Signatures to Follow]
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IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date set forth above.
NATIONSBANK, N.A.
By:
----------------------------
Name
Title
CAPITAL LEASE FUNDING, L.P.
By: CLF HOLDINGS, INC.
By:
----------------------------
Name
Title
<PAGE>
EXHIBITS AND SCHEDULES
EXHIBIT I Form of Confirmation
EXHIBIT II Form of Custodial Delivery
EXHIBIT III Form of Letter of Instruction to
Servicer
EXHIBIT IV Form of Funding Certificate
EXHIBIT V Representations and Warranties Regarding
Mortgage Loans
SCHEDULE A Purchase Price Grid
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EXHIBIT I
Form of Confirmation Letter
[Date]
[see attached]
I-1
<PAGE>
EXHIBIT II
Form of Custodial Delivery
On this _______ day of ____________, 19___, Capital Lease Funding, L.P.
(the "Seller") under that certain Amended and Restated Repurchase Agreement
Governing Purchases and Sales of Mortgage Loans, dated as of April 1, 1998 (the
"Repurchase Agreement") between Seller and NationsBank, N.A. (the "Buyer"), does
hereby deliver to [Buyer][Buyer's designee] LaSalle National Bank ("Custodian"),
as custodian under that certain Custodial Agreement, dated as of July 19, 1996,
[between Buyer and Custodian][among Buyer, Seller and Custodian], the Mortgage
Files with respect to the Mortgage Loans to be purchased by Buyer on __________
pursuant to the Repurchase Agreement, which Mortgage Loans are listed on the
Mortgage Loan Schedule attached hereto [and which Mortgage Loans shall be
subject to the terms of the Custodial Agreement on the date hereof].
[With respect to the Mortgage Files delivered hereby, for the purposes of
issuing the Initial Trust Receipt, the Custodian shall review the Mortgage Files
to ascertain delivery of the documents listed in Annex A attached to the
Custodial Agreement. Custodian shall deliver the Final Trust Receipt within
____ days of the Purchase Date.]
[Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Custodial Agreement.]
IN WITNESS WHEREOF, Seller has caused its name to be signed hereto by its
officer thereunto duly authorized as of the day and year first above written.
CAPITAL LEASE FUNDING, L.P.
By: CLF HOLDINGS, INC.
By:
-----------------------------
Name
Title
II-1
<PAGE>
EXHIBIT III
Letter of Instructions to Servicer
[Servicer]
Ladies/Gentlemen:
On __________ __, 199__, ("Seller"), sold to [Buyer] ["Buyer"] all of
Seller's right, title and interest in and to the mortgage loans identified on
Appendix A attached to this letter and made a part hereof (the "Mortgage Loans")
pursuant to that certain Amended and Restated Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans dated as of April 1, 1998 between Buyer
and Seller.
Accordingly, Seller hereby unconditionally and irrevocably instructs you to
pay to Buyer, pursuant to the terms of our existing servicing arrangements, any
and all monies received by you on or after __________ __, 199__ which would
have been payable from time to time by you to Seller on account of or otherwise
in connection with the Mortgage Loans, including without limitation any, and all
principal, interest, partial prepayments, prepayments in full, penalties,
advance payments, or expenses; provided, however, that you shall remit to Seller
an amount equal to the excess of any interest received over the applicable
Periodic Payment due and owing to the Buyer as specified by the Buyer; provided,
further, that any such monies representing scheduled payments of principal of or
interest on such Mortgage Loans due prior to ________, ___, 199__ shall be paid
to Seller. All such monies shall be paid by you to the order of Buyer in the
manner and on the date such monies would have been payable to Seller, as
follows:
[Bank]
ABA # ________ for the account of [Buyer]
Acct. #_______
Attn: ________/re: [Seller]
Very truly yours,
CAPITAL LEASE FUNDING, L.P.
By: CLF HOLDINGS, INC.
By:
-----------------------------
Name
Title
III-1
<PAGE>
EXHIBIT IV
Form of Funding Certificate
[Date]
[see attached]
IV-1
<PAGE>
EXHIBIT V
Representations and Warranties
Regarding Mortgage Loans
Seller represents and warrants to the Buyer that, with respect to each
Mortgage Loan sold hereunder and with respect to each pool of Mortgage Loans
sold in a Transaction hereunder, as of the related Purchase Date:
(a) MORTGAGE LOANS AS DESCRIBED. The information set forth in the
Mortgage Loan Schedule is complete, true and correct;
(b) PAYMENTS CURRENT. All payments required to be made up to the Purchase
Date for each Mortgage Loan under the terms of the Mortgage Note have been made
and credited. No payment required under the Mortgage Loan has been delinquent
at any time since the date the Mortgage Loan was originated;
(c) NO OUTSTANDING CHARGES. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid, or an escrow of funds has
been established in an amount sufficient to pay for every such item which
remains unpaid and which has been assessed but is not yet due and payable.
Seller has not advanced funds, or induced, solicited or knowingly received any
advance of funds by a party other than the mortgagor, directly or indirectly,
for the payment of any amount required under the Mortgage Loan, except for
interest accruing from the date of the Mortgage Note or date of disbursement of
the Mortgage Loan proceeds, whichever is greater, to the day which precedes by
one month the due date of the first installment of principal and interest;
(d) ORIGINAL TERMS UNMODIFIED. The terms of the Mortgage Note and
mortgage have not been impaired, waived, altered or modified in any respect,
except by a written instrument which has been recorded, if necessary to protect
the interests of Buyer, and which has been delivered to Buyer or its designee
(including the Custodian). No mortgagor has been released, in whole or in part,
except in connection with an assumption agreement, which assumption agreement is
included in the Mortgage File delivered to Buyer or its designee (including the
Custodian) and the terms of which are reflected in the Mortgage Loan Schedule;
(e) NO DEFENSES. The Mortgage Loan is not subject to any right of
rescission, set-off, abatement, diminution, counterclaim or defense, including
without limitation the defense of usury, nor will the operation of any of the
terms of the Mortgage Note or the Mortgage, or the exercise of any right
thereunder, render either the Mortgage Note or the Mortgage unenforceable, in
whole or in part, or subject to any right of rescission, set-off, abatement,
diminution, counterclaim or defense, including without limitation the defense of
usury, and no such right of rescission, set-off, abatement, diminution,
counterclaim or defense has been asserted with respect thereto;
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<PAGE>
(f) INSURANCE POLICIES IN EFFECT. The fire and casualty insurance policy
covering the Mortgaged Property (1) affords (and will afford) sufficient
insurance against fire and such other risks as are usually insured against in
the broad form of extended coverage insurance from time to time available, as
well as insurance against flood hazards if the Mortgaged Property is an area
identified by the Federal Emergency Management Agency as having special flood
hazards; (2) is a standard policy of insurance for the locale where the
Mortgaged Property is located, is in full force and effect, and the amount of
the insurance is in the amount of the full insurable value of the Mortgaged
Property on a replacement cost basis or the unpaid balance of the Mortgage
Loans, whichever is less; (3) names (and will name) the present owner of the
Mortgaged Property as the insured; and (4) contains a standard mortgagee loss
payable clause in favor of Seller;
(g) COMPLIANCE WITH APPLICABLE LAWS. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
equal credit opportunity or disclosure laws applicable to the Mortgage Loan have
been complied with, and Seller shall maintain in its possession, available for
Buyer's inspection, and shall deliver to Buyer upon demand, evidence of
compliance with all such requirements;
(h) NO SATISFACTION OF MORTGAGE. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission;
(i) VALID FIRST LIEN. The Mortgage is a valid, subsisting and enforceable
first lien on the Mortgaged Property, including all buildings on the Mortgaged
Property and all installations and mechanical, electrical, plumbing, heating and
air conditioning systems located in or annexed to such buildings, and all
additions, alterations and replacements made at any time with respect to the
foregoing. The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments
not yet due and payable;
(2) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of
recording acceptable to mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy
delivered to the originator of the Mortgage Loan and (i) referred to
or otherwise considered in the appraisal made for the originator of
the Mortgage Loan or (ii) which do not adversely affect the appraised
value of the Mortgaged Property set forth in such appraisal; and
(3) other matters to which like properties are commonly
subject which do not materially interfere with the benefits of the
security intended to be provided by the
V-2
<PAGE>
Mortgage or the use, enjoyment, value or marketability of the related
Mortgaged Property.
The Mortgaged Property was not, as of the date of origination of the Mortgage
Loan, subject to a Mortgage, deed of trust, deed to secured debt or other
security instrument creating a lien subordinate to the lien of the Mortgage;
(j) VALIDITY OF MORTGAGE DOCUMENTS. The Mortgage Note and the Mortgage
are genuine, and each is the legal, valid and binding obligation of the maker
thereof enforceable in accordance with its terms (subject to applicable
bankruptcy, insolvency or other similar laws affecting the rights of creditors
generally and general principals of equity). All parties to the Mortgage Note
and the Mortgage had legal capacity to enter into the Mortgage Loan and to
execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note
and the Mortgage have been duly and properly executed by such parties;
(k) FULL DISBURSEMENT OF PROCEEDS. The proceeds of the Mortgage Loan have
been fully disbursed and there is no requirement for future advances thereunder,
and any and all requirements as to completion of any on-site or off-site
improvement and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or closing the
Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is
not entitled to any refund of any amounts paid or due under the Mortgage Note or
Mortgage;
(l) TITLE INSURANCE. The Mortgage Loan is covered by an ALTA lender's
title insurance policy, insuring Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount of the
Mortgage Loan, subject only to the exceptions contained in clauses (1), (2) and
(3) of paragraph (i) above and, with respect to adjustable rate Mortgage Loans,
against any loss by reason of the invalidity or unenforceability of the lien
resulting from the provisions of the Mortgage providing for adjustment to the
mortgage interest rate and monthly payment. Seller is the sole insured of such
lender's title insurance policy, and such lender's title insurance policy is in
full force and effect and will be in force and effect upon the consummation of
the transactions contemplated by this Agreement. No claims have been made under
the lender's title insurance policy, and no prior holder of the mortgage,
including Seller, has done, by act or omission, anything that would impair the
coverage of such lender's title insurance policy;
(m) NO DEFAULTS. There is no default, breach, violation or event of
acceleration existing under the Mortgage or the Mortgage Note and, to the best
of Seller's knowledge, no event which, with the passage of time or with notice
and the expiration of any grace or cure period, other than the failure to make,
prior to expiration of the applicable grace period, the monthly payment due
immediately prior to the related Purchase Date if such Purchase Date occurs
prior to the expiration of such grace period, would constitute a default,
breach, violation or event of acceleration, and neither Seller nor its
predecessors have waived any default, breach, violation or event of
acceleration;
V-3
<PAGE>
(n) NO MECHANICS' LIENS. There are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and, to the best of
Seller's knowledge, no rights are outstanding that under the law, could give
rise to such liens) affecting the mortgaged property which are or may be liens
prior to or equal or coordinate with, the lien of the Mortgage;
(o) LOCATION OF IMPROVEMENTS: NO ENCROACHMENTS: ZONING COMPLIANCE. All
improvements which were considered in determining the appraised value of the
Mortgaged Property lay wholly within the boundaries and building restriction
lines of the Mortgaged Property and no improvements on adjoining properties
encroach upon the Mortgaged Property. No improvements located on or being part
of the Mortgaged Property are in violation of any applicable zoning law or
regulation;
(p) REMEDIES. The Mortgage contains customary and enforceable provisions
such as to render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security
provided thereby, including, (i) in the case of a Mortgage designated as a deed
of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure;
(q) NO ADDITIONAL COLLATERAL. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
executed and delivered in connection therewith;
(r) DEEDS OF TRUST. In the event the Mortgage constitutes a deed of
trust, a trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in the deed of trust,
and no fees or expenses are or will become payable by Buyer to the trustee under
the deed of trust, except in connection with a trustee's sale after default by
the mortgagor;
(s) ACCEPTABLE INVESTMENT. Seller has no knowledge of any circumstances
or conditions with respect to the Mortgage, the Mortgaged Property, the
Mortgagor or the Mortgagor's credit standing that can reasonably be expected to
cause private institutional investors to regard the Mortgage Loan as an
unacceptable investment, cause the Mortgage Loan to become delinquent, or
adversely affect the value or marketability of the Mortgage Loan;
(t) TRANSFER OF MORTGAGE LOANS. The assignment of mortgage is in
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;
(u) DUE ON SALE. The Mortgage contains an enforceable provision for the
acceleration of the payment of the unpaid principal balance of the Mortgage Loan
in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder;
V-4
<PAGE>
(v) NO FRAUD. Neither the Seller nor any of its officers, employees or
agents has participated in or condoned any fraud in connection with the
origination, underwriting or servicing of the Mortgage Loan, and in originating
and underwriting the Mortgage Loan, to the best knowledge of the Seller, no
fraud was committed against it;
(w) MORTGAGOR'S FINANCIAL CONDITION. To the best knowledge of the Seller,
the credit reports relating to, and the financial statements of, the related
Mortgagor and its Affiliates, if any, furnished to the Seller in connection with
the Mortgage Loan, correctly reflect the financial condition of the Mortgagor
and its Affiliates, if any, in all material respects;
(x) SOLVENCY. To the best knowledge of the Seller, neither the related
Mortgagor, the manager of the related Mortgaged Property not any Affiliate of
either of them, is currently a party to any bankruptcy, reorganization,
insolvency or comparable proceeding;
(y) APPRAISAL. All requirements and conditions set forth in each
appraisal contained in the related Mortgage File as the basis for the valuation
made in such appraisal have been satisfied or arrangements have been made to
satisfy such requirements and conditions in accordance with the Seller's
underwriting guidelines;
(z) HAZARDOUS SUBSTANCES. The Seller has reviewed the hazardous substance
report contained in the related Mortgage File, the representations of the
Mortgagor in the documents in the Mortgage File and the tenant estoppel letter,
if any, and has made such other reasonable investigation, including, without
limitation, inquiry of the Mortgagor, as would be undertaken by a prudent
institutional lender underwriting and originating the Mortgage Loan for its own
portfolio, and such documents and investigation do not indicate that any of the
following statements are untrue: (A) the Mortgaged Property is not now and has
never been used to generate, manufacture, refine, transport, treat, store,
handle, dispose of, transfer, produce, process or in any manner deal with
Hazardous Substances, (B) no Hazardous Substances have ever been installed in,
placed on, or in any manner dealt with on the Mortgaged Property, and (C) no
owner of the Mortgaged Property or any tenant, subtenant, occupant, prior
tenant, prior subtenant, prior occupant or other Person has received any notice
or advice from any governmental agency or any of the foregoing Persons with
regard to Hazardous Substances on, from or affecting the Mortgaged Property.
Based on the Seller's actual knowledge of the related Mortgaged Property, the
related Mortgagor and its use of the Mortgaged Property and the geographic area
where such Mortgaged Property is located, the Seller has no reason or cause to
believe that the hazardous substance report is incorrect;
(aa) MORTGAGE NOTE. When the Mortgage Note is delivered to the Buyer or
its designee, it will be the only promissory note evidencing the related
Mortgage Loan that has been manually signed by the Mortgagor;
(bb) MORTGAGED PROPERTY UNDAMAGED. There is no proceeding pending or
threatened for the total or partial condemnation of the mortgaged property and
the mortgaged property is undamaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or other
V-5
<PAGE>
casualty so as to affect adversely the value of the mortgaged property as
security for the Mortgage Loan or the use for which the premises were intended;
and
(cc) ENVIRONMENTAL MATTERS. A third party unaffiliated with Seller has
conducted a "Phase I" environmental assessment of the mortgaged property within
the past six (6) months and has concluded that, the mortgaged property is free
from any and all toxic or hazardous substances and there exists no violation of
any local, state or federal environmental law, rule or regulation.
V-6
<PAGE>
SCHEDULE A
PURCHASE PRICE GRID
BOND RATING(1)
OR EQUIVALENT BOND NET(2) TRIPLE NET/GROUND(3) DOUBLE NET(4)
AAA/AAA 100% 99% 97%
(Min. Spread)(5) (1.07%) (1.12%) (1.18%)
AA/AA 100% 98% 97%
(Min. Spread) (1.08%) (1.13%) (1.19%)
A/A 98% 96% 94%
(Min. Spread) (1.11%) (1.17%) (1.25%)
BBB/BAA 92% 91% 90%
(Min. Spread) (1.25%) (1.40%) (1.55%)
BBB/BA(6) 86% 85% 84%
BB/BA(6) 86% 85% 84%
B/B(7) 0% 0% 0%
BELOW(7) 0% 0% 0%
(1) For the purposes hereof, "Bond Rating" shall mean the long term
unsecured debt rating given by Standard & Poor's, a division of The McGraw-Hill
Companies ("S & P"), Fitch IBCA, Inc., Duff and Phelps, Inc. or the equivalent
by Moody's Investors Service, Inc. ("Moody's").
In the absence of Bond Ratings, NAIC 1 will be purchased at BBB/Baa levels.
NAIC 2 will be purchased at BBB/Ba levels.
In the absence of Bond Ratings, short-term debt ratings of A-1+ by S & P
will be purchased in accordance with AA/AA levels. Short-term debt ratings of
A-1 by S & P or Prime-1 by Moody's will be purchased in accordance with A/A
levels. Short-term debt ratings of A-2/A-3 by S & P or Prime 2/Prime-3 by
Moody's will be purchased in accordance with BBB/Baa levels. Any short-term
debt rating below these levels will be considered in the Buyer's sole
discretion.
All plus or minus aspects of Lease ratings will be ignored. Any split
rating will default to the lower of the ratings.
(2) "Bond Net" leases refers to those leases that contain no landlord
obligations and no capacity for tenant to cancel lease without a make-whole
payment by tenant to landlord.
(3) "Triple Net" and "Ground" leases refer to those leases that contain no
landlord obligations other than restoration at condemnation and casualty and
which provide the tenant with cancellation or rent abatement rights in
connection with such events.
(4) "Double Net" leases refers to those leases that contain certain
on-going obligations of the landlord related to structural and maintenance items
and provide the tenant with cancellation or rent abatement rights associated
with landlord's failure to perform its obligations.
(5) "Minimum Spread" reflects the minimum spread over the WAL Treasury
Security for a particular initial mortgage loan. In the Buyer's sole
discretion, any Mortgage Loan inside these quoted spreads will lead to a lower
Purchase Rate.
(6) The sum of each Adjusted Purchase Price paid for a Mortgage Loan
related to tenants rated at these levels shall not at any time exceed 20% of the
Aggregate Outstanding Amount. The Minimum Spread applicable to these levels
shall be as approved by Buyer in its sole discretion.
(7) These levels are included in order to calculate margin levels in the
event of a downgrade of a tenant related to a Mortgaged Property and will not be
acceptable for the initial purchase of a Mortgage Loan.
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary Selected
Historical and Pro Forma Financial Information," "Selected Historical and Pro
Forma Financial Information," "Experts" and to the use of our reports dated May
20, 1998 with respect to the statement of financial condition of Capital Lease
Funding, Inc. at April 30, 1998, and January 23, 1998 except for Note 9 as to
which date is March 17, 1998, with respect to the consolidated financial
statements of Capital Lease Funding L.P. and Subsidiaries (a Limited
Partnership) for each of the two years in the period ended December 31, 1997 and
for the period September 25, 1995 (commencement of operations) to December 31,
1995, in the Amendment #1 to Registration Statement (Form S-11) and related
Prospectus of Capital Lease Funding, Inc. for the registration of 8,441,000
shares of its common stock.
/s/ ERNST & YOUNG LLP
New York, New York
May 20, 1998
