<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1996
REGISTRATION NO 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
---------------
MELLON PREFERRED CAPITAL CORPORATION
(Exact name of Registrant as specified in its governing instruments)
---------------
ONE BOSTON PLACE
BOSTON, MASSACHUSETTS 02108
(617) 722-7610
(Address of principal executive offices)
---------------
CARL KRASIK, ESQ.
1910 ONE MELLON BANK CENTER
PITTSBURGH, PENNSYLVANIA 15258
(412) 234-5222
(Name and address of agent for service)
WITH COPIES TO:
ROBERT K. MORRIS, ESQ. MARK J. WELSHIMER, ESQ.
REED SMITH SHAW & MCCLAY SULLIVAN & CROMWELL
435 SIXTH AVENUE 125 BROAD STREET
PITTSBURGH, PENNSYLVANIA 15219 NEW YORK, NEW YORK 10004
TEL (412) 288-3131 TEL (212) 558-4000
FAX (412) 288-3063 FAX (212) 558-3588
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-Cumulative Preferred Stock,
Series A, par value $0.01 per
share.............................. 8,000,000 $25.00 $200,000,000 $68,965.52
</TABLE>
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- ----------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus............... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................................. Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges......................... Prospectus Summary; Risk
Factors; The Company; Business
and Strategy; Certain
Transactions Constituting the
Formation
4. Determination of Offering Price...................... Not Applicable
5. Dilution............................................. Not Applicable
6. Selling Security Holders............................. Not Applicable
7. Plan of Distribution................................. Underwriting
8. Use of Proceeds...................................... Use of Proceeds
9. Selected Financial Data.............................. Not Applicable
10. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ Not Applicable
11. General Information as to Registrant................. Prospectus Summary; The
Company; Management; Business
and Strategy; Certain
Transactions Constituting the
Formation
12. Policy with Respect to Certain Activities............ Business and Strategy--
Management Policy and Programs
13. Investment Policies of Registrant.................... Business and Strategy--
Management Policy and Programs
14. Description of Real Estate........................... Not Applicable
15. Operating Data....................................... Not Applicable
16. Tax Treatment of Registrant and Its Security Holders. Federal Income Tax
Considerations; ERISA
Considerations
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters........ Business and Strategy--
Dividends; Certain Transactions
Constituting the Formation
18. Description of Registrant's Securities............... Description of Capital Stock;
Description of Series A
Preferred Shares
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- ----------------------
<C> <S> <C>
19. Legal Proceedings.............................. Business and Strategy--Legal
Proceedings
20. Security Ownership of Certain Beneficial
Owners and Management.......................... Certain Transactions
Constituting the Formation;
Management--Beneficial
Ownership of Stock
of MBC
21. Directors and Executive Officers............... Management
22. Executive Compensation......................... Management
23. Certain Relationships and Related Transactions. Risk Factors; Use of Proceeds;
Business and Strategy--
Management Policies and
Programs; Certain Transactions
Constituting the Formation
24. Selection, Management and Custody of
Registrant's Investments....................... Risk Factors--Relationship with
Boston Safe and its Affiliates;
Conflicts of Interest; --Risks
Associated with Mortgage Loans
Generally; Business and
Strategy--Management Policies
and Programs; --Servicing;
Management--The Advisor
25. Policies with Respect to Certain Transactions.. Risk Factors; Business and
Strategy--Management Policies
and Programs; Management;
Certain Transactions
Constituting the Formation
26. Limitations of Liability....................... Management
27. Financial Statements and Information........... Index to Financial Statements
28. Interests of Named Experts and Counsel......... Experts; Validity of Securities
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED SEPTEMBER , 1996
8,000,000 SHARES
MELLON PREFERRED CAPITAL CORPORATION
% NON-CUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
----------
Dividends on the % Non-Cumulative Preferred Stock, Series A, par value $0.01
per share, liquidation preference $25.00 per share (the "Series A Preferred
Shares"), of Mellon Preferred Capital Corporation, a Massachusetts corporation
(the "Company"), will accrue from , 1996 and will be payable quarterly on
or about the last day of March, June, September and December of each year,
commencing December 31, 1996, at the rate of % of the initial liquidation
preference per annum (an amount equal to $ per annum per share). Such
dividends will be payable when, as and if declared by the Board of Directors of
the Company in its sole discretion out of funds legally available for such
payment.
Dividends on the Series A Preferred Shares will not be cumulative, and, if
for any reason a dividend on the Series A Preferred Shares is not declared for
a dividend period, the Company will have no obligation to pay a dividend for
such period, whether or not dividends on the Series A Preferred Shares are
declared for any future dividend period. If, however, full dividends have not
been paid or set aside for payment on the Series A Preferred Shares in respect
of a dividend period, the Company may not declare or pay dividends on its
Common Stock, par value $0.01 per share (the "Common Stock"), during such
period.
The Series A Preferred Shares are not redeemable prior to , 2001, except
upon the occurrence of a Tax Event (as described herein). On and after ,
2001, the Series A Preferred Shares may be redeemed for cash at the option of
the Company, in whole or in part, at a redemption price of $25.00 per share,
plus an amount equal to the dividend for the then-current quarterly dividend
period accrued to but excluding the date of such redemption (whether or not
declared, but without accumulation of dividends for prior dividend periods).
The Series A Preferred Shares will not be subject to any sinking fund or
mandatory redemption and will not be convertible into any other securities of
the Company.
The Company is engaged in the business of acquiring, holding and managing
real estate mortgage assets. The Company's initial assets were acquired from
Boston Safe Deposit and Trust Company, a Massachusetts trust company ("Boston
Safe"), and the Company expects that all of the mortgage assets acquired by it
in the future will be acquired from Boston Safe or its affiliates. All of the
shares of the Company's Common Stock are indirectly owned by Boston Safe.
Mellon Bank Corporation ("MBC"), which indirectly owns all of the issued and
outstanding shares of capital stock of Boston Safe, has indicated to the
Company that, so long as any Series A Preferred Shares are outstanding, it
intends to maintain direct or indirect ownership of at least 80% of the
outstanding Common Stock.
THESE SECURITIES ARE NOT DEPOSITS. THESE SECURITIES ARE NOT INSURED BY THE
FDIC OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED BY
THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, BOSTON SAFE OR MBC. NO OBLIGATION OF THE COMPANY IS GUARANTEED
BY BOSTON SAFE OR MBC.
The Company expects to qualify as a real estate investment trust for federal
income tax purposes commencing with the taxable year ending December 31, 1996.
No person or persons acting as a group is permitted to beneficially own more
than 9.9% of the value of any series of Preferred Stock of the Company,
including the Series A Preferred Shares, with limited exceptions.
Prior to the offering, there has been no market for the Series A Preferred
Shares. Application has been made to list the Series A Preferred Shares on the
New York Stock Exchange under the symbol " ".
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A PREFERRED
SHARES OFFERED HEREBY. AMONG THE RISKS WHICH PROSPECTIVE PURCHASERS SHOULD
CONSIDER ARE THE FOLLOWING:
. Limited prior operating history of the Company;
. Dependence on Boston Safe as Advisor and Servicer;
. Possible conflicts of interest between the Company and Boston Safe and its
affiliates;
. Possible restrictions on operations of the Company by bank regulatory
authorities;
. Possible adverse effect on the Company's cash flow in the event of a
significant decline in interest rates; and
. Geographic concentration in the Northeast and California of properties
securing the Company's initial portfolio of mortgage loans.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share.............................. $25.00 $ $
Total.................................. $200,000,000 $ $
</TABLE>
- -----
(1) MBC and the Company have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting".
(2) Before deducting expenses payable by the Company estimated at $ .
----------
The Series A Preferred Shares are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Series A Preferred Shares will be ready for delivery through the facilities of
The Depository Trust Company in New York, New York on or about , 1996
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO.
----------
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL INFORMATION.................................................... 4
PROSPECTUS SUMMARY........................................................ 5
The Company.............................................................. 5
Risk Factors............................................................. 5
The Offering............................................................. 6
The Formation............................................................ 8
Business and Strategy.................................................... 9
Tax Status of the Company................................................ 12
RISK FACTORS.............................................................. 13
Limited Operating History................................................ 13
Dependence upon Boston Safe as Advisor and Servicer...................... 13
Relationship with Boston Safe and its Affiliates; Conflicts of Interest.. 13
Bank Regulatory Restrictions on Operations of the Company................ 14
Interest Rate Risk....................................................... 14
Risks Associated with Mortgage Loans Generally........................... 14
Risk of Future Revisions in Policies and Strategies by Board of
Directors............................................................... 17
Tax Risks................................................................ 17
Risk Associated with Leverage............................................ 18
No Third Party Valuation of the Mortgage Loans; No Arm's-Length
Negotiations with Affiliates............................................ 18
No Prior Market for Series A Preferred Shares............................ 19
THE COMPANY............................................................... 19
USE OF PROCEEDS........................................................... 20
CAPITALIZATION............................................................ 20
BUSINESS AND STRATEGY..................................................... 20
General.................................................................. 20
Dividends................................................................ 21
Liquidity and Capital Resources.......................................... 22
General Description of Mortgage Assets; Investment Policy................ 22
Acquisition of Initial Portfolio......................................... 23
Management Policies and Programs......................................... 23
Description of Initial Portfolio......................................... 27
Servicing................................................................ 33
Officers................................................................. 35
Competition.............................................................. 35
Legal Proceedings........................................................ 35
MANAGEMENT................................................................ 36
Directors and Executive Officers......................................... 36
Beneficial Ownership of Stock of MBC..................................... 37
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Directors..................................................... 38
Audit Committee........................................................... 38
Compensation of Directors and Officers.................................... 38
Limitations on Liability of Directors and Officers........................ 38
The Advisor............................................................... 39
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION............................ 39
The Formation.............................................................. 39
Benefits to Boston Safe and its Affiliates................................. 41
DESCRIPTION OF SERIES A PREFERRED SHARES................................... 42
General................................................................... 42
Dividends................................................................. 42
Voting Rights............................................................. 43
Redemption................................................................ 44
Rights Upon Liquidation................................................... 45
Independent Director Approval............................................. 46
Restrictions on Ownership................................................. 46
DESCRIPTION OF CAPITAL STOCK............................................... 47
Common Stock.............................................................. 47
Preferred Stock........................................................... 47
Restrictions on Ownership and Transfer.................................... 48
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 50
Taxation of the Company................................................... 50
Failure to Qualify........................................................ 55
Taxation of United States Stockholders.................................... 55
Taxation of Foreign Stockholders.......................................... 56
Information Reporting Requirement and Backup Withholding Tax.............. 58
Other Tax Consequences.................................................... 59
ERISA CONSIDERATIONS....................................................... 59
General................................................................... 59
Plan Asset Regulation..................................................... 60
Prohibited Transactions................................................... 61
Unrelated Business Taxable Income......................................... 61
EXPERTS.................................................................... 62
RATINGS.................................................................... 62
VALIDITY OF SECURITIES..................................................... 62
GLOSSARY................................................................... 63
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
UNDERWRITING............................................................... U-1
</TABLE>
3
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part) on
Form S-11 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Series A Preferred Shares
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Series A
Preferred Shares offered hereby, refer to the Registration Statement and the
exhibits thereto.
The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
The Certificate of Vote establishing the rights, preferences and limitations
of the Series A Preferred Shares provides that the Company shall maintain its
status as a reporting company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), for so long as any of the Series A Preferred
Shares are outstanding.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" commencing
on page 63 for the definitions of certain terms used in this Prospectus. The
offering of 8,000,000 shares of % Non-Cumulative Preferred Stock, Series A,
par value $0.01 per share, liquidation preference $25.00 per share (the "Series
A Preferred Shares"), is referred to herein as the "Offering".
THE COMPANY
Mellon Preferred Capital Corporation (the "Company") is a Massachusetts
corporation incorporated on March 26, 1996 as TBC Loan Co., Inc., which is
engaged in the business of acquiring, holding and managing mortgage loans and
mortgage-backed securities (together, "Mortgage Assets"). The Company will
provide Boston Safe Deposit and Trust Company, a Massachusetts trust company
("Boston Safe"), and its parent, Mellon Bank Corporation, a Pennsylvania
corporation ("MBC"), with a means of raising capital for bank regulatory
purposes. The Series A Preferred Shares are expected to be treated as capital
for regulatory purposes for both Boston Safe and MBC. The issuance of the
Series A Preferred Shares by the Company is a more cost-effective means of
raising capital for Boston Safe and MBC than if Boston Safe or MBC were to
issue preferred stock itself because of the Company's ability to deduct for
income tax purposes the dividends payable on the Series A Preferred Shares as a
result of its qualification as a real estate investment trust (a "REIT"). The
Company will elect to be subject to tax as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), and will generally not be subject to
federal income tax to the extent that it distributes its earnings to its
stockholders and maintains its qualification as a REIT. All of the shares of
the Company's Common Stock are owned by Bridgewater Land Company, Inc., a
Massachusetts corporation ("Bridgewater"). Bridgewater is a wholly owned
subsidiary of Boston Safe. MBC has indicated to the Company that, so long as
any Series A Preferred Shares are outstanding, it intends to maintain direct or
indirect ownership of at least 80% of the outstanding Common Stock. In
addition, Massachusetts banking law requires Boston Safe to own directly or
indirectly all the Common Stock of the Company so long as it directly or
indirectly owns any Common Stock.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED BY
THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, BOSTON SAFE OR MBC. NO OBLIGATION OF THE COMPANY IS GUARANTEED
BY BOSTON SAFE OR MBC.
The principal executive offices of the Company are located at One Boston
Place, Boston, Massachusetts 02108-4402, telephone number (617) 722-7610.
RISK FACTORS
The purchase of the Series A Preferred Shares offered hereby is subject to
certain risks. See "Risk Factors" commencing on page 13. Among such risks are
the following:
. The Company is a recently organized corporation with a limited operating
history.
. The Company will be dependent in virtually every phase of its operations
on the diligence and skill of the officers and employees of Boston Safe
and its affiliates.
. Because of the relationship between the Company and Boston Safe,
conflicts of interest may arise between Boston Safe and its affiliates
and the Company.
5
<PAGE>
. As a subsidiary of Boston Safe, and consistent with regulations
applicable to banking entities generally, the Company is subject to the
risk that banking authorities will restrict the ability of the Company to
transfer assets or make distributions to stockholders.
. Because the rate at which dividends are required to be paid is fixed, a
significant decline in interest rates might adversely affect the
Company's ability to pay dividends on the Series A Preferred Shares.
. Risks associated with Mortgage Loans generally, and particularly the
geographic concentration of the Company's Mortgage Loan portfolio, could
affect the value of the Mortgage Loans held by the Company and the Series
A Preferred Shares.
. The Board of Directors may amend or revise (in certain circumstances
subject to the approval of a majority of the Independent Directors) the
policies of the Company set forth herein, including the Company's policy
regarding incurring indebtedness.
. Because REIT status will afford the Company certain tax advantages, the
Company is subject to risks associated with failing to maintain such
status and any change in law which affects such status.
THE OFFERING
For a more complete description of the terms of the Series A Preferred Shares
specified in the following summary, see "Description of Series A Preferred
Shares".
ISSUER............................ Mellon Preferred Capital Corporation, a
Massachusetts corporation engaged in
the business of acquiring, holding and
managing Mortgage Assets.
SECURITIES OFFERED................ 8,000,000 Series A Preferred Shares.
RANKING........................... With respect to the payment of
dividends and amounts upon liquidation,
the Series A Preferred Shares will rank
senior to the Company's Common Stock
and will rank on a parity with the
Company's Floating Rate Non-Cumulative
Preferred Stock, Series A2, par value
$0.01 per share, liquidation preference
$25.00 per share (the "Series A2
Preferred Shares"). Additional shares
of preferred stock, par value $0.01 per
share, liquidation preference $25.00
per share, of the Company (the
"Preferred Stock") ranking senior to or
on a parity with the Series A Preferred
Shares may not be issued without the
approval of a majority of the
Independent Directors (as defined
below).
USE OF PROCEEDS................... The net proceeds to the Company from
the Offering will be (i) used to pay
the expenses of the Offering and the
formation of the Company (currently
estimated by the Company to be
approximately $ in the aggregate)
and (ii) to the extent not necessary
therefor, distributed to Bridgewater.
See "Use of Proceeds".
6
<PAGE>
DIVIDENDS......................... Dividends on the Series A Preferred
Shares will accrue from the date of
original issue and are payable
quarterly on or about the last day of
March, June, September and December of
each year, commencing December 31,
1996, at the rate of % of the initial
liquidation preference per annum (an
amount equivalent to $ per share per
annum). Dividends on the Series A
Preferred Shares will not be
cumulative, and, if for any reason a
dividend on the Series A Preferred
Shares is not declared for a dividend
period, the Company will have no
obligation to pay a dividend for such
period, whether or not dividends on the
Series A Preferred Shares are declared
for any future dividend period. If,
however, full dividends have not been
paid or set aside for payment on the
Series A Preferred Shares in respect of
a dividend period, the Company may not
declare or pay dividends on the Common
Stock during such period. See
"Description of Series A Preferred
Shares--Dividends".
LIQUIDATION PREFERENCE............ The liquidation preference for each
Series A Preferred Share is $25.00,
plus an amount equal to the dividend
for the then-current quarterly dividend
period accrued to but excluding the
date of payment of such preference
(whether or not declared, but without
accumulation of dividends for prior
dividend periods). See "Description of
Series A Preferred Shares--Rights Upon
Liquidation".
REDEMPTION........................ The Series A Preferred Shares are not
redeemable prior to , 2001,
except upon the occurrence of a Tax
Event (as defined in "Description of
Series A Preferred Shares--
Redemption"). On and after ,
2001, the Series A Preferred Shares may
be redeemed for cash at the option of
the Company, in whole or in part, at a
redemption price of $25.00 per share,
plus an amount equal to the dividend
for the then-current quarterly dividend
period accrued to but excluding the
date of such redemption (whether or not
declared, but without accumulation of
dividends for prior dividend periods).
Upon the occurrence of a Tax Event, the
Company will have the right at any time
to redeem the Series A Preferred
Shares, in whole (but not in part), at
a redemption price of $25.00 per share,
plus an amount equal to the dividend
for the then-current quarterly dividend
period accrued to but excluding the
date of such redemption (whether or not
declared, but without accumulation of
dividends for prior dividend periods).
7
<PAGE>
The Series A Preferred Shares will not
be subject to any sinking fund or
mandatory redemption and will not be
convertible into any other securities
of the Company. Any redemption of the
Series A Preferred Shares will be
subject to the prior approval of the
Board of Governors of the Federal
Reserve System (the "Federal Reserve
Board") and the Federal Deposit
Insurance Corporation (the "FDIC"). See
"Description of Series A Preferred
Shares--Redemption".
VOTING RIGHTS..................... Except as described herein with respect
to certain voting rights in the
Company, holders of Series A Preferred
Shares will not have any voting rights.
In any matter in which the Series A
Preferred Shares may vote (as expressly
provided herein or as may be required
by law), each Series A Preferred Share
will be entitled to one vote. See
"Description of Series A Preferred
Shares--Voting Rights". Ownership of
more than 9.9% of any outstanding
series of Preferred Stock, including
the Series A Preferred Shares offered
hereby, is restricted in order to
preserve the Company's status as a REIT
for federal income tax purposes. See
"Description of Capital Stock--
Restrictions on Ownership and
Transfer".
TRADING........................... Application has been made to list the
Series A Preferred Shares on the New
York Stock Exchange under the symbol
" ".
RATINGS........................... It is expected that the Series A
Preferred Shares will be rated by
Moody's Investors Service, Inc. and
by Standard and Poor's Ratings Group. A
security rating is not a recommendation
to buy, sell or hold securities and may
be subject to revision or withdrawal at
any time by the assigning rating
organization.
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company,
Boston Safe and Bridgewater will engage in the transactions described under
"Certain Transactions Constituting the Formation--The Formation". These
transactions are designed (i) to transfer the ownership of the Initial
Portfolio (defined below) to the Company, (ii) to facilitate the Offering and
(iii) to enable the Company to qualify as a REIT for federal income tax
purposes commencing with its taxable year ending December 31, 1996.
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The following chart outlines the relationship between the Company, Boston
Safe and its affiliates relevant to the Offering following completion of the
Offering:
MBC
100% Ownership 100% Ownership
Mellon Bank, N.A. Boston Group
Holdings, Inc.
100% Ownership Subservicing 100% Ownership
Agreement
The Boston Company, Inc.
100% Ownership
Mellon Mortgage Company-- -- -- -- -- -- -- Boston Safe
100% Ownership Advisory
Agreement
Public Stockholders Bridgewater and
100% 100% Servicing
Series A Preferred Shares Common Stock and Agreement
Series A2 Preferred
Shares
The Company
MBC and Boston Safe are required by the Federal Reserve Board and the FDIC,
respectively, to maintain certain levels of capital for bank regulatory
purposes. Boston Safe has informed the Company that the Series A Preferred
Shares are expected to be treated as capital of both MBC and Boston Safe for
regulatory purposes. Boston Safe has indicated to the Company that such
treatment, together with the Company's ability to deduct, for income tax
purposes, the dividends payable on the Series A Preferred Shares as a result of
the Company's qualification as a REIT, will provide each of MBC and Boston Safe
with a more cost-effective means of obtaining capital for regulatory purposes
than if Boston Safe or MBC were to issue preferred stock itself.
Boston Safe will realize certain other benefits from the Offering and the
other transactions constituting the formation of the Company, including (i) the
receipt by Boston Safe (through Bridgewater, its wholly owned subsidiary) of
the net proceeds from the sale of the Series A Preferred Shares and (ii) the
receipt of advisory and servicing fees under the Advisory Agreement and the
Servicing Agreement. It is also expected that Bridgewater, Boston Safe's wholly
owned subsidiary, will receive dividends in respect of the Common Stock and
Series A2 Preferred Shares held by it. See "Certain Transactions Constituting
the Formation--Benefits to Boston Safe and Its Affiliates".
BUSINESS AND STRATEGY
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to stockholders.
On April 1, 1996, Bridgewater contributed to the Company a portfolio (the
"Initial Portfolio") of whole loans ("Mortgage Loans") generally secured by
first mortgages or deeds of trust or other similar security instruments
creating first liens on single-
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family (one- to four-unit), five- and six-unit and condominium residential
properties, including stock allocated to dwelling units in residential
cooperative housing corporations, located throughout the United States (the
"Mortgaged Properties"), which portfolio Boston Safe had contributed to
Bridgewater. The Company expects that all of the Mortgage Assets acquired by it
in the future will be acquired from Boston Safe or affiliates of Boston Safe.
The Company may also from time to time acquire mortgage securities that qualify
as real estate assets under Section 856(c)(6)(B) of the Code, that are rated by
at least one nationally recognized statistical rating organization and that
represent interests in or obligations backed by pools of mortgage loans
("Mortgage-Backed Securities"). Mortgage loans underlying the Mortgage-Backed
Securities will be secured by first mortgages or deeds of trust on Mortgaged
Properties and multifamily or commercial real estate properties located in the
United States.
The net proceeds of the Offering will be distributed to Bridgewater, as the
holder of all the issued and outstanding Common Stock of the Company. In
addition, simultaneously with the consummation of the Offering, 7,000,000
Series A2 Preferred Shares will be issued to Bridgewater, as the holder of all
the issued and outstanding Common Stock of the Company. See "Use of Proceeds".
On , 1996 (the "Reference Date"), the Mortgage Loans included in the
Initial Portfolio had an aggregate principal balance of approximately
$ . Boston Safe will enter into a servicing agreement with respect to
the Mortgage Loans (the "Servicing Agreement") pursuant to which it will
service the Mortgage Loans included in the Initial Portfolio and will be
entitled to receive fees in connection with the servicing of such Mortgage
Loans. Boston Safe in its role as servicer under the Servicing Agreement is
hereinafter referred to as the "Servicer". Boston Safe has indicated to the
Company that Mellon Mortgage Company, an indirect, wholly owned subsidiary of
MBC, will perform the actual servicing of the Mortgage Loans included in the
Initial Portfolio pursuant to a subservicing agreement with Boston Safe. See
"Business and Strategy--Servicing".
The Company and Boston Safe estimate that the fair value of the Initial
Portfolio was approximately $ as of the Reference Date. However, no
third-party valuations of the Mortgage Loans constituting the Initial Portfolio
were obtained for purposes of the Offering. See "Risk Factors--No Third-Party
Valuation of the Mortgage Loans; No Arm's-Length Negotiations with Affiliates".
The Company will enter into an advisory and custody agreement with Boston
Safe (the "Advisory Agreement") pursuant to which Boston Safe will administer
the day-to-day operations of the Company. Boston Safe in its role as advisor
under the terms of the Advisory Agreement is hereinafter referred to as the
"Advisor". The Advisor will be responsible for (i) monitoring the credit
quality of the Mortgage Assets held by the Company, (ii) advising the Company
with respect to the acquisition, management, financing and disposition of the
Company's Mortgage Assets and (iii) holding documents relating to the Mortgage
Assets as custodian on behalf of the Company. The Advisor may from time to time
subcontract all or a portion of its obligations under the Advisory Agreement to
one or more of its affiliates involved in the business of managing Mortgage
Assets. If no affiliate of the Advisor is engaged in the business of managing
Mortgage Assets, the Advisor may, with the approval of a majority of the Board
of Directors, as well as a majority of the Independent Directors, subcontract
all or a portion of its obligations under the Advisory Agreement to unrelated
third parties. The Advisor will not, in connection with the subcontracting of
any of its obligations under the Advisory Agreement, be discharged or relieved
in any respect from its obligations under the Advisory Agreement. The Advisor
and its personnel have substantial experience in mortgage finance and in the
administration of Mortgage Loans.
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The Advisory Agreement has an initial term of one year and will be renewed
for additional one-year periods if the Advisor and the Company agree. The
Advisory Agreement may be terminated by the Company at any time upon 90 days'
prior notice. As long as any Series A Preferred Shares remain outstanding, any
decision by the Company either to terminate or not to renew the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of Independent Directors. The Advisor will be entitled to receive
an annual advisory fee equal to $250,000. See "Management--The Advisor".
See "Certain Transactions Constituting the Formation--Benefits to Boston Safe
and its Affiliates" for information regarding the aggregate amounts payable to
Boston Safe and its affiliates in connection with the Offering and the
transactions to be entered into in connection with the Offering.
The Company will initially have a board of directors (the "Board of
Directors") composed of seven members, two of whom will be Independent
Directors. An "Independent Director" is a director who is not a current officer
or employee of the Company, MBC, Boston Safe or any affiliate of Boston Safe or
of any other person or persons that, in the aggregate, own more than 50% of the
outstanding Common Stock. Certain actions by the Company require the prior
approval of a majority of Independent Directors. So long as there are only two
Independent Directors, any action that requires the approval of a majority of
the Independent Directors must be approved by both Independent Directors.
Pursuant to the Certificate of Vote establishing the Series A Preferred Shares,
the Independent Directors are required to take into account the interests of
the holders of the Preferred Stock, including the Series A Preferred Shares,
and the Common Stock in assessing the benefit to the Company of any proposed
action requiring their consent. The Company currently has officers and no
employees and does not anticipate that it will require additional officers or
any employees. See "Management".
The Company may from time to time purchase additional Mortgage Loans out of
proceeds received in connection with the repayment or disposition of Mortgage
Loans or the issuance of additional shares of Common Stock and Preferred Stock.
Except for the Series A2 Preferred Shares and the Series A3 Preferred Shares
described in the following sentence, additional shares of Preferred Stock
ranking senior to or on a parity with the Series A Preferred Shares may not be
issued without the approval of a majority of the Independent Directors. It is
currently anticipated that the Company will issue up to 40,000 shares of
Preferred Stock, having an aggregate liquidation preference of up to $1,000,000
(the "Series A3 Preferred Shares") to approximately 125 officers and employees
of MBC and its affiliates. Such issuance is intended to ensure that the Company
complies with certain requirements for qualification as a REIT, even in the
event the Series A Preferred Shares are redeemed. It is also currently
anticipated that the Company will issue additional shares of Preferred Stock if
such issuance would provide Boston Safe and MBC with the most cost-effective
means of raising capital for bank regulatory purposes at the time. To the
extent any Series A2 Preferred Shares are outstanding at the time of any such
issuance, the proceeds of such issuance would be used to redeem such Series A2
Preferred Shares. See "Certain Transactions Constituting the Formation--
Benefits to Boston Safe and its Affiliates".
The Company currently anticipates that all of the Mortgage Loans that may be
acquired by it in the future will be purchased from Boston Safe and affiliates
of Boston Safe. The Company expects that Mortgage Loans acquired by the Company
from Boston Safe and its affiliates will have been originated based on
underwriting standards generally applied (at the time of origination) by Boston
Safe or the affiliate of Boston Safe which originated the Mortgage Loans being
acquired. None of the Mortgage Loans included in the Initial Portfolio was, as
of the Reference Date or had been, at any time since the date of its
acquisition by the Company, (a) Classified, (b) in Nonaccrual Status or (c)
renegotiated due to financial deterioration of the borrower, and $ million
in aggregate principal balance of
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the Mortgage Loans included in the Initial Portfolio was, as of the Reference
Date, more than 60 days past due. The Company's current policy prohibits the
future acquisition of Mortgage Loans or interests in Mortgage Loans (other than
an interest resulting from the acquisition of Mortgage-Backed Securities) which
(i) are or were, at any time during the prior 12 months, (a) Classified, (b) in
Nonaccrual Status or (c) renegotiated due to financial deterioration of the
borrower or (ii) were, more than once during the prior 12 months, more than 60
days past due. The Company anticipates that the Mortgage Loans acquired by the
Company in the future will be serviced by Boston Safe.
The Company acquired the majority of the Mortgage Loans included in the
Initial Portfolio on April 1, 1996 and has been in operation since that date.
The Company acquired additional Mortgage Loans included in the Initial
Portfolio on November 1, 1996. As of the Reference Date, it had approximately
$ in assets, $ in stockholders' equity and no indebtedness.
Immediately after (i) issuance by the Company of the Series A Preferred Shares
in the Offering (and assuming that there are $ in aggregate offering and
organizational expenses), (ii) issuance by the Company of the Series A2
Preferred Shares to Bridgewater and (iii) distribution of the net proceeds of
the issuance of the Series A Preferred Shares to Bridgewater, the Company will
have approximately $ in Mortgage Assets, $200,000,000 of liquidation
preference attributable to the Series A Preferred Shares, $175,000,000 of
liquidation preference attributable to the Series A2 Preferred Shares, $1 of
par value attributable to the Common Stock, approximately $383,534,000 of
additional paid-in capital and approximately $19,275,000 of retained earnings.
See "Capitalization".
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ending December 31, 1996. As a
REIT, the Company generally will not be subject to federal income tax on net
income and capital gains that it distributes to holders of its Common Stock and
Preferred Stock, including the Series A Preferred Shares.
A REIT is subject to a number of organizational and operational requirements,
including a requirement that it currently distribute to its stockholders at
least 95% of its "REIT taxable income". Notwithstanding qualification for
taxation as a REIT, the Company may be subject to federal, state and/or local
tax. See "Risk Factors--Tax Risks" and "Federal Income Tax Considerations".
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RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Series A Preferred Shares in the Offering.
LIMITED OPERATING HISTORY
The Company was incorporated on March 26, 1996 and acquired the Initial
Portfolio on April 1, 1996.
DEPENDENCE UPON BOSTON SAFE AS ADVISOR AND SERVICER
The Company is dependent for the selection, structuring and monitoring of
its Mortgage Assets on the diligence and skill of its officers (all of whom
are also officers or employees of Boston Safe or its affiliates) and the
officers and employees of Boston Safe, as Advisor. See "Management". In
addition, the Company will be dependent on the expertise of Boston Safe, as
Servicer, for the servicing of its Mortgage Loans. The Advisor may subcontract
all or a portion of its obligations under the Advisory Agreement, and the
Servicer may subcontract all or a portion of its obligations under its
Servicing Agreement, to one or more of its affiliates and, under certain
circumstances, non-affiliates involved in the business of managing Mortgage
Assets. In the event that the Advisor or the Servicer subcontracts its
obligations in such a manner, the Company will be dependent on the
subcontractor to provide any such services. See "Management--The Advisor" and
"Business and Strategy--Servicing".
RELATIONSHIP WITH BOSTON SAFE AND ITS AFFILIATES; CONFLICTS OF INTEREST
Boston Safe and its affiliates are involved in virtually every aspect of the
Company's existence. Boston Safe is the indirect holder of all of the Common
Stock of the Company (through Bridgewater) and administers the day-to-day
activities of the Company in its role as Advisor under the Advisory Agreement.
Boston Safe also services the Company's Mortgage Loans in its role as Servicer
under the Servicing Agreement. In addition, other than the Independent
Directors, all of the officers and directors of the Company are also officers
and directors of Boston Safe or its affiliates. As the holder of all of the
outstanding Common Stock of the Company, Bridgewater has the right to elect
all directors of the Company, including the Independent Directors.
Boston Safe and its affiliates may have interests that are not identical to
those of the Company. Consequently, conflicts of interest may arise with
respect to transactions, including, without limitation, the Company's
acquisition of Mortgage Loans from Boston Safe or its affiliates; servicing of
Mortgage Loans, particularly with respect to Mortgage Loans that become
Classified or placed in Nonaccrual Status or which have been, more than once
during the preceding twelve months, more than 60 days past due in the payment
of principal and interest; future dispositions of Mortgage Loans to MBC or any
of its non-bank subsidiaries; and the modification of the Advisory Agreement
or the Servicing Agreement.
It is the intention of the Company, MBC and Boston Safe that any agreements
and transactions between the Company, on the one hand, and MBC, Boston Safe or
their affiliates, on the other hand, are fair to all parties and consistent
with market terms, including the prices paid and received for Mortgage Loans
on their acquisition or disposition by the Company or in connection with the
servicing of the Mortgage Loans. The requirement in the Certificate of Vote
establishing the Series A Preferred Shares that certain actions of the Company
be approved by a majority of the Independent Directors is also intended to
ensure fair dealings between the Company and Boston Safe, MBC and their
affiliates. However, there can be no assurance that such agreements or
transactions will be on terms as
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favorable to the Company as could have been obtained from unaffiliated third
parties. See "Business and Strategy--Management Policies and Programs--
Conflict of Interest Policies" and "Management".
BANK REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of Boston Safe, and consistent with
regulations applicable to banking entities generally, federal and state
banking authorities will have the right to examine the Company and its
activities. Under certain circumstances, including any determination that
Boston Safe's relationship to the Company results in an unsafe and unsound
banking practice, such banking authorities will have the authority to issue an
order which restricts the ability of the Company to transfer assets, to make
distributions to its stockholders (including dividends to the holders of
Series A Preferred Shares) or to redeem shares of Preferred Stock. Such
actions could potentially result in the Company failing to qualify as a REIT.
See "--Tax Risks".
INTEREST RATE RISK
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. The Company anticipates that its Mortgage Loans
will bear interest at adjustable rates. If there is a decline in interest
rates (as measured by the indices upon which the interest rates of the
Mortgage Loans are based), then the Company will experience a decrease in
income available to be distributed to its stockholders. In such an interest
rate environment, the Company may experience an increase in prepayments on its
Mortgage Loans and may find it more difficult to purchase additional Mortgage
Loans bearing interest rates sufficient to support payment of the dividends on
the Series A Preferred Shares. In addition, certain Mortgage Loan products
which the Company will hold could allow borrowers in such an interest rate
environment to convert an adjustable rate Mortgage Loan into a fixed rate
Mortgage Loan, thus "locking in" a low fixed interest rate. Because the rate
at which dividends are required to be paid on the Series A Preferred Shares is
fixed, there can be no assurance that an interest rate environment in which
there is a significant decline in interest rates would not adversely affect
the Company's ability to pay dividends on the Series A Preferred Shares.
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by, among
other things, a decline in real estate values. In the event the Mortgage
Assets held by the Company become nonperforming, the Company may not have
funds sufficient to pay dividends on the Series A Preferred Shares. Factors
that could affect the value of the Mortgage Assets held by the Company include
the following:
GEOGRAPHIC CONCENTRATION
, , , and Mortgage Loans, representing approximately
%, %, %, % and %, respectively, of the aggregate Principal Balance
(as defined below) of the Mortgage Loans as of the Reference Date (as defined
below), are secured by Mortgaged Properties located in Massachusetts, New
York, California, Connecticut and New Jersey, respectively. The economies of
such states may be adversely affected to a greater degree than those of other
areas of the country by certain developments affecting industries concentrated
in such states. In recent periods, several regions of the United States
(including California and parts of the northeastern United States) have
experienced significant downturns in the market value of real estate. In
addition, Mortgaged Properties located in California may be more susceptible
to certain types of special hazards not covered by insurance (such as
earthquakes) than properties located in other parts of the country. The
Company will not maintain any special hazard insurance policies which could
mitigate any damages caused by natural disasters (such as earthquakes) which
may occur in such regions. In the event of any such natural disaster, the
Company's ability to pay dividends on the Series A Preferred Shares could be
adversely affected. For
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additional information regarding the geographic distribution of the Mortgage
Loans, see "Business and Strategy--Description of the Initial Portfolio--
Geographic Concentration".
NO CREDIT ENHANCEMENT OR SPECIAL HAZARD INSURANCE
The Company generally does not intend to obtain credit enhancements such as
mortgagor bankruptcy insurance or to obtain special hazard insurance for its
Mortgage Loans, other than standard hazard insurance, which will in each case
only relate to individual Mortgage Loans. Accordingly, during the time it
holds such Mortgage Loans for which third-party insurance is not obtained, the
Company will be subject to risks of borrower defaults and bankruptcies and
special hazard losses that are not covered by standard hazard insurance (such
as those occurring from earthquakes). In addition, in the event of a default
on any Mortgage Loan held by the Company resulting from declining property
values or worsening economic conditions, among other factors, the Company
would bear the risk of loss of principal to the extent of any deficiency
between (i) the value of the related Mortgaged Property, plus any payments
from an insurer, and (ii) the amount owing on the Mortgage Loan.
REAL ESTATE MARKET CONDITIONS
The results of the Company's operations will be affected by various factors,
many of which are beyond the control of the Company such as, among other
things, the level of interest income generated by the Company's Mortgage
Assets, the market value of such Mortgage Assets and the supply of and demand
for such Mortgage Assets. No assurance can be given that the values of the
properties securing the Mortgage Loans included in the Company's Initial
Portfolio have remained or will remain at the levels existing on the dates of
origination of such Mortgage Loans.
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS
Even assuming that the Mortgaged Properties underlying the Mortgage Loans
held by the Company provide adequate security for such Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a Mortgaged Property
securing a Mortgage Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Mortgaged Property. In the event
of a default by a mortgagor, these restrictions, among other things, may
impede the ability of the Company to foreclose on or sell the Mortgaged
Property or to obtain proceeds sufficient to repay all amounts due on the
related Mortgage Loan. In addition, the Servicer will be entitled to deduct
from collections received all expenses reasonably incurred in attempting to
recover amounts due and not yet repaid on liquidated Mortgage Loans, including
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses, thereby reducing amounts available to the Company.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the servicing and collection of the Mortgage Loans. Depending on
the provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Company to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Company to damages and
administrative sanctions.
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Repurchase Obligations of Boston Safe
No person other than Boston Safe is obligated with respect to the
representations and warranties made by it in the Confirmation of Mortgage
Transfer Agreement (as defined below) respecting the Mortgage Loans included
in the Initial Portfolio and the remedies for any breach thereof that are
granted to the Company. Therefore, prospective investors should consider the
possibility that Boston Safe will not have sufficient assets with which to
satisfy its repurchase obligations in the event that a substantial amount of
Mortgage Loans are required to be repurchased due to breaches of
representations and warranties.
High Balance Mortgage Loans
As of the Reference Date, the average original principal balance of the
Mortgage Loans was approximately $ , and approximately % of the Mortgage
Loans (by Principal Balance as of the Reference Date) had original principal
balances in excess of $ . The loss and delinquency experience on such
higher balance loans may have a disproportionate effect on the Initial
Portfolio as a whole.
Cooperative Loans
Mortgage Loans, representing approximately % (by Principal Balance
as of the Reference Date) of the Initial Portfolio were made in connection
with a purchase or refinancing of cooperative apartments ("Cooperative
Loans"). Such loans are not secured by liens on real estate. The "owner" of a
cooperative apartment does not own the real estate constituting the apartment,
but owns shares of stock in a corporation which holds title to the building in
which the apartment is located, and by virtue of owning such stock is entitled
to a proprietary lease or occupancy agreement to occupy the specific
apartment. A Cooperative Loan is a loan secured by a lien on the shares and an
assignment of the lease or occupancy agreement.
There are certain risks that arise as a result of the cooperative form of
ownership which differentiate Cooperative Loans from other types of Mortgage
Loans. For example, the power of the board of directors of most cooperative
housing corporations to reject a proposed purchaser of a unit owner's shares
(and prevent the sale of an apartment) for any reason, or for no reason,
significantly reduces the universe of potential purchasers in the event of a
foreclosure. Moreover, in buildings where the "sponsor" (i.e., the owner of
the unsold shares in the corporation) holds a significant number of unsold
interests in apartments, cooperative apartment owners run a special risk that
the sponsor may go into default on its proprietary leases or occupancy
agreements, and thereby cause a default under the underlying Mortgage Loan to
the cooperative housing corporation which is secured by a mortgage on the
building. In such event, the unit owners may be forced to make up any
shortfall in income to the cooperative housing corporation resulting from the
sponsor's default or risk losing their apartments in a foreclosure proceeding
brought by the holder of the mortgage on the building. Not only would the
value attributable to the right to occupy a particular apartment be adversely
affected by such an occurrence, but the foreclosure of a mortgage on the
building in which the apartment is located could result in a total loss of the
shareholder's equity in the building (and a corresponding loss of the lender's
security for its Cooperative Loan) and right to occupy the apartment.
Certain cooperative housing corporations permit purchasers to obtain
mortgage financing on only a portion, or on none, Of a cooperative's purchase
price. Mortgage Loans, representing approximately % (by Principal
Balance as of the Reference Date) of the Initial Portfolio, were made despite
such restrictions and have not been recognized by the related cooperative
housing corporation (such loans, "Unrecognized Cooperative Loans"). As
described above, there are certain risks attendant to foreclosure on
Cooperative Loans. In the case of the Unrecognized Cooperative
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Loans, such risks are increased. A cooperative housing corporation may declare
the borrower in default under the related lease or occupancy agreement because
of the unrecognized financing and terminate such lease or occupancy agreement.
The cooperative housing corporation may actively oppose the efforts of the
Company to realize upon such collateral. In the event of a default under an
Unrecognized Cooperative Loan and resulting foreclosure, the related
collateral may have a value substantially lower than the unpaid principal
balance of the related Mortgage Loan, or may have no value.
In addition, Unrecognized Cooperative Loans, representing approximately
% (by Principal Balance as of the Reference Date) of the Initial Portfolio,
are by their terms subordinate to recognized Mortgage Loans of the same
borrower and with respect to the same Mortgaged Property, which Mortgage Loans
are included in the Initial Portfolio.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors will establish the investment policies and operating
policies and strategies of the Company, certain of which are described in this
Prospectus. These policies may be amended or revised from time to time at the
discretion of the Board of Directors (in certain circumstances subject to the
approval of a majority of the Independent Directors) without a vote of the
Company's stockholders, including holders of the Series A Preferred Shares.
The ultimate effect of any change in the policies and strategies set forth in
this Prospectus on a holder of Series A Preferred Shares may be positive or
negative. See "Business and Strategy--Management Policies and Programs".
TAX RISKS
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company intends to operate so as to qualify as a REIT under the Code.
Although the Company believes that it will be owned and organized and will
operate in such a manner, and Sullivan & Cromwell will render certain
opinions, described under "Federal Income Tax Considerations" below, regarding
the Company's qualification as a REIT, no assurance can be given that the
Company will be able to operate in such a manner so as to qualify as a REIT or
to remain so qualified. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretations. The determination of various
factual matters and circumstances not entirely within the Company's control
and not addressed by the opinion of Sullivan & Cromwell may affect the
Company's ability to qualify as a REIT. Although the Company is not aware of
any proposal in Congress to amend the tax laws in a manner that would
materially and adversely affect the Company's ability to operate as a REIT, no
assurance can be given that new legislation or new regulations, administrative
interpretations, or court decisions will not significantly change the tax laws
in the future with respect to the qualification as a REIT or the federal
income tax consequences of such qualification.
The Company is relying on the opinion of Sullivan & Cromwell, special tax
counsel to the Company, regarding various issues affecting the Company's
ability to qualify, and retain qualification, as a REIT. Such legal opinions
are not binding on the Internal Revenue Service ("IRS").
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. As a result, the amount available for distribution to
the Company's stockholders would be reduced for the year or years involved. In
addition, unless entitled to relief under certain statutory provisions, the
Company would also be disqualified from treatment as a REIT for the four
taxable years
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following the year during which qualification was lost. A failure of the
Company to qualify as a REIT would not by itself give the Company the right to
redeem the Series A Preferred Shares. See "Description of Series A Preferred
Shares--Redemption".
Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred
Stock to revoke the REIT election. As long as any Series A Preferred Shares
are outstanding, any such determination by the Company may not be made without
the approval of a majority of the Independent Directors. The tax law prohibits
the Company from electing treatment as a REIT for the four taxable years
following the year of such revocation. See "Federal Income Tax
Considerations".
REIT REQUIREMENTS WITH RESPECT TO STOCKHOLDER DISTRIBUTIONS
To obtain favorable tax treatment as a REIT qualifying under the Code, the
Company generally will be required each year to distribute as dividends to its
stockholders at least 95% of its "REIT taxable income" (excluding capital
gains). Failure to comply with this requirement would result in the Company's
income being subject to tax at regular corporate rates. In addition, the
Company will be subject to a 4% nondeductible excise tax on the amount, if
any, by which certain distributions considered as paid by it with respect to
any calendar year are less than the sum of 85% of its ordinary income for the
calendar year, 95% of its capital gains net income for the calendar year and
any undistributed taxable income from prior periods.
REDEMPTION UPON OCCURRENCE OF A TAX EVENT
At any time following the occurrence of a Tax Event (as defined under
"Description of Series A Preferred Shares--Redemption"), even if such Tax
Event occurs prior to , 2001, the Company will have the right to redeem
the Series A Preferred Shares in whole but not in part. See "Description of
Series A Preferred Shares--Redemption". Upon the occurrence of a Tax Event,
should the Company not redeem the Series A Preferred Shares, the Company's
ability to pay dividends on the Series A Preferred Shares may be adversely
affected.
RISK ASSOCIATED WITH LEVERAGE
Although the Company does not currently intend to incur any indebtedness in
connection with the acquisition and holding of Mortgage Loans, the Company may
do so at any time (although indebtedness in excess of 20% of the total assets
of the Company may not be incurred without the approval of a majority of the
Independent Directors). To the extent the Company were to change its policy
with respect to the incurrence of indebtedness, the Company would be subject
to risks associated with leverage, including, without limitation, changes in
interest rates, prepayment risk and risks of various hedging strategies.
NO THIRD-PARTY VALUATIONS OF THE MORTGAGE LOANS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and Boston Safe estimate that the fair value of the Initial
Portfolio was approximately equal to $ as of the Reference Date.
However, no third-party valuations of the Mortgage Loans constituting the
Initial Portfolio were obtained for purposes of the Offering, and there can be
no assurance that the fair value of the Initial Portfolio does not differ from
such estimate.
In addition, it is not anticipated that third-party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Loans even in circumstances where an affiliate of the Company is selling the
Mortgage Loans to or purchasing the Mortgage Loans from the Company.
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<PAGE>
Accordingly, although the Company and Boston Safe intend that future
acquisitions or dispositions of Mortgage Loans be on a fair value basis, there
can be no assurance that the consideration to be paid (or received) by the
Company to (or from) Boston Safe or its affiliates in connection with future
acquisitions or dispositions of Mortgage Loans will not differ from the fair
value of such Mortgage Loans.
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES
Prior to the Offering, there has been no public market for the Series A
Preferred Shares, and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be
resold at or above the initial public offering price.
THE COMPANY
The Company is a Massachusetts corporation incorporated on March 26, 1996 as
TBC Loan Co., Inc., which is engaged in the business of acquiring, holding and
managing Mortgage Assets that will generate net income for distribution to
stockholders. The Company will provide Boston Safe and MBC with a means of
raising capital for bank regulatory purposes. The Series A Preferred Shares
are expected to be treated as capital for both MBC and Boston Safe for
regulatory purposes. The issuance of the Series A Preferred Shares by the
Company is a more cost-effective means of raising capital for Boston Safe and
MBC than if Boston Safe or MBC were to issue preferred stock itself, because
of the Company's ability to deduct for income tax purposes the dividends
payable on the Series A Preferred Shares as a result of the Company's
qualification as a REIT. The Company is a direct, wholly owned subsidiary of
Bridgewater, an intermediate holding company the only asset of which is the
Common Stock of the Company. Bridgewater is a direct, wholly owned subsidiary
of Boston Safe.
The Company expects that all of its Mortgage Assets will be acquired as
Mortgage Loans from Boston Safe or affiliates of Boston Safe. Boston Safe will
administer the day-to-day operations of the Company in its role as Advisor
under the Advisory Agreement. The Company will elect to be subject to tax as a
REIT under the Code and will generally not be subject to federal income tax to
the extent that it distributes its earnings to its stockholders and maintains
its qualification as a REIT.
Boston Safe is a Massachusetts trust company headquartered in Boston,
Massachusetts which is engaged in the business of originating "jumbo"
residential mortgage loans and providing fiduciary and investment management
services to personal and institutional clients. Boston Safe owns all the
capital stock of Bridgewater. Boston Safe is a wholly owned subsidiary of The
Boston Company, Inc. ("The Boston Company"). The Boston Company is a wholly
owned subsidiary of Boston Group Holdings, Inc., which in turn is a wholly
owned subsidiary of MBC.
MBC is a multibank holding company incorporated under the laws of
Pennsylvania and headquartered in Pittsburgh, Pennsylvania. Its principal,
wholly owned subsidiaries are Mellon Bank, N.A. (including its wholly owned
subsidiary, The Dreyfus Corporation) and The Boston Company (including its
wholly owned subsidiary, Boston Safe). As of June 30, 1996, MBC on a
consolidated basis had total assets of $42.8 billion, loans net of the reserve
for credit losses of $26.9 billion and total shareholders' equity of $3.8
billion and for the six months then ended had net income of $358 million. MBC
has indicated to the Company that, so long as any Series A Preferred Shares
are outstanding, it intends to maintain direct or indirect ownership of at
least 80% of the outstanding Common Stock of the Company.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, BOSTON SAFE OR MBC. NO OBLIGATION OF THE COMPANY IS GUARANTEED
BY BOSTON SAFE OR MBC.
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For a further description of the operations of the Company, see "Business
and Strategy", "Management", "Risk Factors" and "Federal Income Tax
Considerations".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series A Preferred
Shares offered hereby are expected to be $195,000,000. The net proceeds of the
Offering will be distributed to Bridgewater, as the holder of all the issued
and outstanding Common Stock of the Company. In addition, simultaneously with
the consummation of the Offering, 7,000,000 Series A2 Preferred Shares will be
issued to Bridgewater, as the holder of all the issued and outstanding Common
Stock of the Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
31, 1996 and as adjusted to reflect the consummation of the Offering and the
transactions described in "Certain Transactions Constituting the Formation"
and the use of the net proceeds from the Offering as described under "Use of
Proceeds".
<TABLE>
<CAPTION>
JULY 31, 1996
-----------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
DEBT
Total long-term debt................................... $ -- $ --
-------- --------
STOCKHOLDERS' EQUITY
Series A Preferred Stock, par value $0.01 per share,
none authorized, none issued and outstanding, actual;
and 8,000,000 shares authorized, 8,000,000 shares
issued and outstanding, as adjusted................... -- 195,000
Series A2 Preferred Stock, par value $0.01 per share,
none authorized, none issued and outstanding, actual;
and 7,000,000 shares authorized, 7,000,000 shares
issued and outstanding, as adjusted................... -- 70
Common shareholder's equity:
Common Stock, par value $0.01 per share, 1,000 shares
authorized; 100 shares issued and outstanding,
actual; 1,000 shares authorized, 100 shares issued
and outstanding, as adjusted....................... 0 0
Additional paid-in capital............................ 748,534 553,464
Retained earnings..................................... 19,275 19,275
-------- --------
Total common stockholders' equity.................... 767,809 572,739
-------- --------
Total stockholders' equity.......................... 767,809 767,809
-------- --------
TOTAL CAPITALIZATION................................... $767,809 $767,809
======== ========
</TABLE>
- --------
(1) As of July 31, 1996, the Company's authorized capital consisted of 1,000
shares of Common Stock, par value $0.01 per share, 100 of which were
issued and outstanding, and 1,000 shares of Preferred Stock, par value
$0.01 per share, none of which were issued and outstanding. Prior to
consummation of the Offering, the Articles of Organization of the Company
will be amended to increase the authorized capital of the Company to 1,000
shares of Common Stock and 25,000,000 shares of Preferred Stock. In the
Offering, 8,000,000 Series A Preferred Shares will be issued to the public
and, simultaneously, 7,000,000 Series A2 Preferred Shares will be issued
to Bridgewater.
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and manage
Mortgage Loans that will generate net income for distribution to stockholders.
On April 1, 1996, the Company acquired the
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<PAGE>
Initial Portfolio of Mortgage Loans from Bridgewater, which had, immediately
prior thereto, acquired the Initial Portfolio from Boston Safe. See "Certain
Transactions Constituting the Formation--The Formation".
In order to preserve its status as a REIT under the Code, substantially all
of the assets of the Company will consist of Mortgage Loans and other
qualified REIT real estate assets of the type set forth in Section
856(c)(6)(B) of the Code. See "Federal Income Tax Considerations".
DIVIDENDS
The Company currently expects that the aggregate amount of dividends payable
with respect to its outstanding shares of capital stock will equal
approximately 100% of the Company's "REIT taxable income" (excluding capital
gains). In order to remain qualified as a REIT, the Company must distribute
annually at least 95% of its "REIT taxable income" (excluding capital gains)
to its stockholders. The Company anticipates that none of the dividends on the
Series A Preferred Shares or the Series A2 Preferred Shares and none or no
material portion of the dividends on the Common Stock will constitute non-
taxable returns of capital.
Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. Dividends on the Series A Preferred Shares
will not be cumulative, and, if for any reason a dividend on the Series A
Preferred Shares is not declared for a dividend period, the Company will have
no obligation to pay a dividend for such period, whether or not dividends on
the Series A Preferred Shares are declared for any future dividend period.
Assuming (i) the Mortgage Loans included in the Initial Portfolio are held for
the 12-month period following completion of the Offering, (ii) principal
repayments are reinvested in additional Mortgage Loans with characteristics
similar to those of the Mortgage Loans included in the Initial Portfolio and
(iii) interest rates remain constant during such 12-month period, the Company
anticipates that the Initial Portfolio will generate interest income of
approximately $ million, after payment of servicing and advisory fees,
during such 12-month period. The aggregate annual dividend payment on the
Series A Preferred Shares is $ million. The Series A2 Preferred Shares will
bear dividends at a floating rate, adjusted quarterly, equal to % above the
average weekly yield on U.S. Treasury securities adjusted to a constant
maturity of one year. Based upon the yield of U.S. Treasury securities as of
, 1996, the Series A2 Preferred Shares would have borne dividends at the
rate of % per annum. Assuming that the Series A2 Preferred Shares bear
dividends at such rate for the 12-month period following the consummation of
the Offering and that no Series A2 Preferred Shares are redeemed in that
period, the aggregate annual dividend amount for the Series A2 Preferred
Shares would be $ . Based on the foregoing, the Company anticipates that
$ million would be available for payment of dividends on the Common Stock
held by Bridgewater.
There are several limitations which restrict the Company's ability to pay
dividends on the Common Stock (none of which should adversely affect either
the ability of the Company to pay dividends in respect of the Series A Shares
or the ability of the Company to maintain its status as a REIT). First, under
the Company's current dividend policy, the Company may not make any
distribution in respect of the Common Stock with respect to any year to the
extent that, after taking into account any such proposed distribution, total
cash or property distributions on the Company's outstanding shares of
Preferred Stock and Common Stock with respect to that year would exceed 105%
of the Company's "REIT taxable income" (excluding capital gains) for that year
plus net capital gains of the Company for that year. In connection with the
foregoing, in the event that the total distributions in any year are less than
the limitation described above, the Company may designate one or more
distributions in the next following year to apply toward the prior year's
limitation on distributions as long as (i) such distributions are made on or
prior to the date, including all permitted extensions, on which the Company is
required to file its federal income tax return for such prior year, and (ii)
the limitation on distributions for the prior year is not exceeded as a result
of the additional distributions which are or have been designated in the next
following year to apply to such prior year's limitation. Any such
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<PAGE>
distributions so designated and applied toward a previous year in accordance
with the provisions of the preceding sentence shall not otherwise be counted
toward the limitation on distributions in the year in which such distributions
are made. This policy regarding the limitations on payment of dividends in
respect of Common Stock may not be modified without the approval of a majority
of the Independent Directors. Second, no cash or property dividends may be
paid on the Common Stock unless all accrued and unpaid dividends on the Series
A Preferred Shares and the Series Aq2 Preferred Shares, and all other capital
stock of the Company ranking prior to the Common Stock, have been paid.
Under certain circumstances, including any determination that Boston Safe's
relationship to the Company results in an unsafe and unsound banking practice,
federal and state banking authorities will have the authority to issue an
order which restricts the ability of the Company to make dividend payments to
its stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Loans as Mortgage Loans held by the Company are repaid.
The acquisition of such additional Mortgage Loans will be funded with the
proceeds of principal repayments on its portfolio of Mortgage Loans. The
Company does not anticipate that it will have any other material capital
expenditures. The Company believes that cash generated from the payment of
interest and principal on its Mortgage Loan portfolio will provide sufficient
funds to meet both operating requirements and the payment of dividends by the
Company in accordance with the requirements for qualification as a REIT for
the foreseeable future.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
MORTGAGE LOANS
Each Mortgage Loan that the Company has acquired or will acquire is or will
be evidenced by a promissory note generally secured by a first mortgage or
deed of trust or other similar security instrument creating a first lien on a
single-family (one- to four-unit), five or six-unit or condominium residential
property, including stock allocated to a dwelling unit in a residential
cooperative housing corporation, located in the United States (each, a
"Mortgaged Property"). The Company currently expects that substantially all of
the Mortgage Loans to be acquired by it will be adjustable rate mortgages.
Each Mortgage Loan secured by a single-family (one- to four-unit)
residential property that the Company has acquired or will acquire generally
is or will be "non-conforming". Conventional conforming Mortgage Loans must
comply with the requirements for inclusion in a loan guarantee program
sponsored by either the Federal Home Loan Mortgage Corporation (the "FHLMC")
or the Federal National Mortgage Association (the "FNMA"). These requirements
include limits on debt-to-income ratios, restrictions on income considered for
qualification and caps on the maximum principal balance allowed on the
mortgage loan (currently ranging from a low of $207,000 for one-unit
residential loans wih respect to properties located in most of the United
States to a general maximum of $397,800 for four-unit residential loans).
Nonconforming mortgage loans are mortgage loans that do not qualify in one or
more respects for purchase by FHLMC or FNMA. The Company expects that a
majority of the Mortgage Loans it acquires (including the Mortgage Loans in
the Initial Portfolio) will be nonconforming because they have original
principal balances which exceed the requirements for FHLMC or FNMA programs or
generally because they vary in certain other respects from the requirements of
such programs. A substantial portion of the Company's nonconforming Mortgage
Loans are expected to meet the requirements for sale in the secondary mortgage
market.
MORTGAGE-BACKED SECURITIES
The Company may from time to time acquire Mortgage-Backed Securities
representing interests in or obligations backed by pools of mortgage loans.
The mortgage loans underlying the Mortgage-
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<PAGE>
Backed Securities will be secured by single-family residential, multifamily or
commercial real estate properties located throughout the United States. It is
not currently anticipated that the Company will hold a significant amount of
Mortgage-Backed Securities. The Company intends to acquire Mortgage-Backed
Securities only if they are investment grade. The Company does not intend to
acquire any interest-only, principal-only or high-risk Mortgage-Backed
Securities. The Company will not be precluded from investing in Mortgage-
Backed Securities where Boston Safe or one of its affiliates is the sponsor or
issuer.
ACQUISITION OF INITIAL PORTFOLIO
On April 1, 1996, Bridgewater contributed to the Company the Initial
Portfolio, which consisted of approximately $ in Mortgage Loans, which
Initial Portfolio Boston Safe had contributed to Bridgewater immediately prior
to such contribution. The Company and Boston Safe will enter into an agreement
with respect to the Mortgage Loans in the Initial Portfolio (the "Mortgage
Transfer Agreement") simultaneously with the consummation of the Offering.
Each Mortgage Loan in the Initial Portfolio will be identified in a schedule
appearing as an exhibit to the Mortgage Transfer Agreement (the "Mortgage Loan
Schedule"). The Mortgage Loan Schedule will specify, among other things, with
respect to each Mortgage Loan: the interest rate formula applicable thereto,
the original principal amount and the unpaid principal balance thereof, the
monthly payment, maturity date, the mortgagor, the type of the Mortgaged
Property and the current interest rate.
In addition, Boston Safe has delivered or will deliver or cause to be
delivered to the Company the mortgage note with respect to each Mortgage Loan
(together with all amendments and modifications thereto) endorsed in blank,
the original or certified copy of the mortgage (together with all amendments
and modifications thereto) with evidence of recording indicated thereon, if
available. Boston Safe has executed an instrument assigning the mortgages to
the Company and has covenanted to the Company to deliver an original or
certified copy of an assignment of the mortgage in recordable form upon
request of the Company in certain circumstances. Although the Company will
have the right to record the assignments of mortgage at any time, it does not
currently anticipate doing so. The Company believes that maintaining record
title of the Mortgage Loans in the name of the Servicer will facilitate the
servicing of the Mortgage Loans. Once the assignments of mortgage are
recorded, the Company's lien on the mortgaged properties will date back to the
date of the original mortgages and rank ahead of any intervening mortgage
granted by the borrowers. However, if Boston Safe, in violation of the
Advisory Agreement and the Servicing Agreement, sells any of the Company's
Mortgage Loans to a third party who records its assignment of mortgage before
the Company records its assignment of mortgage with respect to such Mortgage
Loan, the Company may lose its ownership interest in such Mortgage Loan. See
"--Servicing" and "--Description of Initial Portfolio--General".
In the Confirmation of Mortgage Transfer Agreement, Boston Safe will make
certain representations and warranties with respect to each Mortgage Loan in
the Initial Portfolio for the benefit of the Company and will be obligated to
repurchase any Mortgage Loan transferred by it to the Company as to which
there is a material breach of any such representation or warranty. The
repurchase price for any such Mortgage Loan will be its outstanding principal
amount plus accrued and unpaid interest on the date of repurchase. Such
repurchase will constitute the sole remedy available to the Company for a
breach of such representations or warranties.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect
to the acquisition and disposition of assets, use of capital and leverage,
credit risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain
23
<PAGE>
circumstances subject to the approval of a majority of the Independent
Directors) without a vote of the Company's stockholders, including holders of
the Series A Preferred Shares. See also "--Dividends."
ASSET ACQUISITION AND DISPOSITION POLICIES
Subsequent to the acquisition of the Initial Portfolio, the Company
anticipates that it will from time to time purchase additional Mortgage Loans
from Boston Safe or its affiliates, although Mortgage Loans may be acquired
from unaffiliated third parties, out of proceeds received in connection with
the repayment or disposition of Mortgage Loans or the issuance of additional
shares of Common Stock and Preferred Stock. The Company anticipates that
additional Mortgage Loans purchased from Boston Safe or its affiliates will be
purchased on terms that are substantially identical to those that could be
obtained by the Company if such additional Mortgage Loans were purchased from
third parties unaffiliated with the Company. No arrangements or procedures are
currently in place regarding the purchase of additional Mortgage Loans from
unaffiliated third parties. The Company currently anticipates that such
Mortgage Loans will be of the types described in "Business and Strategy--
Description of Initial Portfolio", although if Boston Safe or its affiliates
develop additional Mortgage Loan products, the Company may purchase such
additional types of Mortgage Loans. In addition, the Company may from time to
time acquire Mortgage-Backed Securities representing interests in or
obligations backed by pools of mortgage loans which will be secured by
Mortgaged Properties and multifamily or commercial real estate properties
located throughout the United States. The Company currently anticipates that
it will not acquire the right to service any Mortgage Loan it acquires in the
future and that Boston Safe or an affiliate of Boston Safe will act as
servicer of any such additional Mortgage Loans. The Company anticipates that
any servicing arrangement that it enters into in the future with Boston Safe
will contain fees and other terms that would be substantially identical to
those that would be contained in servicing arrangements entered into with
third parties unaffiliated with the Company.
None of the Mortgage Loans included in the Initial Portfolio was, as of the
Reference Date or had been, at any time since, the date of its acquisition by
the Company, (a) Classified, (b) in Nonaccrual Status or (c) renegotiated due
to financial deterioration of the borrower, and $ million in aggregate
principal balance of Mortgage Loans included in the Initial Portfolio was, as
of the Reference Date, more than 60 days past due. The Company's current
policy prohibits the future acquisition of Mortgage Loans or interests in
Mortgage Loans (other than an interest resulting from the acquisition of
Mortgage-Backed Securities) which (i) are or have been, at any time during the
12 months preceding the date of acquisition, (a) Classified, (b) in Nonaccrual
Status or (c) renegotiated due to financial deterioration of the borrower or
(ii) have been, more than once during the 12 months preceding the date of
acquisition, more than 60 days past due.
The Company may choose, at any time subsequent to its acquisition of any
Mortgage Loan, to require the Servicer to dispose of any Mortgage Loan, for
any reason, including as a result of such Mortgage Loan becoming Classified or
being placed in Nonaccrual Status or having been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal or
interest. Boston Safe has indicated to the Company that it will not purchase
any Mortgage Loan of the Company that the Company chooses to dispose of for
the foregoing reasons; accordingly, the Company currently anticipates that any
such Mortgage Loan would be sold at its then current fair value by the Company
only to MBC, a non-bank subsidiary of MBC or an unrelated third party.
CAPITAL AND LEVERAGE POLICIES
To the extent that the Board of Directors determines that additional funding
is required, the Company may raise such funds through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Code requiring the distribution by a REIT of at least 95% of
its "REIT taxable income" and taking into account taxes that would be imposed
on undistributed taxable income), or a combination of these methods.
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<PAGE>
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the
Company might incur. The Company may not, however, without the approval of a
majority of the Independent Directors, incur debt for borrowed money other
than debt not in excess of 20% of the total assets of the Company. Any such
debt incurred may include intercompany advances made by Boston Safe to the
Company.
The Company may also issue additional series of Preferred Stock and,
simultaneously with the Offering, will issue to Bridgewater 7,000,000 Series
A2 Preferred Shares, which rank on a parity with the Series A Preferred
Shares. It is currently anticipated that the Company will issue up to 40,000
shares of Preferred Stock, having an aggregate liquidation preference of up to
$1,000,000 (the "Series A3 Preferred Shares") to approximately 125 officers
and employees of MBC and its affiliates. Such issuance is intended to ensure
that the Company complies with certain requirements for qualification as a
REIT, even in the event the Series A Preferred Shares are redeemed. Except for
the Senior A2 Preferred Shares and the Series A3 Preferred Shares, the Company
may not issue additional shares of Preferred Stock ranking senior to or on a
parity with the Series A Preferred Shares without the consent of a majority of
the Independent Directors. The Company currently does not anticipate issuing
additional shares of Preferred Stock unless (i) it uses the proceeds thereof
to redeem outstanding shares of Preferred Stock or (ii) in the event that all
the outstanding shares of Preferred Stock eligible for redemption have been
redeemed, the Company simultaneously issues additional Common Stock and the
proceeds to be received from the issuance of the Common Stock are
approximately equal to the proceeds to be received in connection with the
issuance of the additional Preferred Stock and the Company's expenses
(including underwriting discounts) in connection with the issuance of such
additional shares of Preferred Stock. It is also currently anticipated that
the Company will issue additional shares of Preferred Stock if such issuance
would provide Boston Safe and MBC with the most cost-effective means of
raising capital for bank regulatory purposes at the time. See "Certain
Transactions Constituting the Formation--Benefits to Boston Safe and its
Affiliates".
CREDIT RISK MANAGEMENT POLICIES
The Company expects that each Mortgage Loan acquired from Boston Safe or one
of its affiliates in the future will be a whole loan, will generally represent
a first lien and will be originated by Boston Safe, one of its affiliates or a
correspondent thereof in the ordinary course of its real estate lending
activities based on the underwriting standards generally applied (at the time
of origination) by Boston Safe or the affiliate of Boston Safe which
originated the Mortgage Loan or purchased the Mortgage Loan from the
correspondent. See "--Description of Initial Portfolio--Underwriting
Standards". The Company expects that all Mortgage Loans held by the Company
will be serviced pursuant to the Servicing Agreement, which requires servicing
in conformity with accepted secondary market standards, with any servicing
guidelines promulgated by the Company and with FNMA and FHLMC guidelines and
procedures. The Company may also choose, at any time during the servicing
process, to require the servicer of such Mortgage Loans to dispose of any
Mortgage Loan which does not meet the credit standards that were applied to
such Mortgage Loan at the time of its initial acquisition by the Company.
CONFLICT OF INTEREST POLICIES
Because of the nature of the Company's relationship with Boston Safe and its
affiliates, it is likely that conflicts of interest will arise with respect to
certain transactions, including, without limitation, the Company's acquisition
of Mortgage Loans from, or disposition of Mortgage Loans to, Boston Safe or
its affiliates and the modification of the Advisory Agreement or the Servicing
Agreement. It is the Company's policy that the terms of any financial dealings
with Boston Safe and its affiliates will be consistent with those available
from third parties in the mortgage lending industry. In addition, neither
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<PAGE>
the Advisory Agreement nor the Servicing Agreement may be modified or
terminated without approval of a majority of the Independent Directors.
Conflicts of interest between the Company and Boston Safe and its affiliates
may also arise in connection with making decisions that bear upon the credit
arrangements that Boston Safe or one of its affiliates may have with a
mortgagor under a Mortgage Loan. Conflicts could also arise in connection with
actions taken by Boston Safe as a controlling person of the Company. It is the
intention of the Company, Boston Safe and MBC that any agreements and
transactions between the Company, on the one hand, and Boston Safe and its
affiliates, on the other hand, including, without limitation, the Mortgage
Transfer Agreement and the Servicing Agreement, are fair to all parties and
are consistent with market terms for such types of transactions. The Servicing
Agreement provides that (i) foreclosures and dispositions of the Mortgage
Loans are to be performed with a view to maximizing the recovery by the
Company as owner of the Mortgage Loans and (ii) the Servicer shall service the
Mortgage Loans solely with a view toward the interests of the Company, and
without regard to the interests of Boston Safe or its affiliates. The
requirement in the Certificate of Vote establishing the Series A Preferred
Shares that certain actions of the Company be approved by a majority of the
Independent Directors is also intended to ensure fair dealings between the
Company and Boston Safe, MBC and their affiliates. However, there can be no
assurance that any such arrangement or transaction will be on terms as
favorable to the Company as would have been obtained from unaffiliated third
parties.
There are no provisions in the Company's Articles of Organization limiting
any officer, director, security holder or affiliate of the Company from having
any direct or indirect pecuniary interest in any Mortgage Asset to be acquired
or disposed of by the Company or in any transaction in which the Company has
an interest or from engaging in acquiring, holding and managing Mortgage
Assets. As described herein, it is expected that Boston Safe and its
affiliates will have direct interests in transactions with the Company
(including without limitation the sale of Mortgage Assets to the Company);
however, it is not currently anticipated that any of the officers or directors
of the Company will have any interests in such Mortgage Assets.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in loans or other investments, (iv) offer
securities in exchange for property or (v) make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares or other shares of its capital stock in the open market or
otherwise; provided, however, that the Company will not redeem or repurchase
any shares of its Common Stock for so long as any Series A Preferred Shares
are outstanding without approval of a majority of the Independent Directors.
Boston Safe has no present intention of causing the Company to repurchase any
shares of its capital stock, and any such action would be taken only in
conformity with applicable federal and state laws and regulations and the
requirements for qualifying as a REIT.
The Company intends to publish and distribute to stockholders, in accordance
with New York Stock Exchange rules, annual reports containing financial
statements prepared in accordance with generally accepted accounting
principles and certified by the Company's independent public accountants. The
Certificate of Vote establishing the Series A Preferred Shares provides that
the Company shall maintain its status as a reporting company under the
Exchange Act for so long as any of the Series A Preferred Shares are
outstanding.
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The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or
other considerations may cause the Board of Directors, subject to approval by
a majority of independent Directors, to determine that it is in the best
interests of the Company and its stockholders to revoke its REIT status.
DESCRIPTION OF INITIAL PORTFOLIO
Information with respect to the Initial Portfolio is presented as of ,
1996 (the "Reference Date"). The composition of the Initial Portfolio at the
date of issuance of the Series A Preferred Shares may differ in certain
respects from the Initial Portfolio as of the Reference Date as described in
this Prospectus.
References herein to percentages of Mortgage Loans included in the Initial
Portfolio refer in each case to the percentage of such aggregate principal
balance of the Mortgage Loans as of the Reference Date, based on the
outstanding principal balances of such Mortgage Loans as of such date (the
"Principal Balances"). References to percentages of Mortgaged Properties refer
in each case to the percentages of aggregate Principal Balances of the related
Mortgage Loans.
The detailed information set forth in this Prospectus with respect to
Mortgage Loans applies only to the Initial Portfolio. The Company's portfolio
of Mortgage Assets in the future may or may not have the characteristics
described below.
GENERAL
The Initial Portfolio consists of approximately adjustable rate, fully
amortizing, monthly payment Mortgage Loans. None of the Mortgage Loans is
subject to negative amortization. The Mortgage Loans had an aggregate
Principal Balance as of the Reference Date of approximately $[750,000,000].
Each Mortgage Loan had a Principal Balance of not less than $ or more than
$ . The Mortgage Loans had an average Principal Balance of approximately
$ .
All Mortgage Loans were originated between and . The weighted
average number of months since origination of the Mortgage Loans included in
the Initial Portfolio was approximately months as of the Reference Date.
All but of the Mortgage Loans had original terms to maturity of 30 years;
of the Mortgage Loans had original terms to maturity of 35 years; of the
Mortgage Loans had original terms to maturity of 15 years; and of the
Mortgage Loans had an original term to maturity of 25 years. The latest
maturity date of any of the Mortgage Loans is , 20 .
of the Mortgage Loans, representing approximately % (by Principal Balance
as of the Reference Date) of the Initial Portfolio were originated by Boston
Safe in the ordinary course of its real estate lending activities. of the
Mortgage Loans, representing approximately % (by Principal Balance as of the
Reference Date) of the Initial Portfolio were originated by correspondents of
Boston Safe in the ordinary course of their real estate lending activities and
acquired by Boston Safe. The Mortgage Loans in the Initial Portfolio were
originated by Boston Safe or its correspondents generally in accordance with
the underwriting policies customarily employed by Boston Safe during the
period in which such Mortgage Loans were originated.
None of the Mortgage Loans included in the Initial Portfolio was, as of the
Reference Date or had been, at any time since the date of its acquisition by
the Company, (a) Classified, (b) in Nonaccrual Status or (c) renegotiated due
to financial deterioration of the borrower, and $ million in aggregate
Principal Balance of Mortgage Loans included in the Initial Portfolio was, as
of the Reference Date, more than 60 days past due.
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Approximately % of the Mortgage Loans are secured by second homes; and
with respect to % of the Mortgage Loans, the mortgagor represented in the
documents submitted by such mortgagor for the closing of the related Mortgage
Loan that the Mortgaged Property initially was owner-occupied. Mortgage
Loans, representing approximately % (by Principal Balance as of the
Reference Date) of the Initial Portfolio, are secured by more than one
Mortgaged Property.
The following types of Mortgage Loans, each of which is more fully described
below, are included in the Initial Portfolio: One-Year ARM, Six-Month LIBOR
ARM, 3/1 ARM, 5/1 ARM and 3/3 ARM. The following table sets forth certain
information with respect to each type of Mortgage Loan contained in the
Initial Portfolio:
TYPES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF MORTGAGE LOANS
NUMBER OF AGGREGATE OUTSTANDING BY AGGREGATE OUTSTANDING
TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---- -------------- --------------------- ----------------------------
<S> <C> <C> <C>
One-Year ARM............
Six-Month LIBOR ARM.....
3/1 ARM.................
5/1 ARM.................
3/3 ARM.................
---------- ---------- ----------
Total.................
========== ========== ==========
</TABLE>
All of the Mortgage Loans bear interest at adjustable rates. The interest
rate on an "adjustable rate mortgage" or "ARM" is typically tied to an index
(such as the interest rate on United States Treasury Bills) and is adjustable
periodically. ARMs are typically subject to lifetime interest rate caps and
periodic interest rate caps. The interest rates of the Mortgage Loans included
in the Initial Portfolio ranged from % per annum to % per annum as of the
Reference Date. The weighted average interest rate of the Mortgage Loans
included in the Initial Portfolio was approximately % per annum as of the
Reference Date. The following table contains certain additional data with
respect to the interest rates of the Mortgage Loans included in the Initial
Portfolio as of the Reference Date:
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF MORTGAGE LOANS
RANGE OF NUMBER OF AGGREGATE OUTSTANDING BY AGGREGATE OUTSTANDING
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- --------------------- ----------------------------
<S> <C> <C> <C>
to ............
to ............
to ............
to ............
to ............
---------- ---------- ----------
Total.................
========== ========== ==========
</TABLE>
"Gross Margin", with respect to a Mortgage Loan, means the applicable fixed
percentage which, when added to the applicable index, calculates to the
current interest rate paid by the borrower of such Mortgage Loan (without
taking into account any interest rate caps or minimum interest rates). As of
the Reference Date, the weighted average Gross Margin of the Mortgage Loans
included in the Initial Portfolio was approximately %.
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The following table sets forth certain additional data with respect to the
Gross Margins of the Mortgage Loans included in the Initial Portfolio:
GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF MORTGAGE LOANS
RANGE OF NUMBER OF AGGREGATE OUTSTANDING BY AGGREGATE OUTSTANDING
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- --------------------- ----------------------------
<S> <C> <C> <C>
to ............
to ............
-------- -------- --------
Total.................
======== ======== ========
</TABLE>
DESCRIPTION OF TYPES OF MORTGAGE LOANS
The interest rate of each type of ARM product included in the Initial
Portfolio adjusts at the times (each, a "Rate Adjustment Date") and in the
manner described below subject to lifetime interest rate caps, to minimum
interest rates and, in the case of most ARMs in the Initial Portfolio, to
maximum annual interest rate increases or decreases, each as specified in the
mortgage note relating to the ARM. Information set forth below regarding
interest rate caps and minimum interest rates applies to the Initial Portfolio
only. Mortgage Loans purchased by the Company after consummation of the
Offering may be subject to different interest rate caps and minimum interest
rates.
Each ARM bears interest at its initial interest rate until its first Rate
Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on most of the adjustable rate Mortgage Loans
will be adjusted to an amount that will fully amortize the then-outstanding
principal balance of such Mortgage Loan over its remaining term to stated
maturity and that will be sufficient to pay interest at the adjusted interest
rate. Notwithstanding the foregoing, One-Year ARM Mortgage Loans,
representing approximately % (by Principal Balance as of the Reference Date)
of the Initial Portfolio, provide for monthly payments of interest but no
payments of principal for up to the first ten years after origination of such
Mortgage Loan. Following such period, the monthly payment on each such
Mortgage Loan will be increased to an amount sufficient to fully amortize the
outstanding principal balance of such Mortgage Loan over its remaining term
and pay interest at the related mortgage rate. All of the Mortgage Loans
included in the Initial Portfolio allow the mortgagor to prepay at any time
some or all of the outstanding principal balance of the Mortgage Loan without
fee or penalty.
One-Year ARM. The interest rate with respect to each One-Year ARM is fixed
at an initial rate for the first twelve monthly payments and adjusts annually
thereafter on the date specified in the related mortgage note to a rate equal
to the then-current Treasury Index (defined below) plus the Gross Margin set
forth in such mortgage note, subject to a maximum annual interest rate
increase or decrease of 2.00%, a lifetime interest rate cap equal to the
initial interest rate with respect to such Mortgage Loan plus % to % as
specified in the related mortgage note and to a minimum interest rate no less
than the Gross Margin. The sum of the Treasury Index and the Gross Margin is
generally rounded to the nearest 0.125%; however, certain mortgage notes
provide for the sum to be rounded upwards to the nearest 0.125%. The "Treasury
Index" with respect to each One-Year ARM is the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of one year as published
by the Federal Reserve Board in Statistical Release H.15(519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank
or by any U.S. Government department or agency and made available to the
Advisor. Should the Treasury Index not be published or become otherwise
unavailable, the Advisor will select a comparable alternative index over which
it has no control and which is readily available.
Included within One-Year ARMs are Mortgage Loans, representing
approximately % (by Principal Balance as of the Reference Date) of the
Initial Portfolio, having an index based on the
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<PAGE>
monthly (instead of weekly) average yield on U.S. Treasury securities and
which do not round to the nearest 0.125%.
Six-Month LIBOR ARM. The interest rate with respect to each Six-Month LIBOR
ARM is fixed at an initial rate for the first twelve monthly payments and
adjusts annually thereafter on the date specified in the related mortgage note
to a rate equal to the then-current LIBOR Index (defined below) plus the Gross
Margin set forth in such mortgage note, subject to a maximum annual interest
rate increase or decrease of 2.00%, a lifetime interest rate cap equal to the
initial interest rate with respect to such Mortgage Loan plus % to % as
specified in the related mortgage note and to a minimum interest rate no less
than the Gross Margin. The sum of the LIBOR Index and the Gross Margin is
generally rounded to the nearest 0.125%; however, certain mortgage notes
provide for the sum to be rounded upwards to the nearest 0.125%. The "LIBOR
Index" with respect to each Six-Month LIBOR ARM is the Six Month London
Interbank Offered Rate (LIBOR) reported in the Tuesday edition of The Wall
Street Journal (Eastern Edition) in its general guide to Money Rates as the
average of interbank offered rates for dollar deposits in the London market
based on quotations at five major banks. Should the LIBOR Index not be
published or become otherwise unavailable, the Advisor will select a
comparable alternative index over which it has no control and which is readily
available.
Three-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each three-year fixed rate loan with automatic
conversion to a One-Year ARM (a "3/1 ARM") is fixed at an initial rate for the
first 36 monthly payments and adjusts annually thereafter as if the Mortgage
Loan were a One-Year ARM.
Five-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each five-year fixed rate loan with automatic
conversion to a One-Year ARM (a "5/1 ARM") is fixed at an initial rate for the
first 60 monthly payments and adjusts annually thereafter as if the Mortgage
Loan were a One-Year ARM.
Three-Year Fixed Rate Loan with Automatic Conversion to Three-Year ARM. The
interest rate with respect to each three-year fixed rate loan with automatic
conversion to an ARM (a "3/3 ARM") is fixed at an initial rate for the first
36 monthly payments and adjusts thereafter as if the Mortgage Loan were a One-
Year ARM, except that a Rate Adjustment Date occurs only in every third year.
MODIFICATION OF MORTGAGE LOAN TYPE
Boston Safe generally permits borrowers on its ARM products to change the
index and other features of their mortgage loan into those of another ARM
product offered by Boston Safe, assuming certain criteria are met. The eight
Mortgage Loans included in the Initial Portfolio that are not One-Year ARMs
were originated as One-Year ARMs and were modified into their current type.
Certain ARM products into which a borrower would be permitted to convert
permit the borrower to convert into a fixed-rate mortgage loan product. The
Company proposes to continue this mortgage loan modification program.
Accordingly, notwithstanding the types of the Mortgage Loans included in the
Initial Portfolio as described above, such Mortgage Loans may, in the future,
be modified into another type of mortgage loan product, including a fixed-rate
mortgage loan product.
UNDERWRITING STANDARDS
Boston Safe has represented to the Company that all of the Mortgage Loans
included in the Initial Portfolio were originated generally in accordance with
the underwriting policies customarily employed by Boston Safe or one of its
predecessors in interest at the time at which the Mortgage Loan was
originated.
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<PAGE>
The underwriting process is intended to assess both the prospective
borrower's credit standing and ability to repay, and the value and adequacy of
the mortgaged property as collateral. In underwriting a mortgage loan, Boston
Safe relies primarily on the borrower's ability to repay the loan, determined
by analyzing the borrower's cash flow, liquidity and overall financial
condition and the value of the mortgaged property as a measure of the extent
of its recovery in the event of a default. In determining the adequacy of the
property as collateral for a loan, appraisals are generally obtained from
qualified outside appraisers approved by Boston Safe. The qualifications of
appraisers are generally reviewed at least annually.
Boston Safe's appraisal requirements typically exceed FNMA/FHLMC guidelines.
Multiple appraisals may be required depending upon the loan amount and the
location of the mortgaged property. The appraiser generally inspects the
interior and exterior of the property and prepares a report that includes a
market data analysis based on recent sales of comparable homes and, in certain
cases, a cost analysis based on the current cost of constructing a similar
home. This report is generally reviewed by a representative of Boston Safe,
who makes a final determination regarding the appraised value of the home.
Each prospective borrower submits an application package that generally
includes the applicant's federal income tax returns for at least the last two
years (self-employed individuals are generally required to submit their
personal and business tax returns for the past three years) and information
with respect to the applicant's bank and brokerage accounts, assets,
liabilities, income, credit history and employment history. To establish the
applicant's ability to make timely payments, Boston Safe generally obtains a
credit report on each borrower and verifies the income, current employment and
liquid assets of the applicant. Boston Safe will generally obtain a
verification of mortgage and current mortgage statement for mortgage loans not
reported on the credit report. Information relative to adverse credit and
legal actions typically must be explained in writing by the applicant and must
be acceptable to Boston Safe. The origination process generally also requires
that adequate title insurance, standard fire and hazard insurance and, where
necessary, flood insurance be obtained and maintained.
Once all applicable employment, credit and property information is received,
a determination is made as to whether the prospective borrower has (i)
sufficient income available to meet both housing and total debt obligations
and (ii) sufficient post-loan liquidity. Boston Safe generally requires that
the applicant's total housing related expenses and other current obligations
not exceed 38% of the applicant's stable income. However, a high ratio of
expenses to income will not disqualify an applicant if other factors
indicating the applicant's ability to make the mortgage payments are present.
The amount of the loan is limited by Boston Safe to an applicable loan-to-
value ratio, which is equal to the original principal balance of the mortgage
loan divided by (i) in the case of a mortgage loan to refinance an existing
mortgage loan, the appraised value of the mortgaged property determined at the
time of application as reviewed by a representative of Boston Safe, or (ii) in
the case of a mortgage loan to purchase a residence, the lesser of the
appraised value as reviewed by a representative of Boston Safe or the sales
price of the residence. As described under "Business and Strategy--Description
of Initial Portfolio--Additional Collateral" above, Boston Safe may accept
Additional Collateral in conjunction with real estate collateral to lower the
loan-to-value ratio to an acceptable level.
GEOGRAPHIC CONCENTRATION
, , , and Mortgage Loans, representing approximately
%, %, %, % and %, respectively, of the aggregate Principal Balance
of the Mortgage Loans as of the Reference Date, are secured by Mortgaged
Properties located in Massachusetts, New York, California, Connecticut and New
Jersey, respectively. The
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<PAGE>
economies of such states may be adversely affected to a greater degree than
those of other areas of the country by certain developments affecting
industries concentrated in such states. In recent periods, several regions of
the United States (including California and parts of the northeastern United
States) have experienced significant downturns in the market value of real
estate. In addition, Mortgaged Properties located in California may be more
susceptible to certain types of special hazards not covered by insurance (such
as earthquakes) than properties located in other parts of the country. The
Company will not maintain any special hazard insurance policies which could
mitigate any damages caused by natural disasters (such as earthquakes) which
may occur in such regions. In the event of any such natural disaster, the
Company's ability to pay dividends on the Series A Preferred Shares could be
adversely affected. See "Risk Factors--Geographic Concentration". No more than
approximately % of the Mortgage Loans were secured by Mortgaged Properties
located in any one zip code area.
INSURANCE
Pursuant to its terms, each Mortgage Loan, other than a Cooperative Loan or
a loan secured by a condominium unit, is required to be covered by a standard
hazard insurance policy in an amount equal to the lower of the original
principal loan amount or the replacement value of the improvements on the
Mortgaged Property. Generally, a cooperative housing corporation or
condominium association is responsible for maintaining hazard insurance
covering the entire building. None of the Mortgage Loans is required to be
covered by primary mortgage insurance. The Company will not maintain any
special hazard insurance policies. Standard hazard insurance required to be
maintained with respect to Mortgage Loans held by the Company does not protect
the Company against losses occurring from earthquakes and other natural
disasters. Consequently, in the event of an earthquake or other natural
disaster, the Company's ability to pay dividends on the Series A Preferred
Shares could be adversely affected as the Company will not maintain special
hazard insurance to protect against such losses.
TRANSFERS
Upon transfer of the Mortgaged Property underlying a Mortgage Loan included
in the Initial Portfolio, the mortgage note generally will not preclude
assumption of the related Mortgage Loan by the proposed transferee if the
proposed transferee satisfies certain criteria with respect to its ability to
repay the Mortgage Loan.
ADDITIONAL COLLATERAL
Mortgage Loans, representing approximately % (by Principal Balance as
of the Reference Date) of the Initial Portfolio, are secured by, in addition
to real estate or shares of stock in a cooperative housing corporation,
additional collateral ("Additional Collateral") generally consisting of
marketable securities.
Boston Safe requires that borrowers pledge Additional Collateral to secure a
Mortgage Loan to the extent that the loan-to-value ratio of such Mortgage Loan
would otherwise exceed applicable underwriting guidelines. Additional
Collateral may include publicly traded stocks, corporate and municipal bonds,
government securities, commercial paper, bank deposits, trust accounts and
mutual funds. The loan-to-value ratio of a Mortgage Loan secured in part by
Additional Collateral may, with respect to the real property securing such
loan, be greater than 100%.
The market value of Additional Collateral required to be pledged depends on
the nature of the Additional Collateral. All Additional Collateral is valued
on a daily basis; if the market value of such collateral with respect to any
Mortgage Loan declines below specified levels, the related borrower is
required to pledge sufficient Additional Collateral to meet such levels; it is
generally an event of default under the related Mortgage Loan for a borrower
to fail to pledge such Additional Collateral. Boston
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<PAGE>
Safe will generally release its lien on some or all of the Additional
Collateral securing a Mortgage Loan if the borrower meets certain requirements
and the loan-to-value ratio has been reduced due to (i) an increase in the
appraised value of the real property securing such Mortgage Loan or (ii)
prepayment by the borrower of a portion of the loan balance. After a specified
period of time has elapsed following origination of a Mortgage Loan, Boston
Safe may, at its option, liquidate all or part of the related Additional
Collateral in order to reduce the outstanding loan balance to a level within
its loan-to-value guidelines.
The security interests in all Additional Collateral pledged to secure the
Mortgage Loans will be assigned to the Company. Boston Safe will continue to
hold such Additional Collateral as custodian on behalf of the Company.
Investors should consider that, due to changes in market conditions,
Additional Collateral pledged to secure a Mortgage Loan may not be readily
marketable at the time that the related borrower defaults on such Mortgage
Loan and foreclosure proceedings are commenced.
Because Additional Collateral is generally required to be pledged to secure
any Mortgage Loan that would otherwise have a loan-to-value ratio above 80%,
none of the Mortgage Loans is covered by primary mortgage insurance policies.
COOPERATIVE LOANS
Mortgage Loans, representing approximately % of the Mortgage Loans
(by Principal Balance as of the Reference Date) of the Initial Portfolio, are
Cooperative Loans. Such loans were originated primarily in the states of New
York, Massachusetts, California and New Jersey. Cooperative Loans are not
secured by liens on real estate. The "owner" of a cooperative apartment does
not own the real estate constituting the apartment, but owns shares of stock
in a corporation which holds title to the building in which the apartment is
located, and by virtue of owning such stock is entitled to a proprietary lease
or occupancy agreement to occupy the specific apartment. A Cooperative Loan is
a loan secured by a lien on the shares and an assignment of the lease or
occupancy agreement. If the borrower defaults on a Cooperative Loan, the
lender's remedies are similar to the remedies which apply to a foreclosure of
a leasehold mortgage or deed of trust, in that the lender can foreclose the
loan and assume ownership of the shares and of the borrower's rights as lessee
under the related proprietary lease or occupancy agreement. Typically, the
lender and the cooperative housing corporation enter into a recognition
agreement that establishes the rights and obligations of both parties in the
event of a default by the borrower on its obligations under the lease or
occupancy agreement.
Mortgage Loans, representing approximately % of the Mortgage Loans (by
Principal Balance as of the Reference Date) are Unrecognized Cooperative
Loans. In the event of a default under an Unrecognized Cooperative Loan and
resulting foreclosure, the value of the related collateral may be
substantially less than the unpaid principal balance of the related Mortgage
Loan.
In addition, Unrecognized Cooperative Loans, representing approximately
% (by Principal Balance as of the Reference Date) of the Initial Portfolio,
are by their terms subordinate to recognized Mortgage Loans of the same
borrower and with respect to the same Mortgaged Property, which Mortgage Loans
are included in the Initial Portfolio.
Please refer to "Risk Factors--Risks Associated with Mortgage Loans
Generally--Legal Considerations--Cooperative Loans" for additional information
regarding the risks relating to Cooperative Loans.
SERVICING
The Mortgage Loans included in the Initial Portfolio have been transferred
to the Company by Boston Safe on a servicing retained basis. Boston Safe will
service such loans pursuant to the terms
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<PAGE>
of the Servicing Agreement. Boston Safe in its role as servicer under the
terms of the Servicing Agreement is herein referred to as the "Servicer". The
Servicer will receive an annual servicing fee with respect to the Mortgage
Loans serviced for the Company equal to 0.25% of the outstanding principal
balance of the Mortgage Loans.
The Servicing Agreement requires the Servicer to service the Company's
Mortgage Loans in a manner generally consistent with accepted secondary market
practices, with any servicing guidelines promulgated by the Company and with
FNMA and FHLMC guidelines and procedures. The Servicer will collect and remit
principal and interest payments, administer mortgage escrow accounts, submit
and pursue insurance claims and initiate and supervise foreclosure proceedings
on the Mortgage Loans. The Servicer will also provide accounting and reporting
services required by the Company for the Mortgage Loans. The Servicing
Agreement requires the Servicer to follow such collection procedures as are
customary in the industry, including contacting delinquent borrowers and
supervising foreclosures and property dispositions in the event of unremedied
defaults in accordance with servicing guidelines promulgated by the Company.
The Servicer may, in its discretion, arrange with a defaulting borrower a
schedule for the liquidation of delinquencies. The Servicer may also be
directed by the Company, at any time during the servicing process, to dispose
of any Mortgage Loan which does not meet the credit standards that were
applied to such Mortgage Loan at the time of its initial acquisition by the
Company.
The Servicer may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreement to one or more of its
affiliates. If none of its affiliates is engaged in the business of servicing
Mortgage Assets, the Servicer may subcontract all or a portion of its
obligations under the Servicing Agreement to an unrelated third party subject
to approval of a majority of the Independent Directors. The Servicer has
indicated to the Company that it will enter into subservicing arrangements
with Mellon Mortgage Company, an indirect wholly-owned subsidiary of MBC,
pursuant to which Mellon Mortgage Company will perform the actual servicing of
the Mortgage Loans held by the Company. At June 30, 1996, Mellon Mortgage
Company serviced residential mortgage loans having an aggregate principal
balance of approximately $ billion. The Servicer will not, in connection
with subcontracting any of its obligations under the Servicing Agreement, be
discharged or relieved in any respect from its obligation to the Company to
perform its obligations under the Servicing Agreement.
The Servicing Agreement requires the Servicer to pay all expenses related to
the performance of its duties under the Servicing Agreement. The Servicer will
be entitled to reimbursement by the Company for expenses incurred by it in
connection with the liquidation of defaulted Mortgage Loans and in connection
with the restoration of Mortgaged Property. If claims are not made or paid
under applicable insurance policies or if coverage thereunder has ceased, the
Company will suffer a loss to the extent that the proceeds from liquidation of
the Mortgaged Property, after reimbursement of the Servicer's expenses in the
sale, are less than the principal balance of the related mortgage loan. The
Servicer will be responsible to the Company for any loss suffered as a result
of the Servicer's failure to make and pursue timely claims or as a result of
actions taken or omissions made by the Servicer which cause the policies to be
cancelled by the insurer.
In connection with any foreclosure proceedings that the Servicer may
institute, the Servicer may exercise any power of sale contained in any
mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise
acquire title to a Mortgaged Property underlying a Mortgage Loan by operation
of law or otherwise in accordance with the terms of the Servicing Agreement.
The Company may terminate the Servicing Agreement upon the happening of one
or more events specified in the Servicing Agreement. Such events relate
generally to the Servicer's proper and timely performance of its duties and
obligations under the Servicing Agreement. In addition, the Company may also
terminate the Servicing Agreement without cause upon 30 days' notice and
payment of a
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<PAGE>
termination fee that is competitive with that which is generally payable in
the industry. The termination fee will be equal to 2% of the aggregate
outstanding principal amount of the loans then serviced under the Servicing
Agreement. As long as any Series A Preferred Shares remain outstanding, the
Company may not terminate, or elect not to renew, the Servicing Agreement
without the approval of a majority of the Independent Directors.
When any Mortgaged Property is conveyed by a mortgagor, the Servicer
generally will enforce any "due-on-sale" clause contained in the Mortgage
Loan, to the extent permitted under applicable law and governmental
regulations. The terms of a particular Mortgage Loan or applicable law,
however, may provide that the exercise of the "due-on-sale" clause is
prohibited under certain circumstances related to the security underlying the
Mortgage Loan and the buyer's ability to fulfill the obligations under the
related mortgage note. Upon any assumption of a Mortgage Loan by a transferee,
a fee equal to a specified percentage of the outstanding principal balance of
the Mortgage Loan is typically required, which sum will be retained by the
Servicer as additional servicing compensation.
OFFICERS
The Company has five executive officers, each of whom is described further
below under "Management", and other officers. The Company does not
anticipate that it will require any additional officers or any employees
because it has retained the Advisor to perform certain functions pursuant to
the Advisory Agreement described below under "Management--The Advisor". It is
currently anticipated that all of the officers of the Company will also be
officers or employees of MBC, Boston Safe or their affiliates. The Company
will maintain corporate records and audited financial statements that are
separate from those of Boston Safe or any of its affiliates. None of the
officers or directors of the Company will have on an individual basis any
direct or indirect pecuniary interest in any Mortgage Asset to be acquired or
disposed of by the Company or in any transaction in which the Company has an
interest or will individually engage in acquiring, holding or managing
Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and that all of these
Mortgage Loans will be purchased from Boston Safe or affiliates of Boston
Safe.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, Boston Safe or any of its affiliates is currently involved in, nor,
to the Company's knowledge, currently threatened with, any material litigation
with respect to the Mortgage Loans to be included in the Initial Portfolio,
other than routine litigation arising in the ordinary course of business, most
of which is expected to be covered by liability insurance.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors will initially be composed of seven
members, two of whom will be Independent Directors. These directors will serve
until their successors are duly elected and qualified. There is no current
intention to alter the number of directors comprising the Board of Directors.
An "Independent Director" is a director who is not a current officer or
employee of the Company, MBC, Boston Safe or any affiliate of Boston Safe or
of any person or persons that, in the aggretate, own more than 50% of the
Common Stock. Pursuant to the Certificate of Vote establishing the Series A
Preferred Shares, the Independent Directors are required to take into account
the interests of both the Common Stock and the Preferred Stock, including the
holders of the Series A Preferred Shares, in assessing the benefit to the
Company of any proposed action requiring their consent. In considering the
interests of the holders of the Series A Preferred Shares, the Independent
Directors shall owe the same duties which the Independent Directors owe to
holders of Common Stock. The Company currently has five executive officers and
other officers. The Company does not anticipate that it will require
additional officers or any employees because it has retained the Advisor to
perform certain functions pursuant to the Advisory Agreement described below
under "Management--The Advisor".
The persons who are directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<C> <C> <S>
W. Keith Smith 61 President and Director
Christopher M. Condron 49 Director
Paul W. Calhoun 46 Senior Vice President
Michael K. Hughey 45 Vice President, Assistant Treasurer and
Director
Willis F. Williams 50 Treasurer
Marilyn K. Kolb 47 Clerk
[Additional Director] [ ] Director
[Additional Director] [ ] Director
[Independent Director] [ ] Director
[Independent Director] [ ] Director
</TABLE>
The following is a summary of the experience of the executive officers and
directors of the Company:
W. KEITH SMITH is Vice Chairman, Mellon Trust (which comprises the trust and
investment businesses of MBC and The Boston Company), Chairman and Chief
Executive Officer of The Boston Company and Chairman of The Dreyfus
Corporation. From January 1990 to November 1993, Mr. Smith was Vice Chairman,
Service Products of MBC and Mellon Bank, N.A. Mr. Smith was Chief Operating
Officer of The Dreyfus Corporation from August 1994 to January 1995.
CHRISTOPHER M. CONDRON is Vice Chairman, Deputy Director Mellon Trust and
President and Chief Executive Officer of The Dreyfus Corporation. From June
1989 to January 1994, Mr. Condron was President of Boston Safe and Executive
Vice President of The Boston Company.
PAUL W. CALHOUN is Senior Vice President of Boston Safe and has held this
position since October 1993. From September 1991 to September 1993, he was
Senior Vice President and Division Head of Mellon Bank, N.A.'s Global
Corporate Banking Department.
MICHAEL K. HUGHEY is Senior Vice President and Controller of MBC and Senior
Vice President, Director of Taxes and Controller of Mellon Bank, N.A. Mr.
Hughey has held these positions since 1990.
36
<PAGE>
WILLIS F. WILLIAMS is Senior Vice President and Chief Financial Officer of
The Boston Company and has served in this position since May 1993. From May
1991 to May 1993, Mr. Williams served as head of Mellon Bank, N.A.'s Strategic
Planning Department.
MARILYN K. KOLB is Deputy General Counsel of The Boston Company. Ms. Kolb
has held this position since May of 1995. From April 1984 to May 1995, Ms.
Kolb was Assistant General Counsel of The Boston Company.
[ADDITIONAL DIRECTOR #1]
[ADDITIONAL DIRECTOR #2]
[INDEPENDENT DIRECTOR #1]
[INDEPENDENT DIRECTOR #2]
BENEFICIAL OWNERSHIP OF STOCK OF MBC
The following table sets forth, as of , 1996, the number of shares
of Common Stock of MBC beneficially owned by each director of the Company and
by all directors and executive officers of the Company as a group. Except as
otherwise indicated, sole voting power and sole investment power with respect
to the shares shown in the table are held either by the individual alone or by
the individual together with the individual's spouse.
<TABLE>
<CAPTION>
COMMON STOCK
OWNED
NAME BENEFICIALLY (1)(2)
- ---- -------------------
<S> <C>
Paul W. Calhoun.............................................
Christopher M. Condron......................................
Michael K. Hughey...........................................
W. Keith Smith.............................................. (3)
[Additional Director].......................................
[Additional Director].......................................
[Independent Director]......................................
[Independent Director]......................................
Directors and Executive Officers as a group (7 persons).....
</TABLE>
- --------
(1) On , 1996, none of the individuals named in the above table
beneficially owned more than 1% of the outstanding shares of Common Stock
of MBC, and all the directors and executive officers as a group
beneficially owned less than 1% of the outstanding shares of Common Stock
of MBC.
(2) The amounts shown include the following amounts of Common Stock which the
indicated individuals and group have the right to acquire within 60 days
of , 1996, through the exercise of stock options granted pursuant
to MBC's stock option plans: Mr. Calhoun, ; Mr. Condron,
; Mr. Hughey, ; Mr. Smith, ; and all directors and
executive officers as a group, shares. Shares held in accounts under
MBC's Retirement Savings Plan, a 401(k) plan, as to which the holders have
voting power but not investment power, are also included as follows: Mr.
Calhoun, ; Mr. Condron, ; Mr. Hughey, ; Mr. Smith,
; and all directors and executive officers as a group,
shares.
(3) Of these shares, are held by Mr. Smith's wife. Mr. Smith disclaims
beneficial ownership of such shares.
37
<PAGE>
INDEPENDENT DIRECTORS
The Certificate of Vote establishing the Series A Preferred Shares requires
that, so long as any Series A Preferred Shares are outstanding, certain
actions by the Company be approved by a majority of the Independent Directors
of the Company. See "Description of Series A Preferred Shares--Independent
Director Approval". and are the Company's initial Independent
Directors. The Certificate of Vote establishing the Series A Preferred Shares
requires that in assessing the benefits to the Company of any proposed action
requiring their consent, the Independent Directors take into account the
interests of holders of both the Common Stock and the Preferred Stock,
including the holders of the Series A Preferred Shares. For so long as there
are only two Independent Directors, any action that requires approval by a
majority of the Independent Directors must be approved by both Independent
Directors.
If at the time the aggregate amount of accrued and unpaid dividends on the
Series A Preferred Shares equals or exceeds an amount equal to six quarterly
dividend payments on the Series A Preferred Shares, the number of directors
then constituting the Board of Directors of the Company will be increased by
two (if not already increased by reason of similar types of provisions with
respect to other series of Preferred Stock) and the holders of the Series A
Preferred Shares, voting together as a single class with the holders of any
other series of Preferred Stock as to which a default in preference dividends
exists, will be entitled to elect such two additional directors to serve on
the Company's Board of Directors. Each director elected by the holders of
shares of the Preferred Stock shall continue to serve as director until the
Company shall have paid a full dividend on the Series A Preferred Shares for
four consecutive dividend periods.
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement of independent accountants and
review the independence of its auditors. The audit committee will also review
the adequacy of the Company's internal accounting controls. The members of the
audit committee will be .
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors fees for their services
as directors. The Independent Directors will receive annual compensation of
$ plus a fee of $ for attendance (in person or by telephone) at each
meeting of the Board of Directors.
The Company will not pay any compensation to its officers or to directors
who are not Independent Directors.
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Articles of Organization eliminate, to the fullest extent
permitted by the Massachusetts Business Corporation Law (the "MBCL"), the
personal liability of a director to the Company or its stockholders for
monetary damages for breach of such director's fiduciary duty.
The by-laws of the Company (the "By-laws") require indemnification of the
Company's directors and specify that the right to indemnification is a
contract right, setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the By-laws. The By-laws also
entitle any director to be reimbursed for the expenses of prosecuting any
claim against him or her arising out of his or her status as such and also
permit the Company to make advances with respect to such expenses pending
resolution of the claim. The By-Laws of the Company also provide that the
Company may enter into contracts with any director in furtherance of the
indemnification provisions
38
<PAGE>
contained in the By-laws and allow the Company to create a trust fund to
ensure payment of amounts indemnified.
THE ADVISOR
In connection with the consummation of the Offering and the formation of the
Company described herein, the Company will enter into the Advisory Agreement
with Boston Safe to manage the day-to-day operations of the Company. Boston
Safe in its role as advisor under the terms of the Advisory Agreement is
herein referred to as the "Advisor". The Advisor will be responsible for (i)
monitoring the credit quality of the Mortgage Assets held by the Company, (ii)
advising the Company with respect to the acquisition, management, financing
and disposition of the Company's Mortgage Assets and (iii) maintaining custody
of the documents related to the Company's Mortgage Loans. The Advisor may from
time to time subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in the business
of managing real estate assets. If no affiliate of the Advisor is engaged in
the business of managing Mortgage Assets, the Advisor may, with the approval
of a majority of the Board of Directors as well as a majority of the
Independent Directors, subcontract all or a portion of its obligations under
the Advisory Agreement to unrelated third parties. The Advisor will not, in
connection with the subcontracting of any of its obligations under the
Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement.
The Advisor and its affiliates have substantial experience in the mortgage
lending industry, both in the origination and in the servicing of mortgage
loans. At June 30, 1996, the Advisor and its affiliates held approximately $
billion of residential mortgage loans. In their residential mortgage loan
business, the Advisor and its affiliates originate and purchase residential
mortgage loans and then sell such loans to investors, primarily in the
secondary market, while generally retaining the rights to service such loans.
The Advisor and its affiliates also purchase servicing rights on residential
mortgage loans. At June 30, 1996, the Advisor and its affiliates, including
Mellon Mortgage Company, serviced residential mortgage loans having an
aggregate principal balance of approximately $ billion.
The Advisory Agreement has an initial term of one year and may be renewed
for additional one-year periods if the Advisor and the Company agree. The
Advisory Agreement may be terminated by the Company at any time upon 90 days'
prior notice. As long as any Series A Preferred Shares remain outstanding, any
decision by the Company either to terminate or not to renew the Advisory
Agreement must be approved by a majority of the Board of Directors as well as
a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $250,000 with respect to the advisory
and management services provided by it to the Company.
As a result of the relationship between Boston Safe and the Company, certain
conflicts of interest may arise. See "Risk Factors--Relationship with Boston
Safe and its Affiliates; Conflicts of Interest".
The principal executive offices of the Advisor are located at One Boston
Place, Boston, Massachusetts 02108-4402, telephone number (617) 722-7610.
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company,
Boston Safe and Bridgewater will engage in the transactions described below
which are designed (i) to transfer ownership of the Initial Portfolio to the
Company, (ii) to facilitate the Offering and (iii) to enable the Company to
qualify as a REIT for federal income tax purposes commencing with its taxable
year ending December 31, 1996.
39
<PAGE>
The transactions constituting the formation of the Company will include the
following:
. The Initial Portfolio was contributed by Boston Safe to Bridgewater and by
Bridgewater to the Company, and Bridgewater was issued 100 shares of the
Common Stock of the Company, on April 1, 1996. See "Business and Strategy--
Acquisition of Initial Portfolio".
. The Articles of Organization of the Company will be amended to provide for
1,000 authorized shares of Common Stock and 25,000,000 authorized shares of
Preferred Stock, and the Company will file Certificates of Vote with the
Secretary of the Commonwealth of the Commonwealth of Massachusetts
establishing the terms of the Series A Preferred Shares and the Series A2
Preferred Shares.
. The Company will sell to the public 8,000,000 Series A Preferred Shares in
the Offering.
. The Company will issue to Bridgewater, as the holder of all the issued and
outstanding shares of the Common Stock, 7,000,000 Series A2 Preferred
Shares and distribute to Bridgewater the net proceeds of the Offering.
. The Company will enter into the Mortgage Transfer Agreement with Boston
Safe pursuant to which Boston Safe will make certain representations,
warranties and agreements with respect to the Mortgage Loans in the Initial
Portfolio. See "Description of Initial Portfolio".
. The Company will enter into the Servicing Agreement with Boston Safe
pursuant to which Boston Safe will agree to act as the Servicer with
respect to the Mortgage Loans in the Initial Portfolio. See "Business and
Strategy--Servicing".
. The Company will enter into the Advisory Agreement with Boston Safe
pursuant to which Boston Safe, as Advisor, will agree to manage the
Mortgage Assets held by the Company and administer the day-to-day
operations of the Company. See "Management--The Advisor".
Bridgewater, which is a wholly owned subsidiary of Boston Safe, currently
owns and, following the completion of the Offering and the transactions
described above, will continue to own all of the issued and outstanding shares
of Common Stock of the Company. In addition, following the completion of the
Offering and the transactions described above, Bridgewater will own all
7,000,000 issued and outstanding Series A2 Preferred Shares. MBC, which
indirectly owns all of the issued and outstanding shares of capital stock of
Boston Safe, has indicated to the Company that, so long as any Series A
Preferred Shares are outstanding, it intends to maintain direct or indirect
ownership of at least 80% of the outstanding Common Stock. In addition,
Massachusetts law requires Boston Safe to own directly or indirectly all the
Common Stock of the Company so long as it directly or indirectly owns any
Common Stock.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, BOSTON SAFE OR MBC. NO OBLIGATION OF THE COMPANY IS GUARANTEED
BY BOSTON SAFE OR MBC.
Following the Offering, Boston Safe will indirectly own 100% of the Common
Stock of the Company. Boston Safe will also have responsibility for the day-
to-day management and custody of the Company's assets as Advisor under the
Advisory Agreement and as Servicer of the Mortgage Loans under the Servicing
Agreement. See "Management--The Advisor" for a description of the Advisory
Agreement, including a description of fees payable to the Advisor. See "Risk
Factors--Relationship with Boston Safe and its Affiliates; Conflicts of
Interest".
The Company and Boston Safe estimate that the fair value of the Initial
Portfolio approximately equalled $ as of the Reference Date. However,
no third-party valuations of the Mortgage
40
<PAGE>
Loans constituting the Initial Portfolio have been or will be obtained for
purposes of the Offering, and there can be no assurance that the fair value of
the Initial Portfolio does not differ from such estimated fair value. See
"Risk Factors--No Third-Party Valuation of the Mortgage Loans; No Arm's-Length
Negotiations with Affiliates" and "Risk Factors--Relationship with Boston Safe
and its Affiliates; Conflicts of Interest".
BENEFITS TO BOSTON SAFE AND ITS AFFILIATES
Boston Safe and its affiliates expect to realize the following benefits in
connection with the Offering and the formation of the Company:
. MBC and Boston Safe are required by the Federal Reserve Board and the FDIC,
respectively, to maintain certain levels of capital for bank regulatory
purposes. Boston Safe has informed the Company that the Series A Preferred
Shares is expected to be treated as capital for both MBC and Boston Safe
for regulatory purposes. Boston Safe has indicated to the Company that such
treatment, together with the Company's ability to deduct, for income tax
purposes, the dividends payable on the Series A Preferred Shares as a
result of the Company's qualification as a REIT, will provide each of MBC
and Boston Safe with a more cost-effective means of obtaining regulatory
capital than if Boston Safe or MBC were to issue preferred stock itself.
Neither Boston Safe nor MBC would be permitted to treat any securities
issued by a trust established by either Boston Safe or MBC to securitize
its mortgage assets as capital for bank regulatory purposes.
. Bridgewater, Boston Safe's wholly owned subsidiary, will receive the net
proceeds of the Offering as a distribution on the Common Stock of the
Company held by it.
. Boston Safe will be entitled to receive annual advisory and servicing fees
and Bridgewater will receive dividends in respect of the Common Stock and
the Series A2 Preferred Shares held by it. For the first 12 months
following completion of the Offering, these annual fees and dividends are
anticipated to be as follows:
<TABLE>
<S> <C>
Advisory Fee........................................................ $250,000
Servicing Fee....................................................... *
Series A2 Preferred Shares Dividend............................... **
Common Stock Dividend............................................... ***
========
Total........................................................... $
</TABLE>
- --------
* Assumes that for the first 12 months following completion of the Offering,
the Company holds Mortgage Loans with the same outstanding principal balance
as the Mortgage Loans included in the Initial Portfolio. See "Business and
Strategy--Servicing" for a description of the basis upon which the servicing
fee will be calculated.
** The Series A2 Preferred Shares will bear dividends at a floating rate,
adjusted quarterly, equal to % above the average weekly yield on U.S.
Treasury securities adjusted to a constant maturity of one year. Based upon
the yield of U.S. Treasury securities as of , 1996, the Series A2
Preferred Shares would have borne dividends at the rate of % per annum.
Assuming that the Series A2 Preferred Shares bear dividends at such rate
for the 12-month period following the consummation of the Offering and that
no Series A2 Preferred Shares are redeemed in that period, the aggregate
annual dividend amount for the Series A2 Preferred Shares would be $ .
*** The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's "REIT taxable income"
(excluding capital gains) over the amount of dividends paid in respect of
Preferred Stock. The aggregate annual dividend amount of the Series
41
<PAGE>
A Preferred Shares is $ . As described in the previous note, the
aggregate annual dividend amount of the Series A2 Preferred Shares is
assumed to be $ . Assuming that (i) the Mortgage Loans included in the
Initial Portfolio are held for the 12-month period following completion of
the Offering, (ii) principal repayments are reinvested in additional
Mortgage Loans with characteristics similar to those of the Mortgage Loans
included in the Initial Portfolio and (iii) interest rates remain constant
during such 12-month period, the Company anticipates that the Initial
Portfolio will generate "REIT taxable income" (excluding capital gains) of
approximately $ million, after payment of servicing and advisory fees,
during such 12-month period.
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to
the terms and provisions of the Certificate of Vote establishing the Series A
Preferred Shares and the Company's Articles of Organization, the forms of
which have been filed with the Commission as exhibits to the Registration
Statement of which this Prospectus forms a part. See "Description of Capital
Stock" below.
GENERAL
The Series A Preferred Shares constitute a series of the Preferred Stock of
the Company, which Preferred Stock may be issued from time to time in one or
more series with such rights, preferences and limitations as are determined by
the Company's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Company to issue
the Series A Preferred Shares.
When issued in the Offering, the Series A Preferred Shares will be validly
issued, fully paid and nonassessable. The holders of the Series A Preferred
Shares will have no preemptive rights with respect to any shares of the
capital stock of the Company or any other securities of the Company
convertible into or carrying rights or options to purchase any such shares.
The Series A Preferred Shares will not be convertible into shares of Common
Stock or any other class or series of capital stock of the Company and will
not be subject to any sinking fund or other obligation of the Company for its
repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be ChaseMellon Shareholder Services, L.L.C. The registrar
for shares of Preferred Stock will send notices to shareholders of any
meetings at which holders of the Preferred Stock have the right to elect
directors of the Company or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to receive, when, as
and if declared by the Board of Directors of the Company in its sole
discretion out of assets of the Company legally available for payment, cash
dividends at the annual rate of % of the initial liquidation preference
(equivalent to $ per share per annum). Dividends on the Series A Preferred
Shares will not be cumulative and, if for any reason a dividend on the Series
A Preferred Shares is not declared for a dividend period, the Company will
have no obligation to pay a dividend for such period, whether or not dividends
on the Series A Preferred Shares are declared for any future dividend period.
Dividends on the Series A Preferred Shares will be payable quarterly on or
about the last day of March, June, September and December of each year, at
such annual rate, commencing on December 31, 1996. Each such dividend will be
payable to holders of record as they appear on the stock register of the
Company on such record dates, not exceeding 45 days preceding the payment
dates thereof, as shall be fixed by the
42
<PAGE>
Board of Directors of the Company. Dividends will accrue from the date of
original issue or from the most recent dividend payment date (whether or not
dividends were paid on such date). Dividends payable on the Series A Preferred
Shares for any period less than a full dividend period shall be computed on
the basis of twelve 30-day months, a 360-day year and the actual number of
days elapsed in the period. Dividends payable on the Series A Preferred Shares
for each full dividend period shall be computed by dividing the per annum
dividend rate by four.
If any Series A Preferred Shares are outstanding, no full dividends shall be
declared or paid or set apart for payment on any series of capital stock of
the Company ranking, as to dividends, on a parity with the Series A Preferred
Shares for any period unless full dividends have been or contemporaneously are
declared and paid, or declared and a sum sufficient for the payment thereof
set apart for such payments, on the Series A Preferred Shares for the then-
current dividend period. When dividends are not paid in full (or a sum
sufficient for such full payment is not set apart) upon the Series A Preferred
Shares and the shares of any other series of capital stock ranking on parity
as to dividends with the Series A Preferred Shares, all dividends declared
upon Series A Preferred Shares and any other series of capital stock ranking
on a parity as to dividends with the Series A Preferred Shares shall be
declared pro rata so that the amount of dividends declared per share on the
Series A Preferred Shares and such other series of capital stock shall in all
cases bear to each other the same ratio that accrued dividends for the then-
current dividend period per share on the Series A Preferred Shares and accrued
dividends, including required or permitted accumulations, if any, of such
other series of capital stock, bear to each other.
Unless full dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof set apart for payment, for the then-current dividend
period, (i) no dividends (other than in Common Stock or other capital stock
ranking junior to the Series A Preferred Shares as to dividends and upon
liquidation) shall be declared or paid or set aside for payment and no other
distribution shall be declared or made upon the Common Stock or any other
capital stock of the Company ranking junior to the Series A Preferred Shares
as to dividends or amounts upon liquidation, and (ii) no Common Stock or any
other capital stock of the Company ranking junior to or on a parity with the
Series A Preferred Shares as to dividends or amounts upon liquidation may be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
to be paid to or made available for a sinking fund for the redemption of any
such stock) by the Company (except by conversion into or exchange for other
capital stock of the Company ranking junior to the Series A Preferred Shares
as to dividends and amounts upon liquidation).
For a discussion of the tax treatment of distributions to stockholders, see
"Federal Income Tax Considerations--Taxation of United States Stockholders"
and "--Taxation of Foreign Stockholders".
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to
vote as indicated below, each Series A Preferred Share will be entitled to one
vote on matters on which holders of the Series A Preferred Shares are entitled
to vote.
If at any time the aggregate amount of accrued and unpaid dividends on the
Series A Preferred Shares equals or exceeds an amount equal to six quarterly
dividend payments on the Series A Preferred Shares, the number of directors
then constituting the Board of Directors of the Company will be increased by
two (if not already increased by reason of similar types of provisions with
respect to other series of Preferred Stock) and the holders of the Series A
Preferred Shares, voting together as a single class with the holders of any
other series of Preferred Stock as to which a default in preference dividends
exists, will be entitled to elect such two additional directors to serve on
the
43
<PAGE>
Company's Board of Directors. Each director elected by the holders of shares
of the Preferred Stock shall continue to serve as a director (subject to
certain provisions on removal) until the Company shall have paid a full
dividend on the Series A Preferred Shares for four consecutive dividend
periods.
In the event any meeting of holders of Series A Preferred Shares is required
to elect directors, the Clerk of the Company shall call such meeting as
promptly as possible but in any event within 20 days after receipt of the
written request of the holders of at least 5% of the Series A Preferred Shares
then outstanding, addressed to the Company at its principal office. Such
meeting shall be held at the place designated as provided in the By-laws of
the Company for meetings of the Company's stockholders, and upon not less than
10- nor more than 20-days' notice. If any such meeting shall not be called
within 20 days after receipt by the Clerk of the Company of a request, then
the holders of at least 5% of the Series A Preferred Shares then outstanding,
may, by written notice to the Clerk of the Company, designate any person to
call such meeting, and the person so designated may call such meeting at the
place above provided and upon not less than 10- nor more than 20-days' notice
and for that purpose will have access to the stock record books of the
Company. At any such meeting or at any annual meeting held while the holders
of the Series A Preferred Shares have the right to elect directors, the
holders of Preferred Stock who are present in person or by proxy will be
sufficient to constitute a quorum for the purpose of such meeting.
The Company may not alter or change the provisions of the Company's Articles
of Organization so as to adversely affect the voting power, preferences or
special rights of the holders of the Series A Preferred Shares (provided,
however, that the creation of any class or series of stock of the Company
shall not be deemed to have such an adverse effect, even if such class or
series shall have preference as to dividends or distribution of assets over
the Series A Preferred Shares), without the consent of the holders of shares
entitled to cast at least 66-2/3% of the votes entitled to be cast by the
holders of the Series A Preferred Shares and the holders of any other series
of Preferred Stock entitled to vote thereon, voting together as a single class
without regard to series.
The issuance of any class or series of stock which shall rank senior to or
on a parity as to dividends or distribution of assets with the Series A
Preferred Shares shall require the approval of a majority of the Independent
Directors. Simultaneously with the issuance of the Series A Preferred Shares,
the Company will issue to Bridgewater 7,000,000 Series A2 Preferred Shares,
which rank on a parity with the Series A Preferred Shares. It is currently
anticipated that, prior to December 31, 1997, the Company will issue up to
40,000 Series A3 Preferred Shares, which will also rank on a parity with the
Series A Preferred Shares. Neither such issuance will be subject to the
approval of a majority of the Independent Directors.
Except as provided above and as required by law, the holders of Series A
Preferred Shares are not entitled to vote on any merger or consolidation
involving the Company or a sale of all or substantially all of the assets of
the Company.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to , 2001,
except upon the occurrence of a Tax Event (as defined below). On or after such
date, the Series A Preferred Shares will be redeemable at the option of the
Company, in whole or in part, at any time or from time to time on not less
than 30 nor more than 60 days' notice by mail, at a redemption price of $25.00
per share, plus an amount equal to the dividend for the then-current quarterly
dividend period accrued to but excluding the date of such redemption (whether
or not declared, but without accumulation of dividends for prior dividend
periods). Any such redemption may only be effected with the prior approval of
the Federal Reserve Board and the FDIC (unless at such time it is determined
that such approvals are not required). Under current policies of the Federal
Reserve Board and the FDIC, such approval would be granted only if the
redemption were to be made out of the proceeds of the issuance of another
capital
44
<PAGE>
instrument or if such regulators determine that the condition and
circumstances of Boston Safe and its bank holding company parents (MBC, Boston
Group Holdings, Inc. and The Boston Company) warrant the reduction of a source
of permanent capital.
The Company will also have the right at any time, upon the occurrence of a
Tax Event, to redeem the Series A Preferred Shares, in whole (but not in part)
at a redemption price of $25.00 per share, plus an amount equal to the
dividend for the then-current quarterly dividend period accrued to but
excluding the date of such redemption (whether or not declared, but without
accumulation of dividends for prior dividend periods). "Tax Event" means the
receipt by the Company of an opinion of a nationally recognized law firm
experienced in such matters to the effect that, as a result of (i) any
amendment to, clarification of, or change (including any announced prospective
change) in, the laws or treaties (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein
affecting taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the interpretation
of such Administrative Action or any interpretation or pronouncement that
provides for a position with respect to such Administrative Action that
differs from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or change is
made known, which amendment, clarification, or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Series A Preferred Shares, there is more than an insubstantial risk that (a)
dividends paid or to be paid by the Company with respect to the capital stock
of the Company are not, or will not be, fully deductible by the Company for
United States federal income tax purposes or (b) the Company is, or will be,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any distribution of assets
is made to holders of Common Stock or any other class of stock ranking junior
to the Series A Preferred Shares upon liquidation, liquidating distributions
in the amount of $25.00 per share, plus an amount equal to the dividend for
the then-current quarterly dividend period accrued to but excluding the date
of payment of such preference (whether or not declared, but without
accumulation of dividends for prior dividend periods).
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Series A Preferred
Shares, including the Series A2 Preferred Shares, in the distribution of
assets upon any liquidation, dissolution or winding up of the affairs of the
Company, then the holders of the Series A Preferred Shares and such other
classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, neither the sale of all or substantially all the property
or business of the Company, nor the merger or consolidation of the Company
into or with any other corporation or the merger or consolidation of any other
corporation into or with the Company, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, of the Company.
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INDEPENDENT DIRECTOR APPROVAL
The Certificate of Vote establishing the Series A Preferred Shares requires
that, so long as any Series A Preferred Shares are outstanding, certain
actions by the Company be approved by a majority of the Independent Directors.
For so long as there are only two Independent Directors, any action that
requires approval by a majority of the Independent Directors must be approved
by both Independent Directors. and are the Company's initial
Independent Directors. See "Management--Independent Directors". In order to be
considered "independent", a director must not be a current officer or employee
of the Company, MBC, Boston Safe or any affiliate of Boston Safe or of any
person or persons that, in the aggregate, own more than 50% of the Common
Stock of the Company. In addition, any members of the Board of Directors
elected by holders of the Company's Preferred Stock will be deemed to be
Independent Directors for purposes of approving the actions requiring the
approval of a majority of the Independent Directors.
The actions which may not be taken without the approval of a majority of the
Independent Directors include (i) the issuance of Preferred Stock ranking
senior to or on a parity with the Series A Preferred Shares (other than the
Series A2 Preferred Shares and the Series A3 Preferred Shares), (ii) the
incurrence of debt for borrowed money in excess of 20% of the total assets of
the Company, (iii) the modification of the general distribution policy or the
declaration of any distribution in respect of Common Stock for any year if,
after taking into account any such proposed distribution, total distributions
on the Preferred Stock and the Common Stock would exceed an amount equal to
the sum of 105% of the Company's "REIT taxable income" (excluding capital
gains) for such year plus net capital gains of the Company for that year, (iv)
the acquisition of real estate assets other than Mortgage Loans, or Mortgage-
Backed Securities that (A) qualify as real estate assets under Section
856(c)(6)(B) of the Code, (B) are rated investment grade or better by at least
one nationally recognized statistical rating organization, (C) are not
interest-only, principal-only or high-risk securities and (D) represent
interests in or obligations backed by pools of mortgage loans (other than
pursuant to foreclosure on Mortgage Loans or other remedies with respect
thereto), (v) the redemption of any shares of Common Stock, (vi) the
termination or modification of, or the election not to renew, the Advisory
Agreement or the Servicing Agreement or the subcontracting of any duties under
the Advisory Agreement or the Servicing Agreement to third parties
unaffiliated with Boston Safe, (vii) any dissolution, liquidation or
termination of the Corporation prior to , 2001, (viii) any material
amendment to or modification of the Confirmation of Mortgage Transfer
Agreement, including, without limitation, any amendment entered into in
connection with the acquisition of additional Mortgage Loans, (ix) the
determination to revoke the Company's REIT status and (x) the amendment of the
provisions contained in Article V of the Corporation's Restated Articles of
Organization limiting ownership of Common Stock or Preferred Stock. The
Certificate of Vote establishing the Series A Preferred Shares requires that
in assessing the benefits to the Company of any proposed action requiring
their consent, the Independent Directors shall take into account the interests
of holders of both the Common Stock and the Preferred Stock, including,
without limitation, holders of the Series A Preferred Shares.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer".
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the capital stock of the Company does
not purport to be complete and is subject in all respects to the applicable
provisions of the MBCL and the Articles of Organization of the Company.
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COMMON STOCK
GENERAL
The Company is authorized to issue up to 1,000 shares of Common Stock and
has issued 100 shares to Bridgewater. MBC has indicated to the Company that,
so long as any series of Preferred Stock is outstanding, it intends to
maintain direct or indirect ownership of at least 80% of the outstanding
Common Stock of the Company. Massachusetts law requires Boston Safe to own
directly or indirectly all the Common Stock of the Company so long as it
directly or indirectly owns any Common Stock.
DIVIDENDS
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor,
provided that, so long as any shares of Preferred Stock are outstanding, no
dividends or other distributions (including redemptions and purchases) may be
made with respect to the Common Stock unless full dividends on the shares of
all series of Preferred Stock, including accumulations in the case of any
cumulative Preferred Stock, have been paid. In order to remain qualified as a
REIT, the Company must distribute annually at least 95% of its annual "REIT
taxable income" (not including capital gains) to stockholders.
VOTING RIGHTS
Subject to the rights, if any, of the holders of any class or series of
Preferred Stock, all voting rights are vested in the Common Stock. The holders
of Common Stock are entitled to one vote per share. All of the issued and
outstanding shares of Common Stock are currently, and upon consummation of the
offering will be, held by Bridgewater.
RIGHTS UPON LIQUIDATION
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been paid or set aside for
the holders of all series of Preferred Stock the full preferential amounts to
which such holders are entitled, the holders of Common Stock will be entitled
to share equally and ratably in any assets remaining after the payment of all
debts and liabilities.
PREFERRED STOCK
Subject to limitations prescribed by Massachusetts law and the Company's
Articles of Organization, the Board of Directors or, if then constituted, a
duly authorized committee thereof is authorized to issue, from the authorized
but unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish,
from time to time, the number of shares of Preferred Stock to be included in
any such class or series and to fix the designation and any preferences,
voting powers, qualifications and special or relative rights or privileges of
any such class or series, and such other subjects or matters as may be fixed
by resolution of the Board of Directors.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Certificate of Vote relating to that class or series.
A Certificate of Vote relating to each class or series of Preferred Stock
will set forth the preferences and other terms of such class or series,
including without limitation the following: (1) the
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title and par value of such class or series; (2) the number of shares of such
class or series offered and the liquidation preference per share of such class
or series; (3) the dividend rate(s), period(s), and/or payment date(s) or
method(s) of calculation thereof applicable to such class or series; (4)
whether such class or series of Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such class or series shall
accumulate; (5) the provision for a sinking fund, if any, for such class or
series; (6) the provision for redemption, if applicable, of such class or
series; (7) the provision, if any, for the conversion of shares of such class
or series into any other security of the Company or any other entity; (8) the
relative ranking and preferences of such class or series as to dividend rights
and rights upon liquidation, dissolution or winding up of the affairs of the
Company; (9) any limitations on issuance of any class or series of Preferred
Stock ranking senior to or on a parity with such class or series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of the Company; (10) any voting rights of such class
or series; (11) any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve the
status of the Company as a REIT; and (12) any other specific terms,
preferences, rights, limitations or restrictions of such class or series.
Simultaneously with the issuance of the Series A Preferred Shares, the
Company is issuing 7,000,000 Series A2 Preferred Shares, which rank on a
parity with the Series A Preferred Shares, to Bridgewater. The Series A2
Preferred Shares have substantially the same terms as the Series A Preferred
Shares, except that the Series A2 Preferred Shares will (i) bear dividends at
a floating rate, adjusted quarterly, equal to % above the average weekly
yield on U.S. Treasury securities adjusted to a constant maturity of one year,
(ii) be redeemable at any time at the option of the Company without the
approval of the Independent Directors (so long as the then-current dividend on
the Series A Preferred Shares has been paid in full or set aside for payment)
and (iii) have no voting rights except as required by law.
It is currently anticipated that, prior to December 31, 1997, the Company
will issue up to 40,000 Series A3 Preferred Shares, having an aggregate
liquidation preference of up to $1,000,000 to approximately 125 officers and
employees of MBC and its affiliates. Such issuance is intended to ensure that
the Company complies with certain requirements for qualification as a REIT (as
described in "--Restrictions on Ownership and Transfer"), even in the event
the Series A Preferred Shares are redeemed.
The Company will provide annually to holders of Series A Preferred Shares
financial statements of the Company including a balance sheet and the related
statements of income, stockholders' equity and cash flow, accompanied by a
report of an independent public accountant stating that an audit of such
financial statements has been made in accordance with generally accepted
accounting principles, stating the opinion of the accountant with respect to
the financial statements and the accounting principles and practices reflected
therein and with respect to the consistency of the application of the
accounting principles, and identifying any matters to which the accountant
takes exception and stating, to the extent practicable, the effect of each
such exception on such financial statements.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Articles of Organization contain certain restrictions on the
number of shares of Common Stock and Preferred Stock that individual
stockholders may own. For the Company to qualify as a REIT under the Code, no
more than 50% in number or value of its outstanding shares of capital stock
may be owned, directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of a taxable
year (other than the first year) or during a proportionate part of a shorter
taxable year (the "Five or Fewer Test"). The capital stock of the Company must
also be beneficially owned by 100 or more persons during at least 335 days of
a taxable year (other than the first year) or during a proportionate part of a
shorter taxable year. The
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ownership by Bridgewater of 100% of the shares of Common Stock of the Company
and 100% of the Series A2 Preferred Shares of the Company will not adversely
affect the Company's REIT qualification because, since MBC, the indirect sole
stockholder of Bridgewater, is widely held, each stockholder of MBC counts as
a separate beneficial owner for purposes of the Five or Fewer Test. Because
the Company expects to qualify as a REIT, the Articles of Organization of the
Company contain restrictions on the acquisition of Preferred Stock intended to
ensure compliance with these requirements.
Subject to certain exceptions specified in the Articles of Organization, no
holder of Preferred Stock may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.9% (the "Ownership Limit") of
any issued and outstanding class or series of Preferred Stock. The Board of
Directors may (but in no event will be required to), with a ruling from the
IRS or an opinion of counsel satisfactory to it, waive the Ownership Limit
with respect to a holder if the Board of Directors believes that such holder's
ownership will not then or in the future jeopardize the Company's status as a
REIT.
If any transfer of shares of capital stock of the Company would cause the
Company to be beneficially owned by fewer than 100 persons, such transfer
shall be null and void and the intended transferee will acquire no rights to
the stock.
The Articles of Organization provide that shares of any class or series of
Preferred Stock owned, or deemed to be owned, by or transferred to a
stockholder in excess of the Ownership Limit (the "Excess Shares") will
automatically be transferred, by operation of law, to a trustee as a trustee
of a trust for the exclusive benefit of a charity to be named by the Company
as of the day prior to the day the prohibited transfer took place. Any
distributions paid prior to the discovery of the prohibited transfer are to be
repaid by the original purported transferee to the Company and by the Company
to the trustee; any vote of the shares while the shares were held by the
original purported transferee prior to the Company's discovery thereof shall
be void ab initio and the original purported transferee shall be deemed to
have given its proxy to the trustee. Any unpaid distributions with respect to
the original purported transferee will be rescinded as void ab initio. The
trustee of the trust shall promptly sell the shares to any person whose
ownership is not prohibited, whereupon the interest of the trust shall
terminate. Proceeds of the sale shall be paid to the original purported
transferee up to its purchase price (or, if the original purported transferee
did not purchase the shares, the value on its date of acquisition) and any
remaining proceeds shall be paid to a charity to be named by the Company. In
liquidation, the original purported transferee stockholder's ratable share of
the Company's assets would be limited to the price paid by the original
purported transferee for the Excess Shares or, if no value was given, the
price per share equal to the closing market price on the date of the purported
transfer.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.9% of a
class or series of issued and outstanding Preferred Stock (or the acquisition
of an interest in an entity that owns shares of such class or series of
Preferred Stock) by an individual or entity could cause that individual or
entity (or another individual or entity) to own constructively in excess of
9.9% of such class or series of Preferred Stock, and thus subject such stock
to the Ownership Limit. Direct or constructive ownership in excess of the
Ownership Limit would cause ownership of the shares in excess of the limit to
be transferred to the trustee.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if the
REIT Provisions are changed so as to eliminate any ownership concentration
limitation or if the ownership concentration limitation is increased. The
Articles of Organization may not be amended to alter, change, repeal or
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amend any of the Ownership Limit provisions without the prior approval of a
majority of the Independent Directors and of the Massachusetts Commissioner of
Banks.
The Articles of Organization require that any person who beneficially owns
1% (or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred
Stock of the Company must provide certain information to the Company within 30
days of June 30 and December 31 of each year. In addition, each stockholder
shall upon demand be required to disclose to the Company in writing such
information as the Company may request in order to determine the effect, if
any, of such stockholder's actual and constructive ownership on the Company's
status as a REIT and to ensure compliance with the Ownership Limit.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the extent
that it constitutes summaries of legal matters or legal conclusions, has been
reviewed by Sullivan & Cromwell, special tax counsel for the Company, and it
is their opinion that such information is accurate in all material respects.
The discussion below is based on existing federal income tax law, which is
subject to change, with possible retroactive effect. The discussion below does
not address all aspects of taxation that may be relevant in the particular
circumstances of each stockholder or to certain types of stockholders
(including insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States, except to the extent discussed) subject to
special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS URGED TO SEEK INDIVIDUAL ADVICE CONCERNING THE
EFFECT ON HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE SERIES A
PREFERRED SHARES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, INCLUDING
THE EFFECT OF POSSIBLE CHANGES IN LAWS.
TAXATION OF THE COMPANY
GENERAL
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code and the applicable Treasury Regulations (the "REIT Requirements"
or the "REIT Provisions"), which are the requirements for qualifying as a
REIT, commencing with its taxable year ending December 31, 1996. The Company
believes that, commencing with its taxable year ending December 31, 1996, it
will be owned and organized and will operate in such a manner as to qualify
for taxation as a REIT under the Code, and the Company intends to continue to
operate in such a manner, but no assurance can be given that it will operate
in a manner so as to qualify or remain qualified.
The REIT Requirements are technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Sullivan & Cromwell, commencing with the Company's taxable
year ending December 31, 1996, the Company will be organized in conformity
with the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that this opinion is
based on certain factual assumptions relating to the organization and
operation of the Company and
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is conditioned upon certain representations made by the Company as to factual
matters, such as the organization and expected manner of operation of the
Company. In addition, this opinion is based upon factual assumptions and
representations of the Company concerning its business and Mortgage Assets.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results, distribution levels
and diversity of stock ownership, the various qualification tests imposed
under the Code discussed below, the results of which will not be reviewed by
Sullivan & Cromwell on a continuing basis. No assurance can be given that the
actual results of the Company's operation for any one taxable year will
satisfy such requirements. See "--Failure to Qualify".
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. Such
treatment substantially eliminates the federal "double taxation" on earnings
(at the corporate and the stockholder levels) that generally results from
investment in a corporation.
Despite the REIT election, the Company may be subject to federal income and
excise tax as follows:
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences, if
any.
Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying
net income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income.
Fourth, if the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other
than sales of foreclosure property and sales that qualify for a statutory
safe harbor), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the
75% or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.
Sixth, if the Company should fail to distribute, or fail to be treated as
having distributed, with respect to each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
Seventh, if during the ten-year period (the "Recognition Period")
beginning on the first day of the Company's first taxable year, the Company
recognizes gain on the disposition of any asset held by the Company as of
the beginning of such Recognition Period, then, to the extent of the excess
of (i) the fair market value of such asset as of the beginning of such
Recognition Period over (ii) the Company's adjusted basis in such asset as
of the beginning of such Recognition Period, such gain will be subject to
tax at the highest regular corporate rate pursuant to regulations that have
not yet been promulgated by the IRS.
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The Company does not now intend to acquire any appreciated assets from a
corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event
of such an acquisition, the Company could, under certain circumstances, be
subject to tax upon disposition of such assets.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for the REIT Requirements; (iv) that is neither a financial institution
nor an insurance company subject to certain provisions of the Code; (v) the
beneficial ownership of which is held by 100 or more persons; (vi) not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
private foundations and certain pension trusts and other entities) at any time
during the last half of each taxable year; and (vii) meets certain other
tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (i) through (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made to be taxed
as a REIT. For purposes of condition (vi), certain tax-exempt entities are
generally treated as individuals, and the beneficiaries of a pension trust
that qualifies under Section 401(a) of the Code and that holds shares of a
REIT will be treated as holding shares of the REIT in proportion to their
actuarial interests in the pension trust. See "--Taxation of United States
Stockholders--Treatment of Tax-Exempt Stockholders".
Sullivan & Cromwell is of the opinion that, for purposes of condition (v)
above, beneficial owners of both common and preferred shares of a corporation
are counted toward the 100 holder requirement. The Company expects that the
Series A Preferred Shares will be held by not less than 100 beneficial owners
at all times such Shares are outstanding. Such ownership of the Series A
Preferred Shares would allow the Company to meet condition (v). Sullivan &
Cromwell is of the opinion that, in determining whether condition (vi) above
is met, shareholders of a corporation are treated as owning their
proportionate share of any stock held by that corporation. The Company expects
that the stock of the Company and of MBC will at no time be held directly or
indirectly by five or fewer shareholders who are individuals, private
foundations, pension trusts or other relevant entities that in the aggregate
own more than 50 percent by value of the stock of the Company or MBC,
respectively. Stock ownership of the Company and MBC in accordance with the
Company's expectation will satisfy condition (vi) with respect to the Company.
In addition, the Company's Articles of Organization include certain
restrictions regarding transfer of its shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. Such transfer and ownership
restrictions are described under "Description of Capital Stock--Restrictions
on Ownership and Transfer". Sullivan & Cromwell is also of the opinion that
the Company will not be treated as a bank for federal income tax purposes by
reason of the activities of any shareholder.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company satisfies this requirement.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of the REIT Requirements,
including satisfying the gross income tests and the assets test.
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INCOME TESTS
In order to maintain qualification as a REIT, the Company must annually
satisfy three gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating
to real property or mortgages on real property (as interest on obligations
secured by mortgages on real property, certain "rents from real property" or
as gain on the sale or exchange of such property and certain fees with respect
to agreements to make or acquire mortgage loans), from certain types of
temporary investments or certain other types of gross income. Second, at least
95% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments as aforesaid and from dividends, interest, and gain from the sale
or other disposition of stock or securities and certain other types of gross
income (or from any combination of the foregoing). Third, short-term gain from
the sale or other disposition of stock or securities, gain from prohibited
transactions, and gain on the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) from the date of acquisition must represent less than
30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation must be
secured by real property having a fair market value at the time of acquisition
at least equal to the principal amount of the loan. The term "interest"
includes only an amount that constitutes compensation for the use or
forbearance of money. For example, a fee received or accrued by a lender which
is in fact a charge for services performed for a borrower rather than a charge
for the use of borrowed money is not includible as interest; amounts earned as
consideration for entering into agreements to make loans secured by real
property, although not interest, are otherwise treated as within the 75% and
95% classes of gross income so long as the determination of those amounts does
not depend on the income or profits of any person. By statute, the term
interest does not include any amount based on income or profits except that
the Code provides that (i) interest "based on a fixed percentage or
percentages of receipts or sales" is not excluded and (ii) when the REIT makes
a loan that provides for interest based on the borrower's receipts or sales
and the borrower leases under one or more leases based on income or profits,
only a portion of the contingent interest paid by the borrower will be
disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the
event that a REIT acquires by foreclosure property that generates income that
does not qualify as "rents from real property," such income will be treated
(if the REIT makes a timely election) as qualifying for two years following
foreclosure (which period may be extended by the IRS) so long as (i) all
leases entered into after foreclosure generate only qualifying rent, (ii) only
limited construction takes place and (iii) within 90 days of foreclosure, any
trade or business in which the property is used is conducted by an independent
contractor from which the REIT derives no income. In the event the special
foreclosure property rule applies to qualify otherwise unqualified income, the
net income that qualifies only under the special rule for foreclosure property
will be subject to tax, as described above.
RELIEF PROVISIONS
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will be generally available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the
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Company would be entitled to the benefit of these relief provisions. As
discussed above in "--Taxation of the Company--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess net
income.
ASSET TESTS
At the close of each quarter of its taxable year, the Company must satisfy
three tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by real estate assets
(including stock or debt instruments held for not more than one year that were
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company), cash, cash items, and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests, and to take such
action within 30 days after the close of any quarter as may be required to
cure any noncompliance, but no assurance can be given that such asset tests
will be met.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to be treated as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable
income" (computed without regard to the dividends paid deduction and the
Company's net capital gain) plus (ii) 95% of the net income, if any, from
foreclosure property in excess of the special tax on income from foreclosure
property, minus (B) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute (or is not treated as having distributed) all of its net capital
gain or distributes (or is treated as having distributed) at least 95%, but
less than 100% of its "REIT taxable income," as adjusted, it will be subject
to tax thereon at regular ordinary and capital gains corporate tax rates. The
Code permits a stockholder to elect to be treated for tax purposes as having
(i) received a distribution in the amount specified in the election and (ii)
contributed the amount thereof to the capital of the Company. In the event the
Company fails to distribute 100% of its income and capital gains, Bridgewater
may elect to be so treated. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company intends to
make timely distributions sufficient to satisfy the annual distribution
requirement.
"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded and (iv)
certain other adjustments are made.
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It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement, the Company may find it necessary to arrange
for borrowings or to pay dividends in the form of taxable stock dividends if
it is practicable to do so.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions described above do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in
any year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income, and subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific
statutory provisions, the Company will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost, and will not be permitted to requalify unless it distributes any
earnings and profits attributable to the period when it failed to qualify. In
addition, it would be subject to tax on any built-in gains on property held
during the period during which it did not qualify if it sold such property
within 10 years of requalification, pursuant to regulations that have not yet
been promulgated by the IRS. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF UNITED STATES STOCKHOLDERS
As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax
purposes (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.
DISTRIBUTIONS GENERALLY
As long as the Company qualifies as a REIT, distributions to a United States
Stockholder up to the amount of the Company's current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account as ordinary income and will not be eligible for the dividends-received
deduction for corporations. Distributions that are designated by the Company
as capital gains dividends will be treated as long-term capital gain (to the
extent they do not exceed the Company's actual net capital gain) for the
taxable year without regard to the period for which the stockholder has held
its stock. However, corporate stockholders may be required to treat up to 20%
of certain capital gains dividends as ordinary income, pursuant to Section
291(d) of the Code. A distribution in excess of current or accumulated
earnings and profits will first be treated as a tax-free return of capital,
reducing the tax basis in the United States Stockholder's Series A Preferred
Shares, and a distribution in excess of the United States Stockholder's tax
basis in its Series A Preferred
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Shares will be taxable gain realized from the sale of such shares. Dividends
declared by the Company in October, November or December of any year payable
to a stockholder of record on a specified date in any such month shall be
treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Stockholders may not
claim the benefit of any tax losses of the Company on their own income tax
returns.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed
under "--Taxation of the Company--General" and "--Taxation of the Company--
Annual Distribution Requirements" above. As a result, stockholders may be
required to treat as taxable dividends certain distributions that would
otherwise result in tax-free returns of capital. Moreover, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of the Company's earnings and
profits.
Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock.
TREATMENT OF TAX-EXEMPT STOCKHOLDERS
Distributions from the Company to a tax-exempt employee's pension trust or
other domestic tax-exempt stockholder will generally not constitute "unrelated
business taxable income" unless the stockholder has borrowed to acquire or
carry its shares of the Company or the shares are otherwise used in an
unrelated trade or business of the tax-exempt entity. A tax-exempt employee's
pension trust that holds more than 10% of the shares of the capital stock of
the Company may under certain circumstances be required to treat a certain
percentage of dividends as unrelated business taxable income if the Company is
"predominantly held" by qualified trusts. For these purposes, a qualified
trust is any trust defined under Section 401(a) of the Code and exempt from
tax under Section 501(a) of the Code.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts
and estates holding Series A Preferred Shares (collectively, "Foreign
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. A Foreign Stockholder should consult with its
own tax advisor to determine the effect of federal, state, and local and
country of tax residence income tax laws on an investment in the Company,
including any reporting requirements.
In general, a Foreign Stockholder will be subject to regular United States
income tax to the same extent as a United States Stockholder with respect to
income or gain derived from its investment in the Company if under all facts
and circumstances such income or gain is "effectively connected" with such
stockholder's conduct of a trade or business in the United States. See "--
Taxation of United States Stockholders". A corporate Foreign Stockholder that
receives income that is effectively connected with a United States trade or
business may also be subject to the branch profits tax under Section 884 of
the Code, which is payable in addition to the regular United States corporate
income tax. The following discussion will apply to a Foreign Stockholder whose
income or gain derived from investment in the Company is not so effectively
connected in light of the facts and circumstances.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
significantly affects the federal income tax treatment of the sale or exchange
of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss
realized on the sale or exchange of a "United States real
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property interest" ("USRPI") by a foreign taxpayer is treated by statute as
effectively connected with a U.S. trade or business as a matter of law,
without regard to the particular facts and circumstances. Shares of a
corporation are treated as a USRPI only if the fair market value of USRPIs
owned by the corporation equals or exceeds 50% of the sum of the fair market
values of its USRPIs, its foreign real property interests and its other trade
or business assets. If at no time within the five years preceding the sale or
exchange of shares in the Company the shares constituted a USRPI, gain or loss
on the sale or exchange will not be treated as effectively connected with a
U.S. trade or business by reason of FIRPTA. While ownership of real property
within the U.S. (including ownership of interests in certain entities) is
always a USRPI, a loan secured by a mortgage on U.S. real property constitutes
a USRPI only if the amounts payable by the borrower are contingent on the
income or receipts of the borrower or the property or otherwise based on the
property. Because such contingent interest is not likely to be present in the
loans to be owned by the Company, the Company believes it is unlikely that its
shares will be USRPIs or that it will derive significant gain from the sale or
exchange of USRPIs, although whether its shares are a USRPI or it derives
income from USRPIs will depend upon the facts as they ultimately develop. A
distribution of cash to a Foreign Stockholder that is not attributable to gain
from sales or exchanges by the Company of USRPIs and not designated by the
Company as a capital gain dividend is not subject to FIRPTA but generally will
be subject to the withholding of United States federal income tax at a rate of
30%, unless (i) a lower treaty rate applies or (ii) the Foreign Stockholder
files an IRS Form 4224 with the withholding agent certifying that the
investment to which the distribution relates is effectively connected to a
United States trade or business of such Foreign Stockholder. A Foreign
Stockholder who receives a distribution that has been subject to such
withholding tax may file a claim for refund to the extent the withholding has
been imposed on a portion of such distributions representing amounts in excess
of current and accumulated earnings and profits. Under FIRPTA, distributions
of proceeds attributable to gain from the Company's sale or exchange of a
USRPI are subject to income tax at the normal capital gains rates applicable
to United States stockholders (subject to applicable alternative minimum tax
and a special alternative minimum tax in the case of a nonresident alien
individual). Also, these distributions may be subject to a 30% branch profits
tax in the hands of a corporate Foreign Stockholder not entitled to a treaty
exemption or reduced rate of tax. Treasury Regulations require the withholding
of 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Foreign
Stockholder's tax liability. It should be noted that the 35% withholding tax
rate on capital gains dividends is higher than the 28% maximum rate on capital
gains of individuals. Capital gain dividends not attributable to gain on the
sale or exchange of USRPIs are not subject to United States taxation if there
is no requirement of withholding.
If the shares of the Company do constitute a USRPI (or did so constitute
within the previous five years), gain or loss on the sale or exchange of the
shares will be treated as effectively connected with the conduct of a U.S.
trade or business unless one or more special rules apply to preclude U.S.
taxation.
If the Company is a "domestically-controlled REIT," a sale of Series A
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly by Foreign Stockholders. Because the
Series A Preferred Shares will be publicly traded, no assurance can be given
that the Company will constitute a domestically-controlled REIT or that it
will be possible to ascertain whether or not it is domestically-controlled.
If the Company is not a domestically-controlled REIT, a sale of Series A
Preferred Shares would be subject to tax under FIRPTA as a sale of a USRPI and
gain or loss would be effectively connected with a United States trade or
business if either (i), the Series A Preferred Shares were not "regularly
traded" (as defined by applicable Treasury Regulations) on an established
securities market (e.g., the New York Stock Exchange, on which the Series A
Preferred Shares will be listed) during the quarter
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in which the Series A Preferred Shares were sold or (ii) even if the Series A
Preferred Shares were "regularly traded", the selling stockholder held,
directly or indirectly, more than 5% of the Series A Preferred Shares during
the five-year period ending on the date of disposition. In the event that the
Series A Preferred Shares were not "regularly traded" and the Company did not
at that time constitute a domestically-controlled REIT, a Foreign Stockholder
(without regard to its ownership percentage of Series A Preferred Shares) must
treat as effectively connected with a United States trade or business any gain
or loss on any sale or other disposition of Series A Preferred Shares that
occurs within a calendar quarter during which the Series A Preferred Shares
were not "regularly traded" and the shares were a USRPI.
If the gain on the sale of the Company's Series A Preferred Shares were
subject to taxation under FIRPTA, the Foreign Stockholder would be subject to
the same treatment as a United States Stockholder with respect to such gain
(subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual). Notwithstanding
the foregoing, capital gain from sale of shares of a REIT not subject to
FIRPTA will nonetheless be taxable to a Foreign Stockholder who is an
individual (under rules generally applicable to United States Stockholders) if
such person is in the United States for 183 days or more during the taxable
year of disposition and certain other conditions apply. In any event, a
purchaser of Series A Preferred Shares from a Foreign Stockholder will not be
required under FIRPTA to withhold on the purchase price if the purchased
Series A Preferred Shares are "regularly traded" on an established securities
market or if the Company is a domestically-controlled REIT. Otherwise, under
FIRPTA the purchaser of Series A Preferred Shares may be required to withhold
10% of the purchase price and remit such amount to the IRS.
Shares of the Company owned by a nonresident alien decedent are subject to
United States federal estate tax (which is imposed at rates up to 55%) unless
an estate tax treaty binding upon the United States provides otherwise.
INFORMATION REPORTING REQUIREMENT AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
UNITED STATES STOCKHOLDERS
Under certain circumstances, a United States Stockholder of Series A
Preferred Shares may be subject to backup withholding at a rate of 31% on
payments made with respect to, or cash proceeds of a sale or exchange of,
Series A Preferred Shares. Backup withholding will apply only if the holder
(i) fails to furnish the person required to withhold with its Taxpayer
Identification Number ("TIN") which, for an individual, would be his or her
Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified by
the IRS that it has failed properly to report payments of interest and
dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. A United States Stockholder should consult with
a tax advisor regarding qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. Backup withholding is not
an additional tax. Rather, the amount of any backup withholding with respect
to a payment to a United States Stockholder will be allowed as a credit
against such United States Stockholder's United States federal income tax
liability and may entitle such United States Stockholder to a refund, provided
that the required information is furnished to the IRS.
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FOREIGN STOCKHOLDERS
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Foreign Stockholders, and a Foreign Stockholder
should consult with a tax advisor with respect to any such information
reporting and backup withholding requirements. Backup withholding with respect
to a Foreign Stockholder is not an additional tax. Rather, the amount of any
backup withholding with respect to a payment to a Foreign Stockholder will be
allowed as a credit against any United States federal income tax liability of
such Foreign Stockholder. If withholding results in an overpayment of taxes, a
refund may be obtained provided that the required information is furnished to
the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profitsharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), a collective investment fund or separate account in which
such plans invest and any other investor using assets that are treated as the
assets of an employee benefit plan subject to ERISA (each, a "Plan" and
collectively, "Plans") should consider (a) whether the ownership of Series A
Preferred Shares is in accordance with the documents and instruments governing
such Plan; (b) whether the ownership of Series A Preferred Shares is solely in
the interest of Plan participants and beneficiaries and otherwise consistent
with the fiduciary's responsibilities and in compliance with the requirements
of Part 4 of Title I of ERISA, including, in particular, the diversification,
prudence and liquidity requirements of Section 404 of ERISA and the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code;
(c) whether the Company's assets are treated as assets of the Plan; and (d)
the need to value the assets of the Plan annually. In addition, the fiduciary
of an individual retirement arrangement under Section 408 of the Code (an
"IRA") considering the purchase of Series A Preferred Shares should consider
whether the ownership of Series A Preferred Shares would result in a non-
exempt prohibited transaction under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Code and regulations and
rulings thereunder, and may be changed (perhaps adversely and with retroactive
effect) by future legislative, administrative or judicial actions. PLANS AND
IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD
CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulation governing what constitutes the assets
of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code
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(the "Plan Asset Regulation" (29 C.F.R. (S)(S)2510.3-101), when a Plan or IRA
makes an equity investment in another entity, the underlying assets of the
entity will not be considered Plan Assets if the equity interest is a
"publicly-offered security".
For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable", (b) part of a class of
securities that is "widely held," and (c) sold to the Plan or IRA as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may
be allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred. The
Series A Preferred Shares will be registered under the Securities Act and the
Exchange Act within the time period specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable". The Company believes that any
restrictions imposed on the transfer of the Series A Preferred Shares are
limited to the restrictions on transfer generally permitted under the Plan
Asset Regulation and are not likely to result in the failure of the Series A
Preferred Shares to be "freely transferable".
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan.
However, the Company believes that under the Plan Asset Regulation the Series
A Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to
be assets of any Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and that
the trustee, or an investment manager (within the meaning of Section 3(38) of
ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, the assets of the Company under
current law do not appear likely to be assets of the Plans receiving Series A
Preferred Shares as a result of the Offering. However, if the assets of the
Company were deemed to be assets of the Plans under ERISA, certain directors
and officers of the Company might be deemed fiduciaries with respect to the
Plans that invest in the Company and the prudence and other fiduciary
standards set forth in ERISA would apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with
respect to the investing Plan or IRA could be prohibited transactions unless a
statutory or administrative exemption is available. In addition, investment
authority would also have been improperly delegated to such fiduciaries, and,
under certain circumstances, Plan fiduciaries who make the decision to invest
in the Series A Preferred Shares could be liable as co-fiduciaries for actions
taken by the Company that do not conform to the ERISA standards for
investments under Part 4 of Title I of ERISA.
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PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit
with a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction
involving the transfer of Plan assets to, or use of Plan assets by or for the
benefit of, a party in interest. Additionally, Section 406 prohibits a Plan
fiduciary from dealing with Plan assets in its own interest or for its own
account, from acting in any capacity in any transaction involving the Plan on
behalf of a party (or representing a party) whose interests are adverse to the
interests of the Plan, and from receiving any consideration for its own
account from any party dealing with the Plan in connection with a transaction
involving Plan assets. Similar provisions in Section 4975 of the Code apply to
transactions between disqualified persons and Plans and IRAs and result in the
imposition of excise taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could be a
prohibited transaction if an Underwriter, the Company, Bridgewater, Boston
Safe, MBC or any of their affiliates is a party in interest or disqualified
person with respect to the Plan. Any such prohibited transaction could be
treated as exempt under ERISA and the Code if the Series A Preferred Shares
were acquired pursuant to and in accordance with one or more "class
exemptions" issued by the Department of Labor, such as Prohibited Transaction
Class Exemption ("PTCE") 75-1 (an exemption for certain transactions involving
employee benefit plans and broker-dealers (such as the Underwriters),
reporting dealers, and banks), PTCE 84-14 (as exemption for certain
transactions determined by an independent qualified professional asset
manager), PTCE 90-1 (an exemption for certain transactions involving insurance
company pooled separate accounts), PTCE 91-38 (an exemption for certain
transactions involving bank collective investment funds), PTCE 95-60 (an
exemption for certain transactions involving an insurance company's general
account) and PTCE 96-23 (an exemption for certain transactions determined by a
qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more than
10% of the Series A Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "Federal Income Tax Considerations--Taxation of United
States Stockholders--Treatment of Tax-Exempt Stockholders".
EXPERTS
The balance sheet of the Company as of July 31, 1996 included in this
Prospectus has been so included in reliance on the report of KPMG Peat Marwick
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
61
<PAGE>
RATINGS
It is expected that the Series A Preferred Shares will be rated by Moody's
Investors Service, Inc. and by Standard and Poor's Ratings Group. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. No person is obligated to maintain any rating on the Series A
Preferred Shares, and, accordingly, there can be no assurance that the ratings
assigned to the Series A Preferred Shares upon initial issuance will not be
lowered or withdrawn by the assigning rating organization at any time
thereafter.
VALIDITY OF SECURITIES
The validity of the Series A Preferred Shares will be passed upon for the
Company by Reed Smith Shaw & McClay, Pittsburgh, Pennsylvania, and for the
Underwriters by Sullivan & Cromwell, New York, New York. Reed Smith Shaw &
McClay and Sullivan & Cromwell will rely as to all matters of Massachusetts
law upon the opinion of Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
Certain tax matters described under "Federal Income Tax Considerations" will
be passed upon for the Company by Sullivan & Cromwell, New York, New York, as
special tax counsel for the Company. Sullivan & Cromwell from time to time
provides legal services to affiliates of the Company.
62
<PAGE>
GLOSSARY
"Additional Collateral" means collateral other than Mortgaged Properties
(which term includes stock allocated to dwelling units in residential
cooperative housing corporations) securing a Mortgage Loan.
"Advisor" means Boston Safe in its role as Advisor under the Advisory
Agreement.
"Advisory Agreement" means the advisory and custody agreement between Boston
Safe and the Company pursuant to which Boston Safe will (i) administer the
day-to-day operations of the Company, (ii) monitor the credit quality of the
Mortgage Assets held by the Company, (iii) advise the Company with respect to
the acquisition, management, financing and disposition of the Company's
Mortgage Assets and (iv) maintain custody of the documents related to the
Company's Mortgage Loans.
"ARM" or "adjustable rate mortgage" means a Mortgage Loan that features
adjustments of the underlying interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to periodic
interest rate and/or payment caps and a lifetime interest rate cap.
"Articles of Organization" means the Restated Articles of Organization of
the Company.
"Board of Directors" means the board of directors of the Company.
"Boston Safe" means Boston Safe Deposit and Trust Company, a Massachusetts
trust company.
"Bridgewater" means Bridgewater Land Company, Inc., a Massachusetts
corporation.
"By-laws" means the by-laws of the Company.
"Certificate of Vote" means the Company's certificate of vote establishing
the Series A Preferred Shares.
"Classified" means a loan which, for bank regulatory purposes, is designated
as "substandard", "doubtful", or "loss". For such purposes, a substandard
asset is one that is deemed inadequately protected by the current sound worth
and paying capacity of the obligor or of the collateral pledged, if any,
because the asset has a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. An asset classified as doubtful has all the
weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are considered
uncollectible.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock, par value $0.01 per share, of the
Company.
"Company" means Mellon Preferred Capital Corporation, a Massachusetts
corporation.
63
<PAGE>
"Cooperative Loan" means a Mortgage Loan made in connection with a purchase
or refinancing of a cooperative apartment, which is secured not by real estate
but by stock in the corporation which holds title to the building in which the
apartment is located and by an assignment of the lease or agreement pursuant
to which the tenant-stockholder is entitled to occupy a specific apartment.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a stockholder in excess of
the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Act of 1980, as
amended.
"5/1 ARM" means a fixed rate Mortgage Loan that automatically converts to a
One-Year ARM in the month in which the 60th monthly payment is due.
"Five or Fewer Test" means the Code requirement that not more than 50% in
value of a Company's outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code).
"Foreign Stockholders" means holders of Series A Preferred Shares that are
for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships, or (iii)
foreign trusts and estates.
"GAAP" means U.S. generally accepted accounting principles.
"Gross Margin" means, with respect to a Mortgage Loan that is an ARM, the
applicable fixed percentage which, when added to the applicable index,
calculates to the current interest rate paid by the borrower of the adjustable
rate Mortgage Loan (without taking into account any interest rate caps or
minimum interest rates).
"Independent Directors" means the members of the Board of Directors who are
not current officers or employees of the Company, MBC, Boston Safe or any
affiliate of Boston Safe or of any person or persons that, in the aggregate,
own more than 50% of the Common Stock.
"Initial Portfolio" means the initial portfolio of Mortgage Loans acquired
by the Company from Boston Safe on April 1, 1996.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
"IRS" means the United States Internal Revenue Service.
"LIBOR Index" means the Six Month Interbank Offered Rate (LIBOR) reported in
the Tuesday edition of The Wall Street Journal (Eastern Edition) in its
general guide to Money Rates as the average of interbank offered rates for
dollar deposits in the London market based on quotations at five major banks.
64
<PAGE>
"Lifetime interest rate cap" means, with respect to Mortgage Loans that are
ARMs, the maximum interest rate that may accrue during any period over the
term of such Mortgage Loan as stated in the governing instruments evidencing
such Mortgage Loan.
"MBC" means Mellon Bank Corporation, a Pennsylvania corporation.
"MBCL" means the Massachusetts Business Corporation Law.
"Mortgage Assets" means Mortgage Loans and Mortgage-Backed Securities.
"Mortgage-Backed Securities" means securities that qualify as real estate
assets under Section 856(c)(6)(B) of the Code, that are rated by at least one
nationally recognized statistical rating organization and that represent
interests in or obligations backed by pools of Mortgage Loans and loans for
multifamily or commercial real estate properties.
"Mortgaged Properties" means single-family (one- to four-unit), five- and
six-unit, condominium and cooperative residential properties located
throughout the United States.
"Mortgage Loans" means whole loans secured by first mortgages or deeds of
trust or other similar security instruments creating first liens on Mortgaged
Properties.
"Mortgage Loan Schedule" means the schedule to the Mortgage Transfer
Agreement describing the Mortgage Loans subject thereto.
"Mortgage Transfer Agreement" means the agreement between the Company and
Boston Safe pursuant to which Boston Safe will make certain representations
and warranties with respect to each Mortgage Loan in the Initial Portfolio for
the benefit of the Company and will be obligated to repurchase any Mortgage
Loan transferred by it to the Company as to which there is a material breach
of any such representation or warranty.
"Nonaccrual Status" means a loan with respect to which, in the opinion of
management, collection of principal or interest is in doubt or which has an
outstanding balance of $250,000 or greater and is 90 days or more delinquent
or which has an outstanding balance of less than $250,000 and is 12 months or
more delinquent.
"Offering" means the offering of Series A Preferred Shares pursuant to this
Prospectus.
"One Hundred Persons Test" means the Code requirement that the capital stock
of the Company be owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
"One-Year ARM" means an ARM that adjusts annually based on the Treasury
Index beginning in the month in which the 12th monthly payment is due.
"Ownership Limit" means the provision in the Company's Articles of
Organization limiting any person from owning (including shares deemed to be
owned by the attribution provisions of the Code) more than 9.9% of any issued
and outstanding class or series of Preferred Stock.
"Periodic interest rate cap" means, with respect to ARMs, the maximum change
in the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic interest rate caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.
65
<PAGE>
"Plan" means a pension, profit-sharing, retirement or other employee benefit
plan.
"Plan Asset Regulation" means the DOL regulations determining the assets of
a Plan for purposes of ERISA and the related prohibited transaction excise tax
provisions of the Code.
"Preferred Stock" means all preferred stock, par value $0.01 per share, of
the Company, including without limitation Series A Preferred Shares and Series
A2 Preferred Shares.
"Principal Balance" means the outstanding principal balance of a Mortgage
Loan as of a date.
"Prospectus" means this prospectus, as the same may be amended.
"Rate Adjustment Date" means, with respect to any ARM, a date on which the
interest rate on such ARM adjusts.
"Reference Date" means , 1996, the date as of which information with
respect to the Initial Portfolio is provided herein.
"Registration Statement" means the registration statement the Company has
filed on Form S-11 with the Commission with respect to the Series A Preferred
Shares.
"Regulations" means the final regulations issued by the DOL regarding
employee benefit plans under ERISA.
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.
"REIT taxable income" shall have the meaning set forth in "Federal Income
Tax Considerations--Taxation of the Company--Annual Distribution
Requirements".
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the shares of % Non-Cumulative Preferred
Stock, Series A, par value $0.01 per share, offered hereby.
"Series A2 Preferred Shares" means the shares of Floating Rate Non-
Cumulative Preferred Stock, Series A2, par value $0.01 per share, issued to
Bridgewater contemporaneously with the issuance of the Series A Preferred
Shares.
"Series A3 Preferred Shares" means up to 40,000 shares of Preferred Stock,
having an aggregate liquidation preference of up to $1,000,000, currently
anticipated to be issued prior to December 31, 1997 to approximately 125
employees of MBC and its affiliates in order to help ensure that the Company
qualifies as a REIT in the event the Series A Preferred Shares are redeemed.
"Servicer" means Boston Safe in its role as servicer of the Mortgage Loans
under the Servicing Agreement.
"Servicing Agreement" means the servicing agreement entered into by Boston
Safe and the Company pursuant to which Boston Safe will act as the Servicer
for the Mortgage Loans.
"Six-Month LIBOR ARM" means an ARM that adjusts semiannually based on the
LIBOR Index beginning in the month in which the 6th monthly payment is due.
66
<PAGE>
"Tax Event" shall have the meaning set forth in "Description of Series A
Preferred Shares-- Redemption".
"3/1 ARM" means a fixed rate Mortgage Loan that automatically converts to a
One-Year ARM in the month in which the 36th monthly payment is due.
"3/3 ARM" means a fixed rate Mortgage Loan that automatically converts in
the month in which the 36th monthly payment is due to a loan that is like a
One-Year ARM, except that a Rate Adjustment Date occurs only once every three
years.
"TIN" means Taxpayer Identification Number.
"Treasury Index" means the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal
Reserve Board in Statistical Release H.15 (519) or any similar publication or,
if not so published, as reported by any Federal Reserve Bank or by any U.S.
Government department or agency.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"United States Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) citizens or residents of
the United States, (ii) corporations, partnerships, or other entities created
or organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
"Unrecognized Cooperative Loan" means a Cooperative Loan made despite
restrictions imposed by, and not recognized by, a cooperative housing
corporation.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheet of Mellon Preferred Capital Corporation as of July 31, 1996... F-3
Notes to Balance Sheet...................................................... F-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Mellon Preferred Capital Corporation:
We have audited the accompanying balance sheet of Mellon Preferred Capital
Corporation as of July 31, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit of a balance sheet includes examining, on a
test basis, evidence supporting the amounts and disclosures in that balance
sheet. An audit of a balance sheet also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Mellon Preferred Capital
Corporation as of July 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
September 18, 1996
F-2
<PAGE>
MELLON PREFERRED CAPITAL CORPORATION
BALANCE SHEET
JULY 31, 1996
<TABLE>
<CAPTION>
ASSETS
($ IN THOUSANDS,
EXCEPT PER SHARE AMOUNT)
------------------------
<S> <C>
Mortgage loans (notes 3 and 6)...................... $704,312
Reserve for loan losses............................. (3,764)
Cash and cash equivalents........................... 63,014
Interest receivable................................. 4,271
Affiliate receivables, net (note 4)................. 561
--------
Total assets...................................... $768,394
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Escrow deposits..................................... $ 585
--------
Total liabilities................................. 585
Stockholders' Equity:
Common stock, par value $0.01 per share, 1,000
shares authorized, 100 shares issued and
outstanding........................................ --
Additional paid-in capital.......................... 748,534
Retained earnings................................... 19,275
--------
Total stockholders' equity........................ 767,809
--------
Total liabilities and stockholders' equity........ $768,394
========
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
MELLON PREFERRED CAPITAL CORPORATION
NOTES TO BALANCE SHEET
(1) ORGANIZATION
Mellon Preferred Capital Corporation (the "Company") is a wholly-owned
subsidiary of Bridgewater Land Company, Inc., which is a wholly-owned
subsidiary of Boston Safe Deposit and Trust Company ("Boston Safe"), a
Massachusetts trust company. Boston Safe is an indirect, wholly-owned
subsidiary of Mellon Bank Corporation. The Company was incorporated on March
26, 1996 in the Commonwealth of Massachusetts and is authorized to engage in
the business of acquiring, holding and managing real estate mortgage assets
including mortgage loans and mortgage-backed securities.
The Company expects to qualify as a Real Estate Investment Trust (a "REIT")
under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. The Company generally will not be subject to federal or state income
tax on net income (primarily from the net interest income derived from its
investments in mortgage-related assets) and capital gains that it distributes
to its stockholders through dividend distributions.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
A description of significant accounting policies follows:
Mortgage Loans and the Reserve for Credit Losses
Mortgage loans are carried at amortized cost (principal balance less net
deferred fees) less the reserve for credit losses. Mortgage loans are
generally placed on nonaccrual status when, in management's judgment,
collection of principal or interest is in doubt or the loans have outstanding
balances of $250,000 or greater and are 90 days or more delinquent, or have
balances of less than $250,000 and are delinquent 12 months or more. Interest
receipts on nonaccrual loans are recognized on a cash basis as interest income
or are applied to principal when management believes the ultimate
collectability of principal is in doubt.
The reserve for credit losses is maintained to absorb future losses inherent
in mortgage loans based on management's judgment. Factors considered in
determining the level of the reserve include: trends in portfolio volume,
quality, maturity and composition; geographic concentrations; adequacy of
collateral; the status and amount of past-due loans; specific known risks; and
current, as well as anticipated, specific and general economic factors that
may affect certain borrowers. Credit losses are charged against the reserve;
recoveries are added to the reserve.
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--
Income Recognition and Disclosures." SFAS No. 114 provides guidelines for
measuring impairment losses on loans. A loan is considered to be impaired when
it is probable that the Company will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
Under SFAS No. 114, impaired loans are required to be measured based upon the
present value of the expected future cash flows, discounted at the loan's
initial effective interest rate, or at the loan's market price or fair value
of the collateral if the loan is collateral dependent.
F-4
<PAGE>
MELLON PREFERRED CAPITAL CORPORATION
NOTES TO BALANCE SHEET, CONTINUED
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and highly liquid
investments with original maturities of three months or less. The carrying
amount of cash equivalents approximates fair value.
Income Taxes
The Company has elected to be taxed as a REIT and intends to comply with the
provisions of the Internal Revenue Code of 1986, as amended, with respect
thereto. As a REIT, the Company is required to file separate federal and state
income tax returns and therefore will not be included in the consolidated
federal income tax return of Mellon Bank Corporation. The Company will not be
subject to federal or state income tax to the extent of its distributions to
shareholders as long as it continues to qualify as a REIT.
Despite the REIT election, the Company may be subject to federal income and
excise tax including, but not limited to, taxation at regular corporate rates
on any undistributed REIT taxable income and alternative minimum tax on
certain of its tax preferences, if any.
Management Fee
In addition to specific operating expenses incurred by the Company and
charged directly to operations, certain management, accounting and other costs
are incurred in common for the Company by Boston Safe. These services include,
but are not limited to, finance, tax, legal and other general management
services. The Company is obligated to pay Boston Safe $250 thousand per year
for such services.
Management believes this charge is reasonable and appropriate in the
circumstances; however, the Company's balance sheet may not necessarily be
indicative of the financial condition that would have existed if the Company
had been operated as an unaffiliated entity.
(3) MORTGAGE LOANS
Mortgage loans at July 31, 1996 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE INTEREST FINAL MATURITY CARRYING
ORIGINAL AMOUNTS RATES DATES AMOUNT
- ---------------- ---------------- -------------- --------
<S> <C> <C> <C>
Less than $300,000..................... 7.84% Through 2026 $302,854
Ranging from $300,001 to $1 million.... 7.94% Through 2026 338,070
Greater than $1 million................ 8.03% Through 2025 63,388
--------
$704,312
========
</TABLE>
All of the mortgage loans at July 31, 1996 are adjustable rate residential
mortgage loans. Approximately $599 million of the mortgage loans are secured
directly by residential property and the remainder is secured by shares of
stock in cooperative housing corporations. The interest rate of each type of
adjustable rate mortgage loan adjusts at the times and in a manner specified
in the mortgage note subject to: lifetime maximum interest rates; minimum
interest rates; and, in the case of most adjustable rate mortgage loans,
maximum annual interest rate increases or decreases.
F-5
<PAGE>
MELLON PREFERRED CAPITAL CORPORATION
NOTES TO BALANCE SHEET, CONTINUED
At July 31, 1996, no loans were considered impaired under SFAS No. 114, and
an insignificant amount of interest and principal was delinquent more than 90
days.
(4) RELATED PARTY TRANSACTIONS
Company Operations
Boston Safe has been acting in the role of servicer and advisor to the
Company for purposes of managing the day-to-day operations of the Company.
Boston Safe, in its role as servicer and advisor has been responsible for (a)
providing mortgage servicing, (b) monitoring the credit quality of the
mortgage assets held by the Company, (c) advising the Company with respect to
the acquisition, management, financing and disposition of the Company's
mortgage assets and (d) maintaining custody of the documents related to the
Company's mortgage loans. It is expected that Boston Safe will continue in
this servicing and advisory role for the foreseeable future.
Boston Safe is paid a servicing fee of 25 basis points per annum of the
outstanding principal balance of the mortgage loans calculated at each month
end. In addition, as discussed in note 2, Boston Safe receives a fee with
respect to the advisory and management services provided by it to the Company.
Asset Acquisition/Disposition Policy
All of the Company's mortgage assets were contributed to the Company by
Boston Safe at Boston Safe's amortized cost. The Company expects that
substantially all of the mortgage loans or mortgage-backed securities acquired
by it in the future will be acquired from Boston Safe or its affiliates. The
Company may choose, subsequent to its acquisition of any mortgage loan and at
any time during the servicing process, to direct the servicer of such mortgage
loan to dispose of any mortgage loan which the Company believes poses more
than normal credit risk. Boston Safe has indicated that it will not purchase
any mortgage loan disposed of by the Company. Accordingly, the Company
currently anticipates that any such mortgage loan would be sold at fair value
by the Company only to Mellon Bank Corporation, a non-bank subsidiary of
Mellon Bank Corporation or an unrelated third party.
Affiliate Receivables
Payments on the mortgage loans are remitted to an affiliated servicing
entity and are applied to interest and related mortgage loan balances. These
payments are remitted to the Company once the funds have been collected.
Accordingly, $609 thousand was due from the affiliated servicing entity at
July 31, 1996. Additionally, the Company owed $48 thousand in management fees
as of July 31, 1996 to affiliated entities.
(5) CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK
The Company's current policy prohibits the future acquisition of mortgage
loans which are or were, at any time during the prior 12 months, classified,
in nonaccrual status or renegotiated due to financial deterioration of the
borrower or were, more than once during the prior 12 months, more than 60 days
past due.
In the event of a default on any mortgage loan held by the Company, the
Company would bear the risk of loss of principal to the extent of any
deficiency between the value of the related mortgaged
F-6
<PAGE>
MELLON PREFERRED CAPITAL CORPORATION
NOTES TO BALANCE SHEET, CONTINUED
property and the amount owing on the mortgage loan. No assurance can be given
that the values of the collateral securing the mortgage loans included in the
Company's balance sheet have remained or will remain at the levels existing on
the date of origination of such mortgage loans.
A majority of the mortgage loans are secured by mortgaged properties located
in Massachusetts, New York, California, Connecticut and New Jersey. The
economies of such states may be adversely affected to a greater degree than
those of other areas of the country by developments affecting industries or
natural disasters concentrated in such states.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Fair value estimates are
based on existing financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Fair value estimates are made
at a point in time, based on relevant market data and information about the
financial instrument. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
Therefore, the fair value estimates cannot always be substantiated by
comparison to independent markets and, in many cases, may not be realizable in
a current sale.
The Company estimates that the fair value of its mortgage loans at July 31,
1996, approximated their carrying value. The fair value of mortgage loans is
estimated using market quotes or discounting contractual cash flows, adjusted
for prepayment estimates. Discount rates were obtained from secondary market
sources, adjusted to reflect differences in servicing, credit and other
characteristics.
Interest receivable, affiliate receivables and escrow deposits are reflected
in the financial statement at their amortized cost, which approximates their
fair value because of the short-term nature of these instruments.
F-7
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Goldman, Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are acting as representatives, has severally
agreed to purchase from the Company, the respective number of Series A
Preferred Shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES A
UNDERWRITER PREFERRED STOCK
- ----------- ----------------
<S> <C>
Goldman, Sachs & Co............................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
Total........................................................ 8,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the shares offered hereby,
if any are taken.
The Underwriters propose to offer the Series A Preferred Shares in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the Series A Preferred Shares are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the representatives.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than pursuant to
employee stock option plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Series A
Preferred Shares or which are convertible or exchangeable into securities
which are substantially similar to the shares of Series A Preferred Shares
without the prior written consent of the representatives, except for the
Series A Preferred Shares offered in connection with the Offering, the Series
A2 Preferred Shares issued to Bridgewater simultaneously with the Offering and
the Series A3 Preferred Shares.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Series A Preferred Shares offered by them.
Prior to the Offering, there has been no public market for the Series A
Preferred Shares.
The Series A Preferred Shares will be listed on the New York Stock Exchange
under the symbol . In order to meet one of the requirements for listing the
Series A Preferred Shares on the New York Stock Exchange, the Underwriters
have undertaken to sell Series A Preferred Shares to a minimum of 100
beneficial holders.
MBC and the Company have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to MBC and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
U-1
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 13
The Company............................................................... 19
Use of Proceeds........................................................... 20
Capitalization............................................................ 20
Business and Strategy..................................................... 20
Management................................................................ 36
Certain Transactions Constituting the Formation........................... 39
Description of Series A Preferred Shares.................................. 42
Description of Capital Stock.............................................. 46
Federal Income Tax Considerations......................................... 50
ERISA Considerations...................................................... 59
Experts................................................................... 61
Ratings................................................................... 62
Validity of Securities.................................................... 62
Glossary.................................................................. 63
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
-----------
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE COMMENCEMENT OF
THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI-
TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,000,000 SHARES
MELLON PREFERRED CAPITAL CORPORATION
% NON-CUMULATIVE
PREFERRED STOCK, SERIES A
-----------
PROSPECTUS
-----------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee.............................................. $68,965.52
NASD Fee...................................................... $ *
NYSE Listing Fee.............................................. $ *
Printing and Engraving Expenses............................... $ *
Legal Fees and Expenses....................................... $ *
Accounting Fees and Expenses.................................. $ *
Blue Sky Fees and Expenses.................................... $ *
Financial Advisory Fee........................................ $ *
Miscellaneous................................................. $ *
----------
Total......................................................... $ *
==========
</TABLE>
- --------
*To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
On April 1, 1996, Mellon Preferred Capital Corporation (the "Company")
issued 100 shares of its Common Stock, par value $0.01 per share, to
Bridgewater Land Company, Inc. ("Bridgewater"), in exchange for approximately
$ aggregate outstanding principal amount of mortgage loans.
Simultaneously with the closing of the offering of its Non-Cumulative
Preferred Stock, Series A, par value $0.01 per share, contemplated hereby, the
Company will issue 7,000,000 shares of Floating Rate Non-Cumulative Preferred
Stock, Series A2, par value $0.01 per share, to Bridgewater. The description
of these transactions in the Prospectus under the heading "Certain
Transactions Constituting the Formation" is incorporated herein by reference.
These shares of Common Stock were issued and Preferred Stock will be issued in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
See response to Item 31 above.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 67 of Chapter 156B of the Massachusetts Business Corporation Law,
which is applicable to the Company, provides as follows:
Indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, or who serve at its
request in any capacity with respect to any employee benefit plan, may be
provided by it to whatever extent shall be specified in or authorized by
(i) the articles of organization or (ii) a by-law adopted by the
stockholders or (iii) a vote adopted by the holders of a majority of the
shares of stock entitled to vote on the election of directors. Except as
the articles or organization or by-laws otherwise require, indemnification
of any persons referred to in the preceding sentence who are not directors
of the corporation may be provided by it to the extent authorized by the
directors. Such indemnification may include payment by the corporation of
expenses incurred in defending a civil or criminal action or proceeding in
advance of the final disposition of such action or proceeding, upon receipt
of an undertaking by the person indemnified to repay such payment if he
shall be adjudicated to be not entitled to indemnification under this
section which undertaking may be accepted without reference to the
financial ability of such
II-1
<PAGE>
person to make repayment. Any such indemnification may be provided although
the person to be indemnified is no longer an officer, director, employee or
agent of the corporation or of such other organization or no longer serves
with respect to any such employee benefit plan.
No indemnification shall be provided for any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not to
have acted in good faith in the reasonable belief that his action was in
the best interest of the corporation or to the extent that such matter
relates to service with respect to an employee benefit plan, in the best
interests of the participants or beneficiaries of such employee benefit
plan.
The absence of any express provision for indemnification shall not limit
any right of indemnification existing independently of this section.
A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or other
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or other agent of another
organization or with respect to any employee benefit plan, against any
liability incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability.
The Articles of Organization of the Company provide that, to the fullest
extent that the MBCL as from time to time in effect permits the limitation or
elimination of the liability of directors, no director of the Company shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director.
The Company's By-laws empower the Company to indemnify any director,
officer, employee or agent of the Company or any other person who is serving
at the Company's request in any such capacity with another corporation,
partnership, joint venture, trust or other enterprise (including, without
limitation, an employee benefit plan) to the fullest extent permitted under
the MBCL as from time to time in effect, and any such indemnification may
continue as to any person who has ceased to be a director, officer, employee
or agent and may inure to the benefit of the heirs, executors and
administrators of such a person.
In addition, the Company's By-laws require indemnification to the fullest
extent permitted under applicable law, as from time to time in effect. The By-
laws provide a right to indemnification for expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by any person in connection with any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil,
administrative or investigative (including, to the extent permitted by law,
any derivative action) by reason of the fact that such person is or was
serving as a director, officer, employee or agent of the Company or, at the
request of the Company, of another corporation, partnership, joint venture,
trust or other enterprise (including, without limitation, an employee benefit
plan). The By-laws specify that the right to indemnification so provided is a
contract right, set forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the By-laws, entitle the
persons to be indemnified to be reimbursed for the expenses of prosecuting any
such claim against the Company and entitle them to have all expenses incurred
in advance of the final disposition of a proceeding paid by the Company,
subject to the obligation of the person to repay amounts if it is subsequently
adjudicated that such person is not entitled to indemnification. Such
provisions, however, are intended to be in furtherance and not in limitation
of the general right to indemnification provided in the By-laws, which right
of indemnification and of advancement of expenses is not exclusive.
The Company's By-laws also provide that the Company may enter into contracts
with any director, officer, employee or agent of the Company in furtherance of
the indemnification provisions in the
II-2
<PAGE>
By-laws, as well as create a trust fund, grant a security interest or use
other means (including, without limitation, a letter of credit) to ensure
payment of amounts indemnified.
The Company's By-laws also empower the Company by action of its Board of
Directors, notwithstanding any interest of the directors in the action, to
purchase and maintain insurance in such amounts as the Board of Directors
deems appropriate to protect any director, officer, employee or agent of the
Company or any other person who is serving at the Company's request in any
such capacity with another corporation, partnership, joint venture, trust or
other enterprise (including, without limitation, an employee benefit plan)
against any liability asserted against him or incurred by him in any such
capacity arising out of his status as such (including, without limitation,
expenses, judgments, fines, (including any excise taxes assessed on a person
with respect to any employee benefit plan) and amounts paid in settlement) to
the fullest extent permitted under the MBCL as from time to time in effect,
whether or not the Company would have the power or be required to indemnify
any such individual under the terms of any agreement or by-law or the MBCL.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See F-1 of the Prospectus for a list of the financial statements included as
part of the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S> <C>
1 --Form of Underwriting Agreement among the Company,
MBC and the Underwriters *
3(i)(a) --Form of Restated Articles of Organization of the
Company *
3(i)(b) --Form of Certificate of Vote Establishing the
Series A Preferred Shares *
3(i)(c) --Form of Certificate of Vote Establishing the
Series A2 Preferred Shares *
3(ii) --Form of By-laws of the Company *
4(a) --Specimen of certificate representing Series A
Preferred Shares *
4(b) --Specimen of certificate representing Series A2
Preferred Shares *
5 --Opinions of Reed Smith Shaw & McClay and Goodwin,
Procter & Hoar LLP, relating to Series A Preferred
Shares *
8 --Opinion of Sullivan & Cromwell, special tax
counsel to the Company, relating to certain tax
matters *
10(a) --Form of Mortgage Transfer Agreement between the
Company and Boston Safe *
10(b) --Form of Servicing Agreement between the Company
and Boston Safe *
10(c) --Form of Advisory and Custody Agreement between the
Company and Boston Safe *
23(a) --Consent of KPMG Peat Marwick LLP Filed Herewith
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
23(b) --Consents of Reed Smith Shaw & McClay and Goodwin,
Procter & Hoar LLP (included, respectively, in
Exhibit 5) *
</TABLE>
- --------
*To be filed amendment.
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 33
above, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit or proceeding), is asserted by such director, officer, or
controlling person in connection with the securities registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the 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 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Pittsburgh, Pennsylvania, on the 23rd day of September, 1996.
MELLON PREFERRED CAPITAL CORPORATION
By: /s/ W. Keith Smith
--------------------------
W. Keith Smith
President
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of Mellon Preferred Capital
Corporation, do hereby constitute and appoint Carl Krasik, Marilyn K. Kolb and
Ann M. Sawchuck and each of them, our true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution in each of them, to
do any and all acts and things in our respective names and on our respective
behalves in the capacities indicated below that Carl Krasik, Marilyn K. Kolb
and Ann M. Sawchuck, or any of them, may deem necessary or advisable to enable
Mellon Preferred Capital Corporation, to comply with the Securities Act of
1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for us in our respective names in the capacities indicated below any and
all amendments (including post-effective amendments) hereto and to file the
same, with all exhibits thereto and other documents therewith, with the
Securities and Exchange Commission; and we do hereby ratify and confirm all
that Carl Krasik, Marilyn K. Kolb and Ann M. Sawchuck, or any of them, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ W. Keith Smith Principal executive officer September 23, 1996
- ----------------------------- and Director
W. Keith Smith
/s/ Michael K. Hughey Principal financial and September 23, 1996
- ----------------------------- accounting officer and
Michael K. Hughey Director
/s/ Christopher M. Condron Director September 23, 1996
- -----------------------------
Christopher M. Condron
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S> <C>
1 --Form of Underwriting Agreement among the Company,
MBC and the Underwriters *
3(i)(a) --Form of Restated Articles of Organization of the
Company *
3(i)(b) --Form of Certificate of Vote Establishing the
Series A Preferred Shares *
3(i)(c) --Form of Certificate of Vote Establishing the
Series A2 Preferred Shares *
3(ii) --Form of By-laws of the Company *
4(a) --Specimen of certificate representing Series A
Preferred Shares *
4(b) --Specimen of certificate representing Series A2
Preferred Shares *
5 --Opinions of Reed Smith Shaw & McClay and Goodwin,
Procter & Hoar LLP, relating to Series A Preferred
Shares *
8 --Opinion of Sullivan & Cromwell, special tax
counsel to the Company, relating to certain tax
matters *
10(a) --Form of Mortgage Transfer Agreement between the
Company and Boston Safe *
10(b) --Form of Servicing Agreement between the Company
and Boston Safe *
10(c) --Form of Advisory and Custody Agreement between the
Company and Boston Safe *
23(a) --Consent of KPMG Peat Marwick LLP Filed Herewith
23(b) --Consents of Reed Smith Shaw & McClay and Goodwin,
Procter & Hoar LLP (included, respectively, in
Exhibit 5) *
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
Exhibit 23(a)
[LOGO OF PEAT MARWICK]
One Mellon Bank Center Telephone 412 391 9710 Telefax 412 391 8963
Pittsburgh, PA 15219 Telex 7106642199 PMM & CO PGH
The Board of Directors of
Mellon Preferred Capital Corporation:
We consent to the use of our report included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
September 23, 1996
[LOGO OF PEAT MARWICK]
