<PAGE>
As filed with the Securities and Exchange Commission on August 20, 1996
Registration No. 333-
================================================================================
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
___________________
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Exact name of Registrant as specified in its governing
instruments)
___________________
Stephen R. Halpin, Jr.
Chevy Chase Preferred Capital Corporation
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(301) 986-7000
(Name, Address and Telephone Number of
Registrant's Principal Executive Offices and Agent for Service)
___________________
with copies to:
Thomas H. McCormick, Esq. Vincent J. Pisano, Esq.
Shaw, Pittman, Potts & Trowbridge Skadden, Arps, Slate, Meagher& Flom
2300 N Street, N.W. 919 Third Avenue
Washington, D.C. 20037 New York, New York 10022
Tel: (202) 663-8000 Tel: (212) 735-3000
Fax: (202) 663-8007 Fax: (212) 735-2000
___________________
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. [_]
___________________
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<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Securities Amount Being Proposed Aggregate Amount of
Being Registered Registered Maximum Offering Price (1) Registration Fee
Offering Price Per
Share (1)
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<S> <C> <C> <C> <C>
Noncumulative Preferred Stock, Series A,
par value $25.00 per share ................ 4,000,000 $25.00 $100,000,000 $34,482.76
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</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) 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. ESTIMATED SOLELY FOR PURPOSES OF DETERMINING THE REGISTRATION FEE
PURSUANT TO RULE 457(O) OF THE SECURITIES ACT OF 1933.
1
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CROSS REFERENCE SHEET
<TABLE>
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ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
_____________________________________________________________________________________________________________
<S> <C> <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
3. Summary Information, Risk Factors and Ratio of Earnings to Fixed
Charges......................................................... Prospectus Summary; The Company; Special
Considerations; 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 Policies and Programs
13. Investment Policies of Registrant............................... Business and Strategy - Management Policies and Programs
14. Description of Real Estate...................................... Prospectus Summary; Business and Strategy
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 - Dividend Policy; Certain Transactions
Constituting the Formation
18. Description of Registrant's Securities.......................... Description of Capital Stock; Description of Series A
Preferred Shares
19. Legal Proceedings............................................... Business and Strategy - Legal Proceedings
20. Security Ownership of Certain Beneficial Owners and
Management...................................................... Certain Transactions Constituting the Formation
21. Directors and Executive Officers................................ Management
22. Executive Compensation.......................................... Management
23. Certain Relationships and Related Transactions.................. Special Considerations; Use of Proceeds; Business
and Strategy - Management Policies and Programs;
Certain Transactions Constituting The Formation
24. Selection, Management and Custody of Registrant's
Investments..................................................... Special Considerations _ Risks Associated with
Mortgage Loans Generally; _ Relationship with the Bank and its
Affiliates; _ Conflicts of Interest; Business and Strategy -
Management Policies and Programs; _ Servicing; Management -
The Advisor
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
25. Policies with Respect to Certain Transactions................... Special Considerations; Business and Strategy
___ Management Policies and Programs;
___ Servicing; Certain Transactions
Constituting the Formation
26. Limitations of Liability....................................... Management
27. Financial Statements and Information........................... Not Applicable
28. Interests of Named Experts and Counsel......................... Experts; Certain Legal Matters
29. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities..................................... Not Applicable
</TABLE>
2
<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 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 _____________, 1996
[LOGO]
4,000,000 SHARES
CHEVY CHASE PREFERRED CAPITAL CORPORATION
____% NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
___________________
Chevy Chase Preferred Capital Corporation (the "Company") is hereby
offering 4,000,000 shares of its _____% Noncumulative Preferred Stock, Series A,
par value $25.00 per share (the "Series A Preferred Shares"). Dividends on the
Series A Preferred Shares are payable at the rate of ____% per annum of the
initial liquidation preference (an amount equal to $_____ per annum per share),
if, when and as declared by the Board of Directors of the Company. Dividends are
not cumulative and, if declared, are payable quarterly in arrears on the ______
day of _______, _______, _______ and _______ in each year, commencing _______,
1996. If no dividend is declared on the Series A Preferred Shares by the Company
for a dividend period, holders of the Series A Preferred Shares will have no
right to receive a dividend for that period, and the Company will have no
obligation to pay a dividend for that period, whether or not dividends are
declared and paid for any future period.
The Series A Preferred Shares are not redeemable prior to ________, ____
(except upon the occurrence of a Tax Event, as described herein). On and after
________, ____, the Series A Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at a redemption price of $25.00 per
share, plus accrued and unpaid dividends, if any, thereon. The Series A
Preferred Shares are not be subject to any sinking fund or mandatory redemption
and are not convertible into any other securities of the Company.
The Company has been formed for the purpose of acquiring, holding and
managing real estate mortgage assets. The Company expects that its mortgage
assets will be purchased from Chevy Chase Bank, F.S.B., a federally chartered
and federally insured stock savings bank (the "Bank"), affiliates of the Bank
and unrelated third parties. All of the shares of the Company's common stock,
par value $______ per share (the "Common Stock"), are owned by the Bank.
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. Individuals and certain other persons are not permitted to
beneficially own more than ___% of any series of preferred stock of the Company,
including the Series A Preferred Shares, with limited exceptions; publicly held
corporations are not permitted to beneficially own more than ___% of such stock.
Prior to this offering, there has been no market for the Series A Preferred
Shares. Application will be made to list the Series A Preferred Shares on
__________________.
___________________
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>
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Initial Public Underwriting Proceeds to
Offering Price(1) Discount (2) Company (3)
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<S> <C> <C> <C>
Per Share ............................. $25.00 $ $
- -------------------------------------------------------------------------------------------------------
Total (4) ............................. $100,000,000 $ $
=======================================================================================================
</TABLE>
(1) Plus accrued dividends, if any, from _________, 1996.
(2) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $_______.
(4) The Company has granted the several Underwriters an option for 30 days to
purchase up to an additional _________ Series A Preferred Shares at the
initial public offering price per Series A Preferred Share, less
underwriting discounts, solely to cover over-allotments. If such option is
exercised in full, the total initial public offering price, underwriting
discount and proceeds to Company will be $_________, $_______ and
$________, respectively. See "Underwriting."
___________________
The Series A Preferred Shares are offered by the several Underwriters, as
specified herein, subject to prior sale, when, as and if delivered to and
accepted by them, subject to approval of certain legal matters by counsel for
the Underwriters. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Series A Preferred Shares offered hereby will be made in New
York, New York on or about _________, 1996.
___________________
___________________
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 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 THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
___________________
AVAILABLE 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 of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the content of any contract or other document
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Series A
Preferred Shares offered hereby, reference is made to the Registration Statement
and the exhibits thereto.
The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, 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 Designation establishing the rights, preferences and
limitations of the Series A Preferred Shares provides that the Company shall
maintain its status as a reporting company under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), for as long as any of the Series A
Preferred Shares are outstanding and pursuant thereto will furnish shareholders
with annual reports containing audited financial statements.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. The offering of 4,000,000
shares of _____% Noncumulative Preferred Stock, Series A, par value $25.00 per
share (the "Series A Preferred Shares"), is referred to herein as the
"Offering." Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment option described in "Underwriting" is not
exercised. Capitalized terms used herein and not otherwise defined are as
defined in the Glossary appearing elsewhere in this Prospectus.
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............................. Chevy Chase Preferred Capital
Corporation (the "Company"), a newly-
formed Maryland corporation created for
the purpose of acquiring, holding and
managing real estate mortgage assets
("Mortgage Assets").
SECURITIES OFFERED................. 4,000,000 Series A Preferred Shares.
RANKING............................ The Series A Preferred Shares rank
senior to the Company's common stock,
par value $___ per share (the "Common
Stock") with respect to dividend rights
and rights upon liquidation. Additional
shares of preferred stock, par value
$25.00 per share, of the Company (the
"Preferred Stock") ranking senior to the
Series A Preferred Shares may not be
issued without the approval of holders
of at least ______% of the Series A
Preferred Shares. Additional shares of
Preferred Stock ranking on a parity with
the Series A Preferred Shares may not be
issued without the approval of a
majority of the Independent Directors.
USE OF PROCEEDS.................... The net proceeds to the Company from the
Offering, together with proceeds
received in connection with the sale of
shares of Common Stock to Chevy Chase
Bank, F.S.B., a federally chartered and
federally insured stock savings bank
(the "Bank"), will be used to purchase
the Company's initial portfolio of
Mortgage Assets and to pay the expenses
of the Offering and the formation of the
Company (estimated by the Company to be
approximately $__________ in the
aggregate). See "Use of Proceeds."
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3
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DIVIDENDS........................... Dividends on the Series A Preferred
Shares are payable at the rate of ____%
per annum of the initial liquidation
preference (an amount equal to $_____
per annum per share), if, when and as
declared by the Board of Directors of
the Company. If declared, dividends are
payable quarterly in arrears on the
______ day of _______, _______, _______
and _______ in each year, commencing
_______, 1996. Dividends on the Series A
Preferred Shares are not cumulative and,
accordingly, if no dividend is declared
on the Series A Preferred Shares by the
Company for a dividend period, holders
of the Series A Preferred Shares will
have no right to receive a dividend for
that period, and the Company will have
no obligation to pay a dividend for that
period, whether or not dividends are
declared and paid for any future 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 accrued and unpaid
dividends, if any, thereon. See
"Description of Series A Preferred
Shares -- Rights Upon Liquidation."
REDEMPTION........................... The Series A Preferred Shares are not
redeemable prior to ______, ____ (except
upon the occurrence of a Tax Event, as
defined in "Description of Series A
Preferred Shares _ Redemption"). On and
after _______, ____, the Series A
Preferred Shares may be redeemed for
cash at the option of the Company, in
whole or in part, at any time and from
time to time, at a redemption price of
$25.00 per share, plus accrued and
unpaid dividends, if any, thereon. Upon
the occurrence of a Tax Event, the
Company will have the right to redeem
the Series A Preferred Shares in whole
(but not in part) at a redemption price
of $25.00 per share, plus accrued and
unpaid dividends, if any, thereon. See
"Description of Series A Preferred
Shares -- Redemption."
VOTING RIGHTS........................ Holders of Series A Preferred Shares
will not have any voting rights, except
as expressly provided herein or as may
be required by law. On any matter on
which holders of the Series A Preferred
Shares may vote, each Series A Preferred
Share will be entitled to one vote. See
"Description of Series A Preferred
Shares _ Voting Rights."
OWNERSHIP LIMITS .................... Ownership of more than ___% by any
individuals and certain other persons
(___% in the case of publicly held
corporations) 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 real estate
investment trust (a "REIT") for federal
income tax purposes. See "Description of
Capital Stock -- Restrictions on
Ownership and Transfer."
TRADING.............................. Application will be made to list the
Series A Preferred Shares on the
______________________.
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4
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RATINGS.............................. It is expected that the Series A
Preferred Shares will be rated by two of
the following: Moody's Investors
Service, Inc., Standard and Poor's
Services, Duff & Phelps or Fitch
Investors Service, L.P. 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.
SPECIAL CONSIDERATIONS............... Prospective investors should consider
carefully the factors discussed under
"Special Considerations" before
acquiring any Series A Preferred Shares.
THE COMPANY
The Company is a newly-formed Maryland corporation incorporated on August
20, 1996 and created for the purpose of acquiring, holding and managing Mortgage
Assets. 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 the Bank.
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to stockholders.
The Company expects that its Mortgage Assets will consist of whole loans
("Mortgage Loans") secured by first mortgages or deeds of trust on single-family
(one- to four-unit) residential real estate properties or by commercial real
estate properties and of mortgage securities rated by at least one nationally
recognized independent rating organization and representing interests in or
obligations backed by pools of mortgage loans ("Mortgage-Backed Securities").
Mortgage Loans underlying the Mortgage-Backed Securities will be secured by
single-family residential, multifamily or commercial real estate properties
located in the United States. The Company intends to acquire its Mortgage Assets
from the Bank, affiliates of the Bank and unrelated third parties.
Simultaneously with the consummation of the Offering, the Bank will
purchase shares of Common Stock for a price equal to $100 million. The Company
will use the aggregate proceeds of $200 million received in connection with both
the Offering and such sale of shares of Common Stock to the Bank to purchase a
portfolio of Mortgage Loans and Mortgage-Backed Securities (the "Initial
Portfolio") from the Bank, affiliates of the Bank and unrelated third parties.
If the Underwriters exercise their option to purchase additional Series A
Preferred Shares to cover over-allotments, the Bank will purchase additional
shares of Common Stock for a price equal to the aggregate public offering price
of the additional Series A Preferred Shares purchased pursuant to the
Underwriters' over-allotment option, and the Company will use the additional
proceeds from any such additional sales of Series A Preferred Shares and shares
of Common Stock to purchase additional Mortgage Assets of the types described in
"Business and Strategy _ Description of the Initial Portfolio." See "Use of
Proceeds." Simultaneously with the consummation of the Offering (or upon the
exercise by the Underwriters of their over-allotment option), the Bank will also
purchase additional shares of Common Stock for a price equal to the aggregate
amount of underwriting discounts and expenses incurred by the Company in
connection with the Offering (including without limitation any underwriting
discounts associated with the exercise by the Underwriters of their over-
allotment option) and all expenses incurred by the Company in connection with
its formation in order to provide the Company with funds sufficient to pay such
expenses.
On _________, 1996, the Mortgage Loans included in the Initial Portfolio
had an aggregate outstanding principal balance of approximately $__________, and
the Mortgage-Backed Securities included in the Initial Portfolio had an
aggregate value and unpaid principal balance of approximately $_________ and
$_________, respectively. Approximately __% (measured by aggregate outstanding
principal balance) of the Initial Portfolio consists of Mortgage Loans secured
solely by first mortgages
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5
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or deeds of trust on single-family (one- to four-unit) residential properties
("Residential Mortgage Loans"), and approximately ___% (measured by aggregate
outstanding principal balance) of the Initial Portfolio consists of Mortgage
Loans secured solely by first mortgages or deeds of trust on commercial real
estate properties ("Commercial Mortgage Loans"). The remainder of the Initial
Portfolio consists of Mortgage-Backed Securities. See "Business and Strategy --
Description of Initial Portfolio." The Bank and/or one or more of its affiliates
will service the Mortgage Loans included in the Initial Portfolio. Each servicer
will be entitled to receive fees in connection with the servicing of such
Mortgage Loans. See "Business and Strategy -- Servicing."
The Company and the Bank believe that the fair value of the Initial
Portfolio will equal the amount (approximately $200 million) that the Company
will pay for the Initial Portfolio. However, no third party valuations of the
Mortgage Assets constituting the Initial Portfolio have been or will be obtained
for purposes of the Offering. See "Special Considerations -- No Third Party
Valuation of the Mortgage Assets; No Arm's-Length Negotiations with Affiliates."
The Company will enter into an advisory agreement with the Bank (the
"Advisory Agreement") pursuant to which the Bank will administer the day-to-day
operations of the Company. The Bank in its role as advisor under the terms of
the Advisory Agreement is hereinafter referred to as the "Advisor." The Advisor
will be responsible for (i) monitoring the credit quality of Mortgage Assets
held by the Company, and (ii) advising the Company with respect to the
acquisition, management, financing and disposition of the Company's Mortgage
Assets. 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. The
Advisor may, with the approval of a majority of the Board of Directors, as well
as a majority of the Independent Directors, subcontract all or a portion of its
obligations under the Advisory Agreement to unrelated third parties. The Advisor
will not, in connection with the subcontracting of any of its obligations under
the Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement. The Advisor and its personnel have
substantial experience in mortgage finance and in the administration of Mortgage
Loans.
The Advisory Agreement has an initial term of ____ years, and will be
renewed automatically for additional ____-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon __ days' prior written notice.
As long as any Series A Preferred Shares remain outstanding, any decision by the
Company either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an advisory fee equal to _____. See "Management -- The Advisor."
The Company will have a board of directors (the "Board of Directors")
composed of seven members, three of whom will be Independent Directors. An
"Independent Director" is a director who is not a current officer or employee of
the Company, the Bank or any affiliate of the Bank. Pursuant to the Certificate
of Designation establishing the Series A Preferred Shares, the Independent
Directors are required to take into account the interests of the holders of both
the Series A Preferred Shares and the Common Stock in assessing the benefit to
the Company of any proposed action requiring their approval. The Company
currently has five officers. The Company has no other employees and does not
anticipate that it will require additional employees. See "Management."
The Company may from time to time purchase additional Mortgage Assets out
of proceeds received in connection with the repayment or disposition of Mortgage
Assets or the issuance of additional shares of Common Stock or Preferred Stock.
Additional shares of Preferred Stock ranking senior to the Series A Preferred
Shares may not be issued by the Company without the approval of holders of at
least ______% of the outstanding Series A Preferred Shares. Additional shares of
Preferred Stock ranking on a parity with the Series A Preferred Shares may not
be issued by the Company without the approval of a majority of the Independent
Directors. See "Description of Series A Preferred Shares" and " --Independent
Director Approval." The Company does not currently intend to issue any
additional shares of Preferred Stock unless it simultaneously issues additional
shares of Common Stock to the Bank, and the aggregate proceeds to be received
from such issuance of Common Stock approximately equals the sum of the aggregate
offering price of such additional Preferred Stock and the Company's expenses
(including any
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6
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underwriting discounts or placement fees) incurred in connection with the
issuance of such additional shares of Preferred Stock.
The Company currently anticipates that the Mortgage Assets that it may
acquire in the future will be purchased from the Bank, affiliates of the Bank
and unrelated third parties. The Company expects that the Mortgage Loans that it
purchases will represent first lien positions, will be acquired on a basis
consistent with secondary market standards and will have been originated and
underwritten in conformity with standards generally applied by the originator at
the time the Mortgage Loans were originated. The Company currently intends to
maintain approximately __% of its portfolio of Mortgage Assets in Residential
Mortgage Loans, approximately __% of its portfolio in Commercial Mortgage Loans,
and approximately __% of its portfolio in Mortgage-Backed Securities. The
Company's current policy is not to acquire any Commercial Mortgage Loan if such
Commercial Mortgage Loan would constitute more than 5% of the total book value
of the Mortgage Assets of the Company at the time of its acquisition. The
Company's current policy prohibits the acquisition of any Mortgage Loan or any
interest in a Mortgage Loan (other than an interest resulting from the
acquisition of Mortgage-Backed Securities), which Mortgage Loan (i) is
delinquent in the payment of principal or interest; (ii) is or was at any time
during the preceding 12 months (a) classified, (b) in nonaccrual status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest.
As a newly-formed entity, the Company has no prior operating history. As of
the date hereof, it has no assets, stockholders' equity or indebtedness.
Immediately after the issuance by the Company of the Series A Preferred Shares
to the public and the Common Stock to the Bank and the purchase by the Company
of the Initial Portfolio, the Company (assuming that (i) the Underwriters' over-
allotment option is not exercised and (ii) there are $__________ in aggregate
offering and organizational expenses) will have $200 million in Mortgage Assets,
$100 million of stated capital attributable to the Series A Preferred Shares,
$__________ of stated capital attributable to the Common Stock and $__________
of additional paid-in capital. See "Capitalization."
The principal executive offices of the Company are located at 8401
Connecticut Avenue, Chevy Chase, Maryland 20815, telephone number (301) 986-
7000.
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ending December 31, 1996. As a
REIT, the Company generally will not be subject to federal income tax on net
income and capital gains that it distributes to the holders of its Common Stock
and Preferred Stock, including the Series A Preferred Shares.
A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to
stockholders at least 95% of its "REIT taxable income" (not including capital
gains). Notwithstanding qualification for taxation as a REIT, the Company may be
subject to federal, state and/or local tax. See "Special Considerations -- Tax
Risks" and "Federal Income Tax Considerations."
- --------------------------------------------------------------------------------
7
<PAGE>
THE COMPANY
The Company is a newly-formed Maryland corporation created for the purpose
of acquiring, holding and managing Mortgage Assets that will generate net income
for distribution to stockholders. The Company anticipates that approximately __%
of its portfolio of Mortgage Assets will represent interests in Residential
Mortgage Loans, approximately __% of its portfolio of Mortgage Assets will
represent interests in Commercial Mortgage Loans and approximately __% of its
portfolio will represent interests in Mortgage-Backed Securities.
The Company expects that its Mortgage Assets will be acquired from the
Bank, affiliates of the Bank and unrelated third parties. The Bank will
administer the day-to-day operations of the Company in its role as Advisor under
the Advisory Agreement. All of the Common Stock of the Company is owned by the
Bank. 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.
For a further description of the operations of the Company, see "Business
and Strategy," "Management," "Special Considerations" and "Federal Income Tax
Considerations."
USE OF PROCEEDS
The proceeds to the Company from the sale of the Series A Preferred Shares
offered hereby are expected to be $100 million (assuming the Underwriters' over-
allotment option is not exercised). Simultaneously with the consummation of the
Offering, the Bank will purchase shares of Common Stock for a price equal to
$100 million. The Company will use the aggregate proceeds of $200 million
received in connection with both the Offering and the sale of shares of Common
Stock to the Bank to purchase the Initial Portfolio from the Bank, affiliates of
the Bank and unrelated third parties. See "Business and Strategy."
If the Underwriters exercise their option to purchase additional Series A
Preferred Shares to cover over-allotments in the Offering, the Bank will
purchase additional shares of Common Stock for a price equal to the aggregate
initial public offering price of such additional Series A Preferred Shares. The
Company will use the additional proceeds from any such additional sales of
Series A Preferred Shares and shares of Common Stock to purchase additional
Mortgage Assets of the types described in "Business and Strategy -- Description
of Initial Portfolio." The Company expects that it will purchase any such
additional Mortgage Assets within _____ months from the exercise by the
Underwriters of their over-allotment option. Pending such purchase, the Company
will invest such additional proceeds in short-term money market investments.
Simultaneously with the consummation of the Offering, the Bank will also
purchase additional shares of Common Stock for a price equal to the aggregate
amount of underwriting discounts and expenses incurred by the Company in
connection with the Offering and all expenses incurred by the Company in
connection with its formation (estimated by the Company to be approximately
$_________ in the aggregate) in order to provide the Company with funds
sufficient to pay such expenses. Simultaneously with the consummation of any
sale of additional Series A Preferred Shares in connection with the exercise by
the Underwriters of their over-allotment option, the Bank will also purchase
additional shares of Common Stock for a price equal to the aggregate amount of
underwriting discounts and expenses incurred by the Company in connection with
the exercise of such over-allotment option in order to provide the Company with
funds sufficient to pay such expenses.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
_________, 1996 and as adjusted to reflect (i) the consummation of the Offering
(assuming the Underwriters' over-allotment option is not exercised) and (ii) the
transactions described in "Certain Transactions Constituting The Formation" and
the use of the net proceeds therefrom as described under "Use of Proceeds."
8
<PAGE>
<TABLE>
<CAPTION>
________, 1996
------------------------------------------------
Actual As Adjusted
--------------------- -----------------------
(In thousands, except per share data)
<S> <C> <C>
DEBT
Total long-term debt.................................................. $ -- $ --
--------------------- -----------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $25.00 par value; none authorized, issued and
outstanding, actual; and _________ shares authorized,
4,000,000 shares issued and outstanding, as adjusted............... -- 100,000
Common Stock, $1.00 par value (1); 100 shares authorized, _____
shares issued and outstanding, actual; and _________ shares
authorized, _______ shares issued and outstanding, as adjusted..... (1)
Capital contributed in excess of par.................................. -- (1)
--------------------- -----------------------
Total stockholders' equity....................................
--------------------- -----------------------
TOTAL CAPITALIZATION $ $
===================== =======================
</TABLE>
_____________
(1) The Company will be formed with an initial capitalization of $100. Prior to
consummation of the Offering, the Articles of Incorporation of the Company
will be amended to increase the authorized capital of the Company and to
increase the par value of the Common Stock to $______ per share. Since the
par value per share of the Preferred Stock equals the issue price of a
Series A Preferred Share, the full $100 million raised in the Offering will
represent Preferred Stock capital. Since the par value of the Common Stock
equals __% of its purchase price of $_______ per share and the Bank will be
acquiring _______ shares of Common Stock upon the consummation of the
Offering for an aggregate purchase price of $_______ (including Common
Stock acquired by the Bank in order to provide sufficient funds to pay
aggregate offering and organization expenses, estimated by the Company to
be approximately $_______), the Common Stock capital will equal $_______.
The additional paid-in capital of $_______ represents the excess of the
purchase price for the Common Stock over the par value of such shares after
deducting the aggregate amount of offering and organization expenses.
9
<PAGE>
SPECIAL CONSIDERATIONS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
purchasing Series A Preferred Shares in the Offering.
NO OPERATING HISTORY; DEPENDENCE UPON ADVISOR
The Company is a newly organized corporation with no operating history and
no revenues to date. The Company will be dependent for the selection,
structuring and monitoring of its Mortgage Assets on the diligence and skill of
its officers and the officers and employees of the Advisor. See "Management." In
addition, the Company will be dependent upon the expertise of the Bank and/or
one or more of the Bank's affiliates for the servicing of the Mortgage Loans.
The Advisor may subcontract all or a portion of its obligations under the
Advisory Agreement, and the servicers of the Mortgage Loans may subcontract all
or a portion of their obligations under their respective servicing arrangements,
to one or more affiliates, and under certain conditions to non-affiliates,
involved in the business of managing Mortgage Assets. In the event the Advisor
or any servicer subcontracts its obligations in such a manner, the Company will
be dependent upon the subcontractor to provide services. See "Management _ The
Advisor" and "Business and Strategy _ Servicing."
RISKS ASSOCIATED WITH THE COMPANY BEING A SUBSIDIARY OF THE BANK
Because the Company is a subsidiary of the Bank, federal regulatory
authorities will have the right to examine the Company and its activities. Under
certain circumstances, including any determination that the Bank's relationship
to the Company results in an unsafe and unsound banking practice, such
regulatory authorities will have the authority to issue an order which restricts
the ability of the Company to transfer assets or to make distributions to its
stockholders.
DIVIDENDS NOT CUMULATIVE
Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors does not declare a dividend on the
Series A Preferred Shares for any period, the holders of the Series A Preferred
Shares would not be entitled to recover such dividend whether or not funds are
or subsequently become available. The Board of Directors may determine, in its
business judgment, that it would be in the best interests of the Company to pay
less than the full amount of the stated dividends on the Series A Preferred
Shares or no dividends for any quarter notwithstanding that funds are available.
Factors that would be considered by the Board of Directors in making this
determination are the Company's financial condition and capital needs, the
impact of legislation and regulations as then in effect or as may be proposed,
economic conditions, and such other factors as the Board may deem relevant.
Notwithstanding the foregoing, 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. In addition, the Company intends to
make Balancing Distributions to holders of its Common Stock sufficient to ensure
that the value of the Common Stock will not be greater than ___% of the value of
all of the outstanding stock of the Company. See "_ Tax Risks," below and
"Federal Income Tax Considerations _ Organizational Requirements."
INTEREST RATE RISK
The Company's income will consist primarily of interest payments on the
Mortgage Assets held by it. The Company anticipates that most of its Mortgage
Assets 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 addition, certain Mortgage
Asset products which the Company will purchase could allow borrowers in such an
interest rate environment to convert an adjustable rate mortgage to a fixed rate
mortgage, thus "locking in" a low fixed interest rate. Because the rate at which
dividends, if, when and as declared, are payable on the Series A Preferred
Shares is
10
<PAGE>
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:
Structural Risks of Mortgage Loans. The Company generally does not intend
----------------------------------
to obtain credit enhancements such as mortgagor bankruptcy insurance or to
obtain special hazard insurance for its Mortgage Loans, other than standard
hazard insurance, which will in each case only relate to individual Mortgage
Loans. Accordingly, during the time it holds Mortgage Loans for which third
party insurance is not obtained, the Company will be subject to risks of
borrower defaults and bankruptcies and special hazard losses that are not
covered by standard hazard insurance (such as those occurring from earthquakes
or floods). In addition, in the event of a default on any Mortgage Loan held by
the Company resulting from declining property values or worsening economic
conditions, among other factors, the Company would bear the risk of loss of
principal to the extent of any deficiency between (i) the value of the related
mortgaged property, plus any payments from an insurer (or guarantor in the case
of Commercial Mortgage Loans) and (ii) the amount owing on the Mortgage Loan.
The Company anticipates that approximately __% (measured by aggregate
outstanding principal amount) of its portfolio of Mortgage Assets on an ongoing
basis will consist of Commercial Mortgage Loans. Commercial Mortgage Loans have
certain distinct risks. The Company's current policy is not to acquire any
Commercial Mortgage Loan if such Commercial Mortgage Loan would constitute more
than 5% of the total book value of the Mortgage Assets of the Company at the
time of its acquisition. Commercial Mortgage Loans generally lack standardized
terms, which may complicate their structure. Commercial real estate properties
themselves tend to be unique and are more difficult to value than residential
real estate properties. Commercial Mortgage Loans also tend to have shorter
maturities than Residential Mortgage Loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon" payment
due on maturity. In addition, commercial real estate properties, particularly
industrial and warehouse properties, are generally subject to relatively greater
environmental risks than non-commercial properties and to the corresponding
burdens and costs of compliance with environmental laws and regulations. See "_
Environmental Considerations," below. Also, there may be costs and delays
involved in enforcing rights of a property owner against tenants in default
under the terms of leases with respect to commercial properties. For example,
tenants may seek the protection of the bankruptcy laws, which could result in
termination of lease contracts.
Real Estate Market Conditions. The results of the Company's operations
-----------------------------
will be affected by various factors, many of which are beyond the control of the
Company, such as: (i) local and other economic conditions affecting real estate
value, (ii) the ability of tenants to make lease payments, (iii) the ability of
a property to attract and retain tenants, which may in turn be affected by local
conditions such as an oversupply of space or a reduction in demand for rental
space in the area, the attractiveness of properties to tenants, competition from
other available space, the ability of the owner to pay leasing commissions,
provide adequate maintenance and insurance, pay tenant improvement costs and
make other tenant concessions, (iv) interest rate levels and the availability of
credit to refinance such loans at or prior to maturity, and (v) increased
operating costs, including energy costs, real estate taxes and costs of
compliance with environmental controls and regulations. The results of the
Company's operations depend on, among other things, the level of interest income
generated by the Company's Mortgage Assets, the market value of such Mortgage
Assets and the supply of and demand for such Mortgage Assets. Further, no
assurance can be given that the values of the Mortgage Assets included in the
Company's Initial Portfolio, or the values of properties securing such Mortgage
Assets, have remained or will remain at the levels existing on the dates of
origination of such Mortgage Assets.
11
<PAGE>
Geographic Concentration. In addition to the foregoing, certain geographic
------------------------
regions of the United States from time to time will experience natural disasters
or weaker regional economic conditions and housing markets, and, consequently,
may experience higher rates of loss and delinquency on Mortgage Loans generally.
Any concentration of the Mortgage Loans in such a region may present risks in
addition to those generally present with respect to Mortgage Loans generally.
The Company currently anticipates that approximately __% of the residential
properties underlying the Company's Residential Mortgage Loans included in the
Initial Portfolio will be located in __________. The Company currently
anticipates that approximately __% of the commercial properties underlying its
Commercial Mortgage Loans will be located in __________________________. These
Mortgage Loans may be subject to a greater risk of default than other comparable
Mortgage Loans in the event of adverse economic, political or business
developments or natural hazards that may affect such regions and the ability of
property owners in such regions to make payments of principal and interest on
the underlying mortgages. See "Business and Strategy _ Description of Initial
Portfolio _ Geographic Distribution" herein for further information regarding
the geographic concentration of the Mortgage Loans in the Initial Portfolio.
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 servicers
of the Company's Mortgage Loans will be entitled to deduct from collections
received all expenses reasonably incurred in attempting to recover amounts due
and not yet repaid on liquidated Mortgage Loans, including legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses,
thereby reducing amounts available to the Company.
Legal Considerations. Applicable state laws generally regulate interest
--------------------
rates and other charges and require certain disclosures to borrowers. In
addition, most states have other laws, public policy and general principles of
equity relating to the protection of consumers, unfair and deceptive practices
and practices which may apply to the servicing and collection of the Mortgage
Loans. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Company to collect all or part of the principal of
or interest on the Mortgage Loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the Company to damages
and administrative sanctions.
Environmental Considerations. In the event that the Company is forced to
----------------------------
foreclose on a defaulted Mortgage Loan to recover its investment in such
Mortgage Loan, the Company may be subject to environmental liabilities in
connection with such real property which could exceed the value of the real
property. Although the Company intends to exercise due diligence to discover
potential environmental liabilities prior to the acquisition of any property
through foreclosure, hazardous substances or wastes, contaminants, pollutants or
sources thereof (as defined by state and federal laws and regulations) may be
discovered on properties during the Company's ownership or after a sale thereof
to a third party. If such hazardous substances are discovered on a property, the
Company may be required to remove those substances and clean up the property.
There can be no assurances that the Company would not incur full recourse
liability for the entire costs of any removal and clean-up, that the cost of
such removal and clean-up would not exceed the value of the property or that the
Company could recoup any of such costs from any third party. The Company may
also be liable to tenants and other users of neighboring properties. In
addition, the Company may find it difficult or impossible to sell the property
prior to or following any such clean-up.
12
<PAGE>
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and
operating policies and strategies of the Company, certain of which are described
in this Prospectus. These policies, which are discussed herein, 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."
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 __% of the aggregate
amount of net proceeds received in connection with the issuance of Preferred
Stock and Common Stock may not be incurred without the approval of a majority of
the Independent Directors of the Company). To the extent the Company were to
change its policy with respect to the incurrence of indebtedness, the Company
would be subject to risks associated with leverage, including, without
limitation, changes in interest rates and prepayment risk.
RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock of the
Company and administers the day-to-day activities of the Company in its role as
Advisor under the Advisory Agreement. The Bank and/or one or more of its
affiliates act as servicers of the Company's Mortgage Loans. In addition, other
than the Independent Directors, all of the officers and directors of the Company
are also officers and/or directors of the Bank and/or affiliates of the Bank. As
the holder of all of the outstanding voting stock of the Company, the Bank will
have the right to elect all directors of the Company, including the Independent
Directors.
The Company is dependent for the selection, structuring and monitoring of
its Mortgage Assets on the diligence and skill of its officers and the officers
and employees of the Bank in its role as Advisor and of any affiliates with
which the Advisor enters into sub-advisory agreements. In addition, the Company
is dependent on the Bank and/or one or more affiliates of the Bank for the
servicing of the Mortgage Loans. The Bank and its affiliates may have interests
which are not identical to those of the Company. Consequently, conflicts of
interest may arise with respect to transactions, including without limitation
the Company's acquisition of the Initial Portfolio; future acquisitions of
Mortgage Assets from the Bank or affiliates of the Bank; future dispositions of
Mortgage Loans to the Bank or affiliates of the Bank; and the modification of
the Advisory Agreement or any servicing agreement entered into with the Bank or
any affiliate of the Bank. It is the intention of the Company and the Bank that
any agreements and transactions between the Company, on the one hand, and the
Bank and/or its affiliates, on the other hand, are fair to all parties and
consistent with market terms, including the prices paid and received for
Mortgage Assets, including those in the Initial Portfolio, on their acquisition
or disposition by the Company. The requirement in the Certificate of Designation
establishing the Series A Preferred Shares that certain actions of the Company
be approved by a majority of the Independent Directors is also intended to
ensure fair dealings between the Company and the Bank and its affiliates.
However, there can be no assurance that such agreements or transactions will be
on terms as favorable to the Company as those that could have been obtained from
unaffiliated third parties. See "Business and Strategy _ Management Policies and
Programs _ Conflict of Interest Policies."
13
<PAGE>
NO THIRD PARTY VALUATION OF THE MORTGAGE ASSETS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $200 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Assets constituting the Initial Portfolio were
obtained for purposes of the Offering, and there can be no assurance that the
fair value of the Initial Portfolio does not differ from the purchase price
payable by the Company.
In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Assets even in circumstances where an affiliate of the Company is selling the
Mortgage Assets to, or purchasing the Mortgage Assets from, the Company.
Accordingly, although the Company and the Bank intend that future acquisitions
or dispositions of Mortgage Assets be on a fair value basis, there can be no
assurance that the consideration to be paid (or received) by the Company to (or
from) the Bank or any of its affiliates in connection with future acquisitions
or dispositions of Mortgage Assets will not differ from the fair value of such
Mortgage Assets.
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 Shaw, Pittman, Potts & Trowbridge 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 Shaw, Pittman, Potts & Trowbridge, may affect the Company's
ability to qualify as a REIT. Although the Company is not aware of any proposal
in Congress to amend the tax laws in a manner that would materially and
adversely affect the Company's ability to operate as a REIT, no assurance can be
given that new legislation or new regulations, administrative interpretations or
court decisions will not significantly change the tax laws in the future with
respect to qualification as a REIT or the federal income tax consequences of
such qualification.
The Company is relying on the opinion of Shaw, Pittman, Potts & Trowbridge,
counsel to the Company, regarding various issues affecting the Company's ability
to qualify, and retain qualification, as a REIT. Such legal opinions are not
binding on the Internal Revenue Service ("IRS").
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
its taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. As a result, the amount available for distribution to the Company's
stockholders would be reduced for the year or years involved. In addition,
unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. A failure of the Company
to qualify as a REIT would not by itself give the Company the right to redeem
the Series A Preferred Shares. See "Description of Series A Preferred Shares --
Redemption."
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."
14
<PAGE>
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 ____________,
____, 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."
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.
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to stockholders.
The Company will acquire the Initial Portfolio of Mortgage Assets from the Bank,
affiliates of the Bank and unrelated third parties for an aggregate purchase
price of approximately $200 million. See "Certain Transactions Constituting the
Formation."
In order to preserve its status as a REIT under the Code, substantially all
of the assets of the Company will consist of Mortgage Loans, Mortgage-Backed
Securities 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."
DIVIDEND POLICY
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to not less than 100%
of the Company's "REIT taxable income" (excluding capital gains). In order to
remain qualified as a REIT, the Company must distribute annually at least 95% of
its "REIT taxable income" (excluding capital gains) to stockholders.
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. The Company currently expects that both its
cash available for distribution and its "REIT taxable income" will be
significantly in excess of amounts needed to pay accrued dividends on the Series
A Preferred Shares. Accordingly, the Company expects that it will, after paying
all accrued and unpaid dividends on the Series A Preferred Shares, pay dividends
on an annual basis to holders of its Common Stock. Furthermore, in order to
avoid disqualification as a REIT for federal income tax purposes by reason of
violating certain ownership requirements, the Company will make certain
distributions ("Balancing Distributions") of cash or property to holders of its
Common Stock in situations where the value of the Common Stock would otherwise
exceed ___% of the total value of the stock of the Company. See "Federal Income
Tax Considerations -- Taxation of the Company -- Organizational Requirements."
However, there are several limitations which restrict the Company's ability to
pay dividends on the Common Stock (none of which should
15
<PAGE>
adversely affect either the ability of the Company to pay dividends in respect
of the Series A Preferred Shares or the ability of the Company to maintain its
status as a REIT).
First, under the Company's current dividend policy, the Company may not
make any distribution in respect of the Common Stock with respect to any year to
the extent that, after taking into account such proposed distribution (other
than any Balancing Distributions), total cash or property distributions on the
Company's outstanding shares of Preferred Stock and Common Stock with respect to
that year would exceed ___% of the Company's "REIT taxable income" (excluding
capital gains) for that year plus net capital gains of the Company for that
year. This policy regarding the limitations on payment of dividends in respect
of Common Stock may not be modified without the approval of a majority of the
Independent Directors. Second, no cash or property dividends may be paid on the
Common Stock unless all declared and unpaid dividends on the Series A Preferred
Shares, and on all other capital stock of the Company ranking senior to the
Common Stock, have been paid. Third, Maryland law provides that dividends may be
paid on the capital stock of the Company only out of (i) the Company's capital
surplus (i.e., the excess of the Company's net assets over the aggregate par
value of all shares of capital stock issued by the Company), and (ii) the
Company's net profits for the year in which the dividend is declared and for the
preceding year. Because upon the consummation of the Offering the aggregate par
value of the Series A Preferred Shares and the outstanding shares of Common
Stock will equal $_________ (assuming the Underwriters' over-allotment option is
not exercised and there are $_________ of offering and organizational expenses
in the aggregate), the amount of dividends which the Company could legally pay
on its Common Stock cannot exceed an amount which would cause the Company's net
assets to be less than $_________.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
federal regulatory authorities will have the authority to issue an order which
restricts the ability of the Company to make dividend payments to its
stockholders.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
Residential Mortgage Loans. The Company may from time to time acquire both
--------------------------
conforming and nonconforming Residential Mortgage Loans. Conventional conforming
Residential Mortgage Loans comply with the requirements for inclusion in a loan
guarantee program sponsored by either the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). Under current
regulations, the maximum principal balance allowed on conforming Residential
Mortgage Loans ranges from $207,000 ($310,500 for Residential Mortgage Loans
secured by mortgaged properties located in either Alaska or Hawaii) for one-unit
residential loans to $397,800 ($596,700 for Residential Mortgage Loans secured
by mortgaged properties located in either Alaska or Hawaii) for four-unit
residential loans. Nonconforming Residential Mortgage Loans are Residential
Mortgage Loans that do not qualify in one or more respects for purchase by FNMA
or FHLMC. The Company expects that a majority of the nonconforming Residential
Mortgage Loans it purchases 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 other than the requirements relating to creditworthiness of the
mortgagors. A substantial portion of the Company's nonconforming Residential
Mortgage Loans are expected to meet the requirements for sale to national
private mortgage conduit programs or other investors in the secondary mortgage
market.
Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one-to four-unit) residential
properties, including stock allocated to a dwelling unit in a residential
cooperative housing corporation. Residential real estate properties underlying
Residential Mortgage Loans consist of individual dwelling units, individual
cooperative apartment units, individual condominium units, two- to four-family
dwelling units, planned unit developments and townhouses. The Company currently
expects that most of the Residential Mortgage Loans to be acquired by it will be
adjustable rate Mortgage Loans; however, the Company may also purchase fixed
interest rate Residential Mortgage Loans.
16
<PAGE>
Commercial Mortgage Loans. The Company may from time to time acquire
-------------------------
Commercial Mortgage Loans secured by industrial and warehouse properties, office
buildings, retail space and shopping malls, hotels and motels, hospitals,
nursing homes or senior living centers. Unlike Residential Mortgage Loans,
Commercial Mortgage Loans generally lack standardized terms. In addition,
Commercial Mortgage Loans tend to be fixed rate loans having shorter maturities
than Residential Mortgage Loans. Commercial Mortgage Loans may also not be fully
amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Moreover, commercial properties are generally
subject to relatively greater environmental risks than non-commercial
properties, generally giving rise to increased costs of compliance with
environmental laws and regulations. See "Special Considerations -- Risks
Associated with Mortgage Loans Generally -- Environmental Considerations."
The credit quality of a Commercial Mortgage Loan may depend on, among other
factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been deferred),
the creditworthiness of tenants, the historical and anticipated level of
vacancies and rents on the property and on other comparable properties located
in the same region, potential or existing environmental risks, the availability
of credit to refinance the Commercial Mortgage Loan at or prior to maturity and
the local and regional economic climate in general. Foreclosures of defaulted
Commercial Mortgage Loans are generally subject to a number of complicating
factors, including environmental considerations, which are generally not present
in foreclosures of Residential Mortgage Loans. See "Special Considerations --
Risks Associated with Mortgage Loans Generally -- Structural Risks of Mortgage
Loans" and "-- Environmental Considerations."
Mortgage-Backed Securities. The Company may from time to time acquire
--------------------------
Mortgage-Backed Securities representing interests in or obligations backed by
pools of Mortgage Loans. The Mortgage Loans underlying the Mortgage-Backed
Securities will be secured by single-family residential, multifamily or
commercial real estate properties located throughout the United States.
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Mortgage Loans included in the Initial Portfolio pursuant to the
terms of certain mortgage loan purchase agreements with the Bank, affiliates of
the Bank or unrelated third parties (collectively, the "Mortgage Loan Purchase
Agreements"). Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to its respective Mortgage Loan Purchase Agreement (each, a "Mortgage
Loan Schedule"). Each Mortgage Loan Schedule will specify, among other things,
with respect to each Mortgage Loan: the loan number, the interest rate or
interest rate formula applicable to each Mortgage Loan, the original principal
amount and the unpaid principal balance as of the purchase date, the monthly
payment, the maturity date, the mortgagor, the type of the mortgaged property,
and the current interest rate.
In addition, each seller will deliver or cause to be delivered to the
Company the mortgage note with respect to each Mortgage Loan (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
See "-- Servicing and Description of Initial Portfolio -- General."
Each seller will make certain representations and warranties with respect
to the Mortgage Loans in the Initial Portfolio for the benefit of the Company
and will be obligated to repurchase any Mortgage Loan sold by it to the Company
as to which there is a material breach of any such representation or warranty.
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. In addition, under the terms of
the Mortgage Loan Purchase Agreements, the Company will acquire, in addition to
the Mortgage Loans included in the Initial Portfolio, (i) the amounts held in
one or more accounts maintained in the name of the Company pursuant to the
Servicing Agreements (defined below), and (ii) all insurance policies relating
to the Mortgage Loans and the proceeds thereof.
17
<PAGE>
In addition, the Company will purchase the Mortgage-Backed Securities
included in the Initial Portfolio pursuant to the terms of certain mortgage-
backed securities purchase agreements with the Bank, affiliates of the Bank or
unrelated third parties (collectively, the "Mortgage-Backed Securities Purchase
Agreements"). The Mortgage-Backed Securities will be identified in a schedule
appearing as an exhibit to its respective Mortgage-Backed Securities Purchase
Agreement (each, a "Mortgage-Backed Securities Schedule"). Each Mortgage-Backed
Securities Schedule will specify, among other things, with respect to the
Mortgage-Backed Securities: the interest rate or interest rate formula
applicable to the Mortgage-Backed Securities, the unpaid principal balance as of
the purchase date, the value of the Mortgage-Backed Securities as of the
purchase date and the CUSIP number of the Mortgage-Backed Securities.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect to
the acquisition and disposition of assets, use of capital and leverage, credit
risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of a
majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also "_
Dividend Policy."
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 Assets on a basis consistent with secondary market
standards from the Bank, affiliates of the Bank and unrelated third parties out
of proceeds received in connection with the repayment or disposition of Mortgage
Assets or the issuance of additional shares of Common Stock or Preferred Stock.
The Company currently anticipates that such Mortgage Assets will be of the types
described in "_ Description of Initial Portfolio," although the Company may
purchase other types of Mortgage Assets. The Company currently anticipates that
it will not acquire the right to service any Mortgage Loan it acquires in the
future. The Company anticipates that any servicing arrangement that it enters
into in the future will contain fees and other terms consistent with secondary
market standards.
The Company currently intends to maintain approximately __% of its
portfolio of Mortgage Assets in Residential Mortgage Loans, approximately __% of
its portfolio of Mortgage Assets in Commercial Mortgage Loans and approximately
__% of its portfolio of Mortgage Assets in Mortgage-Backed Securities. The
Company's current policy is not to acquire any Commercial Mortgage Loan that
constitutes more than 5% of the total book value of the Mortgage Assets of the
Company at the time of its acquisition. In addition, the Company's current
policy prohibits the acquisition of any Mortgage Loan or any interest in a
Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities), which Mortgage Loan (i) is delinquent in the
payment of principal or interest at the time of proposed acquisition; (ii) is or
was at any time during the preceding 12 months (a) classified, (b) in nonaccrual
status, or (c) renegotiated due to financial deterioration of the borrower; or
(iii) has been, more than once during the preceding 12 months, more than 30 days
past due in the payment of principal or interest.
The Company currently maintains a policy of disposing of any Mortgage Loan
which subsequent to its acquisition by the Company (i) becomes classified, (ii)
falls into nonaccrual status, (iii) has to be renegotiated due to the financial
deterioration of the borrower, or (iv) is more than 30 days past due in the
payment of principal or interest more than once in any 12 month period.
The Company will develop forms of assignment and a policy regarding
recording of mortgage assignments.
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
18
<PAGE>
cash flow (after consideration of provisions of the Code requiring the
distribution by a REIT of a certain percentage of taxable income and taking into
account taxes that would be imposed on undistributed taxable income), or a
combination of these methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the Company
might incur. Notwithstanding the foregoing, the Company may not, without the
approval of a majority of the Independent Directors, incur debt for borrowed
money other than debt not in excess of ___% of the aggregate amount of net
proceeds received in connection with the issuance of all outstanding Preferred
Stock and Common Stock of the Company. Any such debt incurred may include
intercompany advances made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without the consent of holders of at least ______% of
the outstanding shares of Preferred Stock at that time, including the Series A
Preferred Shares, and the Company may not issue additional shares of Preferred
Stock on a parity with the Series A Preferred Shares without the approval of a
majority of the Company's Independent Directors. In addition, the Company does
not currently intend to issue any additional series of Preferred Stock unless it
simultaneously issues additional Common Stock to the Bank and the proceeds to be
received from the issuance of the Common Stock are approximately equal to the
aggregate offering price of such additional Preferred Stock plus the Company's
expenses (including underwriting discounts or placement fees) in connection with
the issuance of such additional shares of Preferred Stock.
Credit Risk Management Policies. The Company expects that each Mortgage
-------------------------------
Loan acquired from the Bank, an affiliate of the Bank or an unrelated third
party in the future will represent a first lien position and will be originated
in the ordinary course of the originator's real estate lending activities based
on the underwriting standards generally applied (at the time of origination) for
the originator's own account. See "_ Description of Initial Portfolio _
Underwriting Standards." In addition, the Company currently maintains a policy
of disposing of any Mortgage Loan or any interest in a Mortgage Loan (other than
an interest through a Mortgage-Backed Security) held by it, which Mortgage Loan
(i) is or has been, at any time during the preceding 12 months, (a) classified,
(b) in nonaccrual status or (c) renegotiated due to financial deterioration of
the borrower or (ii) has been, more than once during the preceding 12 months,
more than 30 days past due in the payment of principal and interest.
Conflict of Interest Policies. Because of the nature of the Company's
-----------------------------
relationship with the Bank and its affiliates, it is likely that conflicts of
interest will arise with respect to inter-affiliate transactions, including
without limitation the Company's acquisition of Mortgage Assets from, or
disposition of Mortgage Assets to, the Bank or its affiliates and the
modification of the Advisory Agreement or any of the Servicing Agreements. It is
the Company's policy that the terms of any financial dealings with the Bank and
its affiliates will be consistent with those available from third parties in the
mortgage lending industry. In addition, neither the Advisory Agreement nor any
of the Servicing Agreements may be modified or terminated without the approval
of a majority of the Independent Directors. Conflicts of interest between the
Company and the Bank and its affiliates may also arise in connection with making
decisions that bear upon the credit arrangements that the Bank or one of its
affiliates may have with the borrower. The Servicing Agreements provide that
servicing of the Mortgage Loans are performed solely with a view to the
interests of the Company as owner of the Mortgage Loans and without regard to
the interests of the Bank or its other affiliates. Conflicts could also arise in
connection with actions taken by the Bank as a controlling person in the
Company. It is the intention of the Company and the Bank that any agreements and
transactions between the Company, on the one hand, and the Bank or its
affiliates, on the other hand, are fair to all parties and are consistent with
market terms for such types of transactions. The requirement in the Certificate
of Designation establishing the Series A Preferred Shares that certain actions
of the Company be approved by a majority of the Independent Directors is also
intended to ensure fair dealings between the Company and the Bank and its
affiliates. However, there can be no assurance that any such agreement or
transaction will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
19
<PAGE>
There are no provisions in the Company's Articles of Incorporation limiting
any officer, director, security holder or affiliate of the Company from having
any direct or indirect pecuniary interest in any Mortgage Asset to be acquired
or disposed of by the Company or in any transaction in which the Company has an
interest or from engaging in acquiring, holding and managing Mortgage Assets. As
described herein, it is expected that the Bank and its affiliates will have
direct interests in transactions with the Company (including without limitation
the sale of Mortgage Assets to the Company); however, it is not currently
anticipated that any of the officers or directors of the Company will have any
interests in such Mortgage Assets.
Other Policies. The Company intends to operate in a manner that will not
--------------
subject it to regulation under the Investment Company Act of 1940. The Company
does not intend to (i) invest in the securities of other issuers for the purpose
of exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in loans or other investments, (iv) offer
securities in exchange for property, or (v) make loans to third parties,
including without limitation officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the open market or
otherwise; provided, however, that the Company will not redeem or repurchase any
shares of its Common Stock for as long as any Series A Preferred Shares are
outstanding without the approval of a majority of the Independent Directors. The
Company has no present intention of causing the Company to repurchase any shares
of its capital stock, and any such action would be taken only in conformity with
applicable federal and state laws and the requirements for qualifying as a REIT.
The Company intends to publish and distribute to stockholders, in
accordance with the rules of the ____________, annual reports containing
financial statements prepared in accordance with generally accepted accounting
principles and certified by the Company's independent public accountants. The
Certificate of Designation establishing the Series A Preferred Shares provides
that the Company shall maintain its status as a reporting company under the
Exchange Act for as long as any of the Series A Preferred Shares are
outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or other
considerations may cause the Board of Directors, subject to approval by a
majority of the 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. Factual data with respect to the Mortgage Assets included in
the Initial Portfolio relates to Mortgage Assets which the Company currently
believes will be purchased simultaneously with the consummation of the Offering.
The composition of the Initial Portfolio as actually purchased contemporaneously
with the consummation of the Offering may differ in certain respects from the
Initial Portfolio as described in this Prospectus; provided, however, that (i)
at least ____% of the Mortgage Assets included in the actual Initial Portfolio
measured by aggregate outstanding principal balance shall include Mortgage
Assets described herein and (ii) the Company shall have determined that any
changes in the Initial Portfolio from the description herein are not material.
References herein to percentages of Mortgage Loans included in the Initial
Portfolio refer in each case to the percentage of the aggregate outstanding
principal balance of the Mortgage Loans in the Initial Portfolio as of ________,
1996, based on the outstanding principal balances of such Mortgage Loans as of
such date, after giving effect to scheduled monthly payments due on or prior to
such date, whether or not received.
The detailed information set forth in this Prospectus with respect to the
Mortgage Assets applies only to the Initial Portfolio. Except for the
anticipated approximate allocation of the Company's portfolio of Mortgage Assets
going forward between Residential Mortgage Loans (__%), Commercial Mortgage
Loans (__%) and
20
<PAGE>
Mortgage-Backed Securities (__%), the Company's portfolio of Mortgage Assets may
or may not have the characteristics described below at future dates.
General. The Initial Portfolio contains _____ Residential Mortgage Loans,
-------
representing approximately __% of the Mortgage Assets contained in the Initial
Portfolio, and approximately ____ Commercial Mortgage Loans, representing
approximately __% of the Mortgage Loans contained in the Initial Portfolio. The
remainder of the Initial Portfolio consists of Mortgage-Backed Securities. On
_________, 1996, the Mortgage Loans included in the Initial Portfolio had an
aggregate outstanding principal balance of approximately $_________, and the
Mortgage-Backed Securities had an aggregate value and unpaid principal balance
of approximately $_________ and $_________, respectively.
Substantially all of the Residential Mortgage Loans included in the Initial
Portfolio were originated in the ordinary course of the real estate lending
activities of either the Bank, one of the Bank's affiliates or an unrelated
third party. Certain of the Residential Mortgage Loans included in the Initial
Portfolio may have been originated by mortgagees approved by the Secretary of
Housing and Urban Development or institutions (such as banks, credit unions and
insurance companies) subject to supervision and examination by federal and state
authorities and then sold to the Bank, one of the Bank's affiliates or an
unrelated third party. All of the Residential Mortgage Loans included in the
Initial Portfolio were originated generally in accordance with the underwriting
standards customarily employed by the originator during the period in which such
Mortgage Loans were originated.
Each Commercial Mortgage Loan included in the Initial Portfolio was
originated in the ordinary course of the commercial real estate lending
activities of either the Bank, one of the Bank's affiliates or an unrelated
third party.
All of the Residential Mortgage Loans included in the Initial Portfolio
were originated between _______ and _______, and have original terms to stated
maturity of either 15, 20, 25 or 30 years. The weighted average number of months
since origination of the Residential Mortgage Loans included in the Initial
Portfolio (calculated as of _____, 1996) was approximately _____ months. All of
the Commercial Mortgage Loans included in the Initial Portfolio were originated
between __________ and ____________, and have original terms to stated maturity
of between ___ and ___ years.
Except as described below, upon transfer of the residential mortgaged
property underlying a Residential Mortgage Loan included in the Initial
Portfolio that is an adjustable rate Mortgage Loan, the mortgage note generally
will not preclude assumption of the related Residential Mortgage Loan by the
proposed transferee if the proposed transferee satisfies certain criteria with
respect to its ability to repay the Residential Mortgage Loan. The mortgage
notes with respect to certain of the Mortgage Loans included in the Initial
Portfolio contain "due-on-sale" provisions which prevent the assumption of the
Mortgage Loan by a proposed transferee and accelerates the payment of the
outstanding principal balance of the Mortgage Loan. "Due-on-sale" provisions in
mortgage notes with respect to adjustable rate Mortgage Loans may be applicable
in the period prior to the first Rate Adjustment Date (as defined herein) or
following the exercise of a conversion option fixing the interest rate. All
fixed rate Residential Mortgage Loans included in the Initial Portfolio have
mortgage notes which contain "due-on-sale" provisions. Most of the Commercial
Mortgage Loans in the Initial Portfolio also have "due-on-sale" provisions,
although certain Commercial Mortgage Loans in the Initial Portfolio may permit
assumption thereof by a proposed transferee upon the satisfaction of certain
criteria with respect to the ability of such transferee to repay such Commercial
Mortgage Loan.
None of the Mortgage Loans included in the Initial Portfolio (i) is
currently delinquent in the payment of principal or interest; (ii) is or was at
any time during the preceding 12 months (a) classified, (b) in nonaccrual
status, or (c) renegotiated due to financial deterioration of the borrower; or
(iii) was, more than once during the preceding 12 months, more than 30 days past
due in the payment of principal or interest. If, prior to the acquisition of the
Initial Portfolio, any Mortgage Loan included in the description of the Initial
Portfolio herein falls within any of the foregoing categories, the Company will
not purchase such Mortgage Loan but will instead purchase a Mortgage
21
<PAGE>
Loan similar in aggregate outstanding principal balance and product type which
does not fall into any of these categories.
Residential Mortgage Loans. The Company currently anticipates that the
--------------------------
following different types of Residential Mortgage Loan products, each of which
is more fully described below, will be included in the Initial Portfolio: One-
Year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM, 15-year fixed rate Residential
Mortgage Loan and 30-year fixed rate Residential Mortgage Loan.
The following table sets forth certain information with respect to each
type of Residential Mortgage Loan included in the Initial Portfolio:
TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF INITIAL WEIGHTED AVERAGE
PRINCIPAL PORTFOLIO BY WEIGHTED AVERAGE EXPECTED
BALANCE AGGREGATE PRINCIPAL INITIAL LOAN TO REMAINING
TYPE (In Thousands) BALANCE VALUE RATIO MATURITY
- -------------------- ---------------- -------------------------- ------------------------- ----------------------
<S> <C> <C> <C> <C>
One-Year ARM........ $ % %
3/1 ARM.............
5/1 ARM.............
7/1 ARM.............
10/1 ARM............
15-Year Fixed Rate..
30-Year Fixed Rate..
---------------- -------------------------- ------------------------- ----------------------
Total.......... $ % %
================ ========================== ========================= ======================
</TABLE>
Approximately ______% of the Residential Mortgage Loans in the Initial
Portfolio bear interest at fixed rates. The interest rates of the fixed rate
Residential Mortgage Loans included in the Initial Portfolio range from _____%
per annum to _____% per annum. The weighted average interest rate of the fixed
rate Residential Mortgage Loans included in the Initial Portfolio is
approximately _____% per annum. The following table contains certain additional
data with respect to the interest rates of the fixed rate Residential Mortgage
Loans included in the Initial Portfolio (including adjustable rate Mortgage
Loans that have been converted, pursuant to their terms, to fixed rates):
22
<PAGE>
INTEREST RATE OF FIXED RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE INITIAL PORTFOLIO
NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
INTEREST RATE MORTGAGE LOANS (in thousands) PRINCIPAL BALANCE
- ---------------------- --------------------- ----------------------- ---------------------------
<S> <C> <C> <C>
____% to ____%........
____% to ____%........
____% to ____%........
--------------------- ----------------------- ---------------------------
Total......... $ %
===================== ======================= ===========================
</TABLE>
Approximately _____% of the Residential Mortgage Loans included in the
Initial Portfolio bear interest at adjustable rates. The interest rate on an
"adjustable rate mortgage" or an "ARM" is typically tied to an index (such as
the interest rate on United States Treasury Bills), and is adjustable
periodically. ARMs are typically subject to lifetime interest rate caps and
periodic interest rate caps. The current interest rates of the Residential
Mortgage Loans included in the Initial Portfolio that are ARMs ranged from
_____% per annum to _____% per annum as of _________, 1996. The weighted average
current interest rate of the Residential Mortgage Loans included in the Initial
Portfolio that are ARMs as of _________,1996 was approximately _____% per annum.
The following table contains certain additional data with respect to the
interest rates of the Residential Mortgage Loans included in the Initial
Portfolio that are ARMs as of _________,1996:
CURRENT INTEREST RATE OF ADJUSTABLE RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE INITIAL PORTFOLIO
CURRENT NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
INTEREST RATE MORTGAGE LOANS (in thousands) PRINCIPAL BALANCE
- ----------------------- -------------------- ----------------------- ------------------------
<S> <C> <C> <C>
____% to ____%.........
____% to ____%.........
____% to ____%.........
-------------------- ----------------------- ------------------------
Total.......... $ %
==================== ======================= ========================
</TABLE>
"Gross Margin," with respect to a Residential Mortgage Loan that is an ARM,
means the applicable fixed percentage which is added to the applicable index to
calculate the current interest rate paid by the borrower of such Residential
Mortgage Loan (without taking into account any interest rate caps or minimum
interest rates). Gross Margin is inapplicable to fixed rate Residential Mortgage
Loans. As of _________,1996, the weighted average Gross Margin of the
Residential Mortgage Loans included in the Initial Portfolio that are ARMs was
approximately _____%.
The following table sets forth certain additional data with respect to the
Gross Margins of the Residential Mortgage Loans included in the Initial
Portfolio that are ARMs as of _________,1996:
23
<PAGE>
GROSS MARGIN
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE INITIAL PORTFOLIO
NUMBER OF ARM PRINCIPAL BALANCE BY AGGREGATE
GROSS MARGIN MORTGAGE LOANS (in thousands) PRINCIPAL BALANCE
- --------------------- --------------------- ----------------------- ------------------------
<S> <C> <C> <C>
____% to ____%.......
____% to ____%.......
____% to ____%.......
--------------------- ----------------------- ------------------------
Total........ $ %
===================== ======================= ========================
</TABLE>
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 periodic adjustment 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 an adjustable rate Mortgage Loan will be adjusted to an
amount that will fully amortize the then-outstanding principal balance of such
Residential Mortgage Loan over its remaining term to stated maturity and that
will be sufficient to pay interest at the adjusted interest rate. Certain of the
types of Residential Mortgage Loan products that are ARMs contain an option,
which may be exercised by the mortgagor, to convert the ARM into a fixed rate
loan for the remainder of the mortgage term. If a Residential Mortgage Loan that
is an ARM is converted into a fixed rate loan, the interest rate will be
determined at the time of conversion as specified in the mortgage note relating
to such Mortgage Loan and will remain fixed at such rate until the stated
maturity of such Residential Mortgage Loan.
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 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 applicable servicer. Should the
Treasury Index not be published or become otherwise unavailable, the applicable
servicer will select a comparable alternative index over which it has no control
and which is readily available.
Certain One-Year ARMs contain a conversion option which, if exercised,
would convert the One-Year ARM into a fixed rate loan for the remainder of the
term of the mortgage. Subject to conditions specified in the mortgage note
related to a One-Year ARM, a mortgagor may have the right to convert the One-
Year ARM to a fixed rate loan beginning with the first Rate Adjustment Date and
on the first day of each month thereafter until and including the fifth Rate
Adjustment Date. If the conversion option is exercised, the interest rate will
be fixed for the
24
<PAGE>
remainder of the term of the mortgage and will equal the sum of a percentage
equal to at least 0.625% and the FNMA Required Net Yield. The mortgagor must pay
a conversion fee at the time the option is exercised.
Three-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each three-year fixed rate loan with automatic
conversion to a One-Year ARM (a "3/1 ARM") is fixed at an initial rate for the
first 36 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM. Certain 3/1 ARMs contain a conversion option
that is substantially the same as the conversion option for the One-Year ARM
except that the option may be exercised during the period beginning with the
24th payment due date and on the first day of each month thereafter until and
including the 60th payment due date.
Five-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each five-year fixed rate loan with automatic
conversion to a One-Year ARM (a "5/1 ARM") is fixed at an initial rate for the
first 60 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM with a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 4% or
5%, provided that, with respect to certain 5/1 ARMs, on the first Rate
Adjustment Date the interest rate may be increased by 4% or 5%. There is no
option to convert a 5/1 ARM back to a fixed rate loan after the first Rate
Adjustment Date.
Seven-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each seven-year fixed rate loan with automatic
conversion to a One-Year ARM (a "7/1 ARM") is fixed at an initial rate for the
first 84 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM with a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 4% or
5%, provided that, with respect to certain 7/1 ARMs, on the first Rate
Adjustment Date the interest rate may be increased by 4% or 5%. There is no
option to convert a 7/1 ARM back to a fixed rate loan after the first Rate
Adjustment Date.
Ten-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each ten-year fixed rate loan with automatic
conversion to a One-Year ARM (a "10/1 ARM") is fixed at an initial rate for the
first 120 monthly payments and adjusts annually thereafter as if the Residential
Mortgage Loan were a One-Year ARM with a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 4% or
5%, provided that, with respect to certain 10/1 ARMs, on the first Rate
Adjustment Date the interest rate may be increased by 4% or 5%. There is no
option to convert a 10/1 ARM back to a fixed rate loan after the first Rate
Adjustment Date.
Fixed Rate Loans. The fixed rate Residential Mortgage Loans which may be
purchased by the Company will generally have original terms to stated maturity
of 15 or 30 years. The interest rates of these Residential Mortgage loans are
fixed prior to origination. The monthly principal and interest payment is
calculated to fully amortize the initial outstanding principal balance of such
Residential Mortgage Loan to its stated maturity.
Commercial Mortgage Loans. The Company currently anticipates that the
-------------------------
Commercial Mortgage Loans included in the Initial Portfolio will consist
primarily of __________________________________________. The aggregate
outstanding principal balance of the Commercial Mortgage Loans included in the
Initial Portfolio as of _________,1996 ranged from $_________ to $_________.
The following table sets forth certain information with respect to each
type of commercial property underlying each Commercial Mortgage Loan included in
the Initial Portfolio:
25
<PAGE>
TYPE OF COMMERCIAL MORTGAGE LOAN
<TABLE>
<CAPTION>
PERCENTAGE WEIGHTED
AGGREGATE OF INITIAL WEIGHTED AVERAGE AVERAGE
PRINCIPAL PORTFOLIO BY INITIAL EXPECTED
TYPE OF BALANCE AGGREGATE PRINCIPAL LOAN-TO-VALUE REMAINING
MORTGAGED PROPERTY (in thousands) BALANCE RATIO MATURITY
- ------------------------- ----------------- ------------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
_______ .................
_______ .................
----------------- ------------------------- --------------------- -----------------
Total............
================= ========================= ===================== =================
</TABLE>
Approximately _____% of the Commercial Mortgage Loans included in the
Initial Portfolio are not fully amortizing and will have significant principal
balances or "balloon" payments due upon maturity. These balloon payments range
from $_________ to $_________. The following table sets forth certain
information with respect to Commercial Mortgage Loans included in the Initial
Portfolio that are not fully amortizing as of _________, 1996:
COMMERCIAL MORTGAGE LOANS WITH BALLOON PAYMENTS
<TABLE>
<CAPTION>
PERCENTAGE WEIGHTED
AGGREGATE OF INITIAL WEIGHTED AVERAGE AVERAGE
PRINCIPAL PORTFOLIO BY EXPECTED BALLON
TYPE OF BALANCE AGGREGATE PRINCIPAL REMAINING PAYMENT UPON
MORTGAGED PROPERTY (in thousands) BALANCE MATURITY MATURITY
- ------------------------- ------------------ ------------------------ --------------------- -------------------
<S> <C> <C> <C> <C>
_______ .................
_______ .................
------------------ ------------------------ --------------------- -------------------
Total............
================== ======================== ===================== ===================
</TABLE>
Approximately _____% of the Commercial Mortgage Loans in the Initial
Portfolio bear interest at fixed rates. The current interest rates of the fixed
rate Commercial Mortgage Loans included in the Initial Portfolio range from
____% per annum to _____% per annum. The following table contains certain
additional data with respect to the interest rates of the fixed rate Commercial
Mortgage Loans included in the Initial Portfolio:
INTEREST RATE OF FIXED RATE COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE INITIAL PORTFOLIO
NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
INTEREST RATE MORTGAGE LOANS (in thousands) PRINCIPAL BALANCE
- ------------------------ --------------------- --------------------- -----------------------
<S> <C> <C> <C>
____% to ____% .........
____% to ____% .........
____% to ____% .........
--------------------- --------------------- -----------------------
Total........... $ %
===================== ===================== =======================
</TABLE>
Approximately _____% of the Commercial Mortgage Loans included in the
Initial Portfolio bear interest at variable rates which are typically tied to an
index (such as the Prime Rate or LIBOR) and are adjustable periodically. Some of
these variable rate Commercial Mortgage Loans contain an option exercisable by
the borrower to convert the variable rate loan into a fixed rate loan. The
current interest rates borne by the variable rate Commercial Mortgage Loans
included in the Initial Portfolio ranged from _____% per annum to _____% per
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<PAGE>
annum as of _________,1996. The following table contains certain additional data
with respect to the interest rates of the variable rate Commercial Mortgage
Loans included in the Initial Portfolio as of _________,1996:
CURRENT INTEREST RATE OF VARIABLE RATE COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE INITIAL PORTFOLIO
CURRENT NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
INTEREST RATE MORTGAGE LOANS (in thousands) PRINCIPAL BALANCE
- ----------------------- ---------------------- ------------------------ -------------------------
<S> <C> <C> <C>
____% to ____%.........
____% to ____%.........
____% to ____%.........
---------------------- ------------------------ -------------------------
Total.......... $ %
====================== ======================== =========================
</TABLE>
Mortgage-Backed Securities. Approximately ____% of the Initial Portfolio
--------------------------
will consist of Mortgage-Backed Securities representing interests in or
obligations backed by pools of Mortgage Loans. The Mortgage Loans underlying the
Mortgage-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States. The aggregate value and unpaid principal balance of the Mortgage-Backed
Securities included in the Initial Portfolio as of _________,1996 was
approximately $_________ and $_________, respectively. The interest rates of the
Mortgage-Backed Securities included in the Initial Portfolio range from ___% per
annum to ___ % per annum.
Underwriting Standards. The Bank 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
the originator during the period in which the Mortgage Loans in the Initial
Portfolio were originated.
Geographic Distribution. The Company currently anticipates that
-----------------------
approximately __% of the residential real estate properties underlying the
Company's Residential Mortgage Loans included in the Initial Portfolio will be
located in __________________. Consequently, these Residential Mortgage Loans
may be subject to a greater risk of default than other comparable Residential
Mortgage Loans in the event of adverse economic, political or business
developments in __________________ that may affect the ability of residential
property owners in __________________ to make payments of principal and interest
on the underlying mortgages.
The Company currently anticipates that substantially all of the commercial
mortgaged properties underlying its Commercial Mortgage Loans will be located in
__________________. Consequently, these Commercial Mortgage Loans may be subject
to a greater risk of default than other comparable Commercial Mortgage Loans in
the event of adverse economic, political or business developments in
__________________ that may affect the ability of businesses in that area to
make payments of principal and interest on the underlying mortgages.
Loan-to-Value Ratios; Insurance. All of the Residential Mortgage Loans
-------------------------------
having Loan-to-Value Ratios (i.e., the ratio (expressed as a percentage) of the
original principal amount of such Mortgage Loan to the lesser of (i) the
appraised value at origination of the underlying mortgaged property and (ii) if
the Mortgage Loan was made to finance the acquisition of property, the purchase
price of the mortgaged property) of greater than 85%, and approximately ___% of
the Residential Mortgage Loans having Loan-to-Value Ratios of greater than 80%,
are insured under primary mortgage insurance policies. Not more than
approximately ____% of the Residential Mortgage Loans are insured by any one
primary mortgage insurance policy issuer. At the time of origination of the
Residential Mortgage Loans, each of the primary mortgage insurance policy
insurers was approved by FNMA or FHLMC. A standard hazard insurance policy is
required to be maintained by the mortgagor with respect to each Residential
Mortgage Loan in an amount equal to the maximum insurable value of the
improvements securing such
27
<PAGE>
Residential Mortgage Loan or the principal balance of such Residential Mortgage
Loan, whichever is less. If the residential real estate property underlying a
Residential Mortgage Loan is located in a flood zone, such Residential Mortgage
Loan may also be covered by a flood insurance policy as required by law. No
special hazard insurance policy or mortgagor bankruptcy insurance will be
maintained by the Company with respect to the Residential Mortgage Loans in the
Initial Portfolio, nor will any Residential Mortgage Loan be insured by the
Federal Housing Administration or guaranteed by the Veterans Administration.
A standard hazard insurance policy is also required to be maintained by the
mortgagor with respect to each of the Commercial Mortgage Loans included in the
Initial Portfolio. If the commercial real estate property securing a Commercial
Mortgage Loan is located in a flood zone, such Commercial Mortgage Loan may be
covered by a flood insurance policy as required by law. However, as with the
Residential Mortgage Loans in the Initial Portfolio, no special hazard insurance
or mortgagor bankruptcy insurance will be maintained by the Company with respect
to the Commercial Mortgage Loans in the Initial Portfolio.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be serviced by
the Bank and/or one or more of the Bank's affiliates pursuant to the terms of
certain servicing agreements with the Company (collectively, the "Servicing
Agreements"). The servicer receives fees generally ranging from ___% to ___% per
annum on the principal balances of the loans serviced.
Each Servicing Agreement requires the servicer to service the Company's
Mortgage Loans in a manner generally consistent with accepted secondary market
practices, with any servicing guidelines promulgated by the Company and, in the
case of Residential Mortgage Loans, with FNMA and FHLMC guidelines and
procedures. Each servicer will collect and remit principal and interest
payments, administer mortgage escrow accounts, submit and pursue insurance
claims and initiate and supervise foreclosure proceedings on the Mortgage Loans
it services. Each servicer will also provide accounting and reporting services
required by the Company for such Mortgage Loans. Each servicer will be required
to follow such collection procedures as are customary in the industry. Each
servicer may, in its discretion, arrange with a defaulting borrower a schedule
for the liquidation of delinquencies, provided that, in the case of Residential
Mortgage Loans, any primary mortgage insurance coverage is not adversely
affected. Each servicer may from time to time subcontract all or a portion of
its servicing obligations under the Servicing Agreement to which it is a party
to affiliates of the Bank. If no affiliate of the Bank is engaged in the
business of servicing Mortgage Loans, a servicer may subcontract all or a
portion of its obligations under its respective Servicing Agreement to an
unrelated third party subject to approval of a majority of the Independent
Directors. No servicer will, in connection with subcontracting any of its
obligations under its respective Servicing Agreement, be discharged or relieved
in any respect from its obligation to the Company to perform its obligations
under such Servicing Agreement.
Each servicer will be required to pay all expenses related to the
performance of its duties under its respective Servicing Agreement. Each
servicer will be required to make advances of taxes and required insurance
premiums that are not collected from borrowers with respect to any Mortgage Loan
serviced by it, unless (with respect to advances of principal and interest) it
determines that such advances are nonrecoverable from the mortgagor, insurance
proceeds or other sources with respect to such Mortgage Loan. If such advances
are made, the servicer generally will be reimbursed prior to the Company out of
proceeds related to such Mortgage Loan. Each servicer also will be entitled to
reimbursement by the Company for expenses incurred by it in connection with the
liquidation of defaulted Mortgage Loans serviced by it and in connection with
the restoration of mortgaged property. If claims are not made or paid under
applicable insurance policies or if coverage thereunder has ceased, the Company
will suffer a loss to the extent that the proceeds from liquidation of the
mortgaged property, after reimbursement of the servicer's expenses in the sale,
are less than the outstanding principal balance of the related Mortgage Loan.
Each servicer will be responsible to the Company for any loss suffered as a
result of such servicer's failure to make and pursue timely claims or as a
result of actions taken or omissions made by such servicer which cause the
policies to be cancelled by the insurer. Each servicer will be required to
represent and warrant that the Mortgage Loans it services will comply with any
loan servicing guidelines promulgated by the Company and to
28
<PAGE>
agree to repurchase, at the request of the Company, any Mortgage Loan it
services in the event that it fails to make such representations or warranties
or any such representation or warranty is untrue. The repurchase price for any
such Mortgage Loan will be the outstanding principal amount thereof plus accrued
and unpaid interest thereon at the date of repurchase. A servicer may institute
foreclosure proceedings, 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 its Servicing Agreement.
The Company may terminate a Servicing Agreement with any servicer 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 any Servicing Agreement without cause upon 30 days' notice
and payment of a termination fee that is competitive with that which is
generally payable in the industry. The termination fee will be based on the
aggregate outstanding principal amount of the loans then serviced under the
applicable Servicing Agreement. As long as any Series A Preferred Shares remain
outstanding, the Company may not terminate, or elect not to renew, any Servicing
Agreement without the approval of a majority of the Independent Directors.
As is customary in the mortgage loan servicing industry, a servicer will be
entitled to retain any late payment charges, prepayment fees, penalties and
assumption fees collected in connection with the Mortgage Loans serviced by it.
Each servicer will receive any benefit derived from interest earned on collected
principal and interest payments between the date of collection and the date of
remittance to the Company and from interest earned on tax and insurance impound
funds with respect to Mortgage Loans serviced by it. Each servicer will be
required to remit to the Company no later than the ____ day of each month all
principal and interest collected from borrowers of Mortgage Loans serviced by it
(unless deemed nonrecoverable by the servicer) on the _____ day of such month.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law and
governmental regulations. The terms of a particular Mortgage Loan or applicable
law, however, may provide that the servicer is prohibited from exercising the
"due-on-sale" clause 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.
EMPLOYEES
The Company has five officers, three of whom are described further below
under "Management." The Company does not anticipate that it will require any
additional employees because it has retained the Advisor to perform certain
functions pursuant to the Advisory Agreement described below under "_ The
Advisor." Each officer of the Company currently is also an officer and/or
director of the Bank and/or affiliates of the Bank. The Company will maintain
corporate records and audited financial statements that are separate from those
of the Bank or any of the Bank's affiliates. None of the officers, directors or
employees of the Company will have any direct or indirect pecuniary interest in
any Mortgage Asset to be acquired or disposed of by the Company or in any
transaction in which the Company has an interest or will engage in acquiring,
holding and managing Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Assets in addition to those in the Initial Portfolio and that all these Mortgage
Assets will be purchased from the Bank, affiliates of the Bank and unrelated
third parties. The Company expects to compete with mortgage conduit programs,
investment banking firms, savings and loan associations,
29
<PAGE>
banks, thrift and loan associations, finance companies, mortgage bankers or
insurance companies in acquiring its Mortgage Assets.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, the Bank or any affiliate of the Bank is currently involved in nor, to
the Company's knowledge, currently threatened with any material litigation with
respect to the Mortgage Assets 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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently is composed of four persons.
Three additional members will be appointed to the Board, each of whom will be an
Independent Director. An "Independent Director" is a director who is not a
current officer or employee of the Company, the Bank or any affiliate of the
Bank. Pursuant to the Certificate of Designation establishing the Series A
Preferred Shares, the Independent Directors are required to take into account
the interests of the holders of both the Series A Preferred Shares and the
Common Stock in assessing the benefit to the Company of any proposed action
requiring their consent. The Company currently has five officers. The Company
has no other employees and does not anticipate that it will require additional
employees. See "Business and Strategy _ Employees."
The persons who are directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Alexander R. M. Boyle.......... 58 Director
Stephen R. Halpin, Jr.......... 40 Executive Vice President, Chief
Financial Officer, Treasurer and
Director
Leslie A. Nicholson............ 56 Executive Vice President, General
Counsel and Director
B. Francis Saul II............. 64 Chairman of the Board, Chief
Executive Officer and President
Independent Director No. 1..... __ Director
Independent Director No. 2..... __ Director
Independent Director No. 3..... __ Director
</TABLE>
The following is a summary of the experience of the executive officers and
directors of the Company:
ALEXANDER R. M. BOYLE has been Vice Chairman of the Board of Directors of
the Bank since 1985. Prior to beginning service in this position, Mr. Boyle was
the President and a member of the Board of Directors of Government Services
Savings and Loan, Inc. from 1975 until its merger with the Bank in 1985. He has
served as a director of the U.S. League of Savings Institutions and as chairman
of the Maryland League of Financial Institutions. He currently serves as a
director of the Association of Financial Services Holding Companies and serves
on the Chancellor's Advisory Council of the University of Maryland and is a
member of the Rotary Club of Bethesda-Chevy Chase.
30
<PAGE>
STEPHEN R. HALPIN, JR. serves as Executive Vice President and Chief
Financial Officer of the Bank. Mr. Halpin is also the Chief Financial Officer
for the B. F. Saul Company and B. F. Saul Real Estate Investment Trust. He is a
Trustee of the B. F. Saul Employees Profit Sharing Retirement Trust. In
addition, Mr. Halpin is a Trustee for Hospice Caring, Inc. Before joining the
Bank in 1983, Mr. Halpin was with a regional accounting firm.
LESLIE A. NICHOLSON has been an Executive Vice President and the General
Counsel of the Bank since June 1996. Prior to joining the Bank, he was a partner
at Shaw, Pittman, Potts & Trowbridge from January 1972 until May 1996.
B. FRANCIS SAUL II serves as Chairman of the Board and Chief Executive
Officer of the Bank. He also has been President and Chief Operating Officer of
B. F. Saul Company since 1969 and President and Chief Executive Officer of Manor
Investment Company, a wholly-owned subsidiary of the Bank, since 1971. Mr. Saul
has served as the Chairman of B. F. Saul Real Estate Investment Trust since 1969
and as a trustee since 1964. He is also a director of Derwood Investment
Corporation. At _________, 1996, B. F. Saul Real Estate Investment Trust and
Derwood Investment Corporation owned of record ___% and ___%, respectively, of
the Bank's outstanding common stock. Mr. Saul is also Chairman of the Board of
Directors of Chevy Chase Financial Limited and Chevy Chase Property Company
Limited and a past Chairman of Financial General Bankshares. He serves as
Chairman of the Board and Chief Executive Officer of Saul Centers, Inc., a
public real estate investment trust. He also serves as a Trustee of the National
Geographic Society, a member of the Trustees Council of the National Gallery of
Art and an Honorary Trustee of the Brookings Institute. In addition, Mr. Saul is
a director of Colonial Williamsburg Hotel Properties, Inc., a member of the
Folger Shakespeare Library and the Board of Visitors and Governors of Washington
College.
INDEPENDENT DIRECTOR NO. 1.
INDEPENDENT DIRECTOR NO. 2.
INDEPENDENT DIRECTOR NO. 3.
INDEPENDENT DIRECTORS
The Company's Certificate of Designation establishing the Series A
Preferred Shares requires that, as 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.
If at the time of any annual meeting of the Company's stockholders the
aggregate amount of declared and unpaid dividends on the Series A Preferred
Shares equals or exceeds an amount equal to _________ quarterly dividend
payments on such Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two, and
the holders of Series A Preferred Shares, voting together with the holders of
any other outstanding series of Preferred Stock as a single class, will be
entitled to elect two additional directors to serve on the Company's Board of
Directors. Any member of the Board of Directors elected by holders of the
Company's Preferred Stock will be deemed to be an Independent Director for
purposes of the actions requiring the approval of a majority of the Independent
Directors. See "Description of Series A Preferred Shares -- Voting Rights."
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement of independent accountants and review
the independence of its auditors. The audit committee will also
31
<PAGE>
review the adequacy of the Company's internal accounting controls. The audit
committee will be comprised of ___________, ___________ and ___________.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company fees
for their services as directors. The Independent Directors will receive annual
compensation of $______ 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 employees or
to directors who are not Independent Directors.
LIMITATIONS OR LIABILITY OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation eliminate, to the fullest extent
permitted by the Maryland General Corporation Law, the personal liability of a
director to the Company or its stockholders for monetary damages for breach of
such director's fiduciary duty. The Company's Articles of Incorporation empower
the Company to indemnify, to the fullest extent permitted by the Maryland
General Corporation Law, any director or officer of the Company. The Company's
Articles of Incorporation also empower the Company to purchase and maintain
insurance to protect any director or officer against any liability asserted
against him or her, or incurred by him or her, arising out of his or her status
as such.
The by-laws of the Company (the "By-laws") require indemnification of the
Company's directors and officers and specify that the right to indemnification
is a contract right, setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the By-laws. The By-laws also
entitle any director or officer to be reimbursed for the expenses of prosecuting
any claim against him or her arising out of his or her status as such. The By-
laws of the Company also provide that the Company may enter into contracts with
any director or officer in furtherance of the indemnification provisions
contained in the By-laws and allow the Company to create a trust fund to ensure
payment of amounts indemnified.
THE ADVISOR
In connection with the consummation of the Offering and the formation of
the Company as described herein, the Company will enter into the Advisory
Agreement with the Bank to administer the day-to-day operations of the Company.
The Bank in its role as advisor under the terms of the Advisory Agreement is
herein referred to as the "Advisor." The Advisor will be responsible for (i)
monitoring the credit quality of the Mortgage Assets held by the Company and
(ii) advising the Company with respect to the acquisition, management, financing
and disposition of the Company's Mortgage Assets. The Advisor may from time to
time subcontract all or a portion of its obligations under the Advisory
Agreement to one or more of its affiliates involved in the business of managing
Mortgage Assets. If no affiliate of the Advisor is engaged in the business of
managing Mortgage Assets, the Advisor may, with the approval of a majority of
the Board of Directors, as well as a majority of the Independent Directors,
subcontract all or a portion of its obligations under the Advisory Agreement to
unrelated third parties. The Advisor will not, in connection with the
subcontracting of any of its obligations under the Advisory Agreement, be
discharged or relieved in any respect from its obligations under the Advisory
Agreement.
The Advisor and its affiliates have substantial experience in the mortgage
lending industry, both in the origination and in the servicing of mortgage
loans. At June 30, 1996, the Advisor and its affiliates held approximately
$____________ of residential mortgage loans and approximately $___________ of
commercial mortgage loans. In their residential mortgage loan business, the
Advisor and its affiliates originate and purchase residential mortgage loans and
then sell such loans to 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 serviced residential mortgage loans
having an
32
<PAGE>
aggregate principal balance of approximately $_____________. In their commercial
mortgage loan business, the Advisor and its affiliates typically service the
commercial mortgage loans in their portfolio.
The Advisory Agreement has an initial term of ____ years, and will be
renewed automatically for additional ____-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon __ days' prior written notice.
As long as any Series A Preferred Shares remain outstanding, any decision by the
Company either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an advisory fee equal to _____ with respect to the advisory and
management services provided by it to the Company.
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company
and the Bank and its affiliates will engage in the transactions described below
which are designed to (i) facilitate the Offering, (ii) transfer the ownership
of the Initial Portfolio to the Company, and (iii) enable the Company to
qualify as a REIT for federal income tax purposes commencing with its taxable
year ending December 31, 1996.
The transactions constituting the formation of the Company will include the
following:
. The Articles of Incorporation of the Company will be amended to
provide for _____ authorized shares of Common Stock and _____
authorized shares of Preferred Stock, and the Company will file a
Certificate of Designation with the Secretary of State of the State of
Maryland establishing the terms of the Series A Preferred Shares.
. The Company will sell to the public 4,000,000 Series A Preferred
Shares in the Offering (assuming the Underwriters' over-allotment
option is not exercised).
. The Bank will acquire _______ shares of Common Stock for a purchase
price equal to $100 million. In addition, the Bank will acquire
additional shares of Common Stock for a purchase price equal to the
aggregate amount of underwriting discounts and expenses of the
Offering and the Formation.
. The Company will acquire the Initial Portfolio for an aggregate
purchase price equal to approximately $200 million pursuant to the
terms of the Purchase Agreements.
. The Company will enter into the Advisory Agreement with the Advisor
pursuant to which the Advisor will manage the Mortgage Assets held by
the Company and administer the day-to-day operations of the Company.
See "Management -- The Advisor."
. The Company will enter into the Servicing Agreements pursuant to which
the Bank and/or one or more of the Bank's affiliates will service the
Mortgage Loans included in the Initial Portfolio. See "Business and
Strategy -- Servicing."
The Bank currently owns, and following the completion of the Offering will
continue to own, all of the issued and outstanding shares of Common Stock of the
Company. In addition to its ownership of 100% of the Common Stock of the
Company, the Bank will also have responsibility for the day-to-day management of
the Company's assets, in its capacity as Advisor under the Advisory Agreement.
See "Management _ The Advisor" and "Special Considerations -- Relationship with
the Bank and its Affiliates; Conflicts of Interest."
The Company and the Bank intend that the fair value of the Initial
Portfolio will equal the amount (approximately $200 million) that the Company
will pay for the Initial Portfolio. However, no third party
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valuations of the Mortgage Assets constituting the Initial Portfolio have been
or will be obtained for purposes of the Offering, and there can be no assurance
that the fair value of the Initial Portfolio will not differ from the purchase
price to be paid by the Company. See "Special Considerations -- No Third Party
Valuation of the Mortgage Assets; No Arm's-Length Negotiations with Affiliates"
and " -- Relationship with the Bank and its Affiliates; Conflicts of Interest."
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Certificate of Designation establishing the Series A
Preferred Shares and the Company's Articles of Incorporation, 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."
GENERAL
The Series A Preferred Shares form a series of the Preferred Stock of the
Company, which Preferred Stock may be issued from time to time in one or more
series with such rights, preferences and limitations as are determined by the
Company's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Company to issue
the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the capital stock of the
Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
will not be convertible into shares of Common Stock or any other class or series
of capital stock of the Company and will not be subject to any sinking fund or
other obligation of the Company for their repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be ________________________. 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 shall be entitled to receive, if, when
and as declared by the Board of Directors of the Company out of assets of the
Company legally available therefor, cash dividends at the rate of _____% per
annum of the initial liquidation preference (equivalent to $__________ per share
per annum). If declared, dividends on the Series A Preferred Shares shall be
payable quarterly in arrears on _____________, _____________, _____________ and
_____________ of each year, at such annual rate, commencing on _____________,
1996. Each declared dividend shall be payable to holders of record as they
appear at the close of business on the stock register of the Company on such
record dates, not exceeding 45 days preceding the payment dates thereof, as
shall be fixed by the Board of Directors of the Company.
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a dividend period, then holders of
the Series A Preferred Shares will have no right to receive a dividend for that
period, and the Company will have no obligation to pay a dividend for that
period, whether or not dividends are declared and paid for any future period. If
the Company fails to pay or declare and set aside for payment dividends with
respect to an aggregate of ______ quarters, holders of the Preferred Stock of
the Company, including the Series A Preferred Shares, will be entitled to elect
two directors. See " -- Voting Rights."
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If any Series A Preferred Shares are outstanding, no full dividends shall
be declared or paid or set apart for payment on any series of capital stock of
the Company ranking, as to dividends, on a parity with or junior to the Series A
Preferred Shares for any dividend period unless full dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payments on the Series A Preferred
Shares, for the then-current dividend period. When dividends are not paid in
full (or a sum sufficient for such full payment is not set apart) upon the
Series A Preferred Shares and the shares of any other series of capital stock
ranking on a parity as to dividends with the Series A Preferred Shares, all
dividends declared upon Series A Preferred Shares and any other series of
capital stock ranking on a parity as to dividends with the Series A Preferred
Shares shall be declared pro rata so that the amount of dividends declared per
share on the Series A Preferred Shares and such other series of capital stock
shall in all cases bear to each other the same ratio that full dividends, for
the then-current dividend period, per share on the Series A Preferred Shares
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods) and full dividends, including required or permitted
accumulations, if any, on such other series of capital stock bear to each other.
Except as provided in the immediately preceding paragraph, 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 has
been set apart for payment for the then-current dividend period, no dividends
(other than in Common Stock or other capital stock ranking junior to the Series
A Preferred Shares as to dividends and upon liquidation) shall be declared or
paid or set aside for payment and no other distribution shall be declared or
made upon the Common Stock or any other capital stock of the Company ranking
junior to or on a parity with the Series A Preferred Shares as to dividends or
amounts upon liquidation, nor shall any Common Stock or any other capital stock
of the Company ranking junior to or on a parity with the Series A Preferred
Shares as to dividends or amounts upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any monies to be paid to or made
available for a sinking fund for the redemption of any such stock) by the
Company (except by conversion into or exchange for other capital stock of the
Company ranking junior to the Series A Preferred Shares as to dividends and
amounts upon liquidation).
For a discussion of the tax treatment of distributions to stockholders, see
"Federal Income Tax Considerations -- Taxation of United States Stockholders"
and "-- Taxation of Foreign Stockholders."
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to vote
as indicated below, each Series A Preferred Share will be entitled to one vote
on matters on which holders of the Series A Preferred Shares are entitled to
vote.
If at the time of any annual meeting of the Company's stockholders the
aggregate amount of declared and unpaid dividends on any series of Preferred
Stock of the Company, including the Series A Preferred Shares, equals or exceeds
an amount equal to ______ quarterly dividend payments on such series of
Preferred Stock, the number of directors then constituting the Board of
Directors of the Company will be increased by two, and the holders of the Series
A Preferred Shares, voting together with the holders of all other series of
Preferred Stock as a single class, will be entitled to elect such two additional
directors to serve on the Company's Board of Directors at each such annual
meeting. Each director elected by the holders of shares of the Preferred Stock
shall continue to serve as such director for the full term for which he or she
shall have been elected, notwithstanding that prior to the end of such term such
default shall cease to exist.
The affirmative vote or consent of the holders of at least ______% of the
outstanding shares of each series of Preferred Stock of the Company, including
the Series A Preferred Shares, will be required (a) to create any class or
series of stock which shall have preference as to dividends or distribution of
assets over any outstanding series of Preferred Stock of the Company other than
a series which shall not have any right to object to such creation or (b) alter
or change the provisions of the Company's Articles of Incorporation (including
the Certificate of Designation
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establishing the Series A Preferred Shares) so as to adversely affect the voting
powers, preferences or special rights of the holders of a series of Preferred
Stock of the Company; provided that if such amendment shall not adversely affect
all series of Preferred Stock of the Company, such amendment need only be
approved by at least ______% of the holders of shares of all series of Preferred
Stock adversely affected thereby.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to _________,
____ (except upon the occurrence of a Tax Event). On or after such date, the
Series A Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on not less than 30 nor more
than 60 days' notice by mail, at a redemption price of $25.00 per share, plus
accrued and unpaid dividends to the date of redemption, if any, thereon. Any
such redemption must comply with the prompt corrective action and capital
distribution regulations of the Office of Thrift Supervision (the "OTS"), which
may prohibit a redemption or require the OTS' prior approval of a redemption. If
there are any accrued and unpaid dividends on any Series A Preferred Shares, no
Series A Preferred Shares shall be redeemed unless all outstanding Series A
Preferred Shares are redeemed and the Company shall not purchase or otherwise
acquire any Series A Preferred Shares; provided, however, that the Company may
purchase or acquire Series A Preferred Shares pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Series A Preferred
Shares.
The Company will also have the right at any time, upon the occurrence of a
Tax Event, to redeem the Series A Preferred Shares, in whole (but not in part)
at a redemption price of $25.00 per share, plus accrued and unpaid dividends to
the date of redemption, if any, thereon. "Tax Event" means the receipt by the
Company of an opinion of a nationally recognized law firm experienced in such
matters to the effect that, as a result of (i) any amendment to, clarification
of, or change (including any announced prospective change) in, the laws or
treaties (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein affecting taxation, (ii) any
judicial decision, official administrative pronouncement, published or private
ruling, regulatory procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or regulations) ("Administrative
Action") or (iii) any amendment to, clarification of, or change in the official
position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification, or change
is effective or such pronouncement or decision is announced on or after the date
of issuance of the Series A Preferred Shares, there is more than an
insubstantial risk that (a) dividends paid or to be paid by the Company with
respect to the capital stock of the Company are not, or will not be, fully
deductible by the Company for United States federal income tax purposes or (b)
the Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any distribution of assets is
made to holders of Common Stock or any other class of stock ranking junior to
the Series A Preferred Shares upon liquidation, liquidating distributions in the
amount of $25.00 per share, plus accrued and unpaid dividends thereon, if any,
to the date of liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the
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Company ranking on a parity with the Series A Preferred Shares in the
distribution of assets upon any liquidation, dissolution or winding up of the
affairs of the Company, then the holders of the Series A Preferred Shares and
such other classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
liquidation, dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Certificate of Designation establishing the Series A Preferred Shares
requires that, as long as any Series A Preferred Shares are outstanding, certain
actions by the Company be approved by a majority of the 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 employee of the
Company, the Bank or any affiliate of the Bank. In addition, any members of the
Board of Directors of the Company elected by holders of Preferred Stock,
including the Series A Preferred Shares, will be deemed to be Independent
Directors for purposes of approving actions requiring the approval of a majority
of the Independent Directors. The actions which require approval of a majority
of the Independent Directors include (i) the issuance of additional Preferred
Stock ranking on a parity with the Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of ___% of the aggregate amount
of net proceeds received in connection with the issuance of Preferred Stock and
Common Stock, (iii) the modification of the general distribution policy or the
declaration of any distribution in respect of Common Stock for any year if,
after taking into account any such proposed distribution, total distributions on
the Series A Preferred Shares and the Common Stock would exceed an amount equal
to the sum of ___% 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, (v) the redemption of any shares of Common Stock, (vi) the
termination or modification of, or the election not to renew, the Advisory
Agreement or any Servicing Agreement or the subcontracting of any duties under
the Servicing Agreements to third parties unaffiliated with the Bank, and (vii)
the determination to revoke the Company's REIT status. The Articles of
Incorporation require that, in assessing the benefits to the Company of any
proposed action requiring their consent, the Independent Directors take into
account the interests of holders of both the Common Stock and the Preferred
Stock, including, without limitation, holders of the Series A Preferred Shares.
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 Maryland General Corporation Law and the Articles of
Incorporation of the Company.
COMMON STOCK
General. The Company is authorized to issue up to _______ shares of Common
-------
Stock. Upon consummation of the Offering and the transactions described in
"Transactions Constituting the Formation," the Company will have outstanding
_______ shares of Common Stock, all of which will be held by the Bank.
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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, as 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,
for the then-current dividend period, on the shares of all series of 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 and make Balancing Distributions as
required. See "Federal Income Tax Considerations -- Organizational
Requirements."
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 held by the Bank.
Rights Upon Liquidation. In the event of the liquidation, dissolution or
-----------------------
winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of Common
Stock will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
PREFERRED STOCK
Subject to limitations prescribed by Maryland law and the Company's
Articles of Incorporation, the Board of Directors or, if then constituted, a
duly authorized committee thereof is authorized to issue, from the authorized
but unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish, from
time to time, the number of shares of Preferred Stock to be included in any such
class or series and to fix the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of any such
class or series, and such other subjects or matters as may be fixed by
resolution of the Board of Directors.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Certificate of Designation relating to that class or series.
A Certificate of Designation relating to each class or series of Preferred
Stock will set forth the preferences and other terms of such class or series,
including without limitation the following: (1) the title and stated value of
such class or series; (2) the number of shares of such class or series offered
and the liquidation preference per share of such class or series; (3) the
dividend rate(s), period(s), and/or payment date(s) or method(s) of calculation
thereof applicable to such class or series; (4) whether such class or series of
Preferred Stock is cumulative or not and, if cumulative, the date from which
dividends on such class or series shall accumulate; (5) the provision for a
sinking fund, if any, for such class or series; (6) the provision for
redemption, if applicable, of such class or series; (7) any limitations on
direct or beneficial ownership and restrictions on transfer, in each case as may
be appropriate to preserve the status of the Company as a REIT; (8) 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 other specific terms, preferences, rights,
limitations or restrictions of such class or series; and (11) any voting rights
of such class or series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Articles of Incorporation contain certain restrictions on the
number of shares of Preferred Stock that individual stockholders may own. For
the Company to qualify as a REIT under the Code, no more than
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50% of the value of its outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year (other than the
first year) or during a proportionate part of a shorter taxable year (the "Five
or Fewer Test"). The capital stock of the Company must also be beneficially
owned by 100 or more persons during at least 335 days of a taxable year or
during a proportionate part of a shorter taxable year (the "One Hundred Persons
Test"). Because a significant percentage of the Bank is considered to be held by
two individuals, and because the Bank owns 100% of the Common Stock of the
Company, these two individuals are considered to own a significant percentage of
the Common Stock of the Company. Absent the restrictions on the number of shares
of Preferred Stock that individual stockholders may acquire and own (directly or
indirectly), there would be a possibility that the deemed Common Stock ownership
of these two individuals, in combination with the ownership by other holders of
the Preferred Stock, would cause the Company to fail the Five or Fewer Test.
Further, the Articles of Incorporation of the Company contain restrictions on
the acquisition and ownership of Preferred Stock intended to ensure compliance
with the One Hundred Persons Test. Such provisions include a restriction that if
any transfer of shares of capital stock of the Company would cause the Company
to be owned by fewer than 100 persons, such transfer shall be null and void and
the intended transferee will acquire no rights to the stock.
Subject to certain exceptions specified in the Company's Articles of
Incorporation, no holder of Preferred Stock which is a publicly held corporation
is permitted to own (including shares deemed to be owned by virtue of the
attribution provisions of the Code), more than ___% (the "Ownership Limit") of
any issued and outstanding class or series of Preferred Stock. For other
holders, such as individuals and trusts, the Ownership Limit is ___% of any
issued and outstanding class or series of Preferred Stock. The Board of
Directors may (but in no event will be required to), upon receipt of a ruling
from the IRS or an opinion of counsel satisfactory to it, waive the Ownership
Limit with respect to a holder if such holder's ownership will not then or in
the future jeopardize the Company's status as a REIT.
The Articles of Incorporation 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 transferee
to the Company and by the Company to the trustee; any vote of the shares while
the shares were held by the original transferee prior to the Company's discovery
thereof shall be void ab initio and the original transferee shall be deemed to
have given its proxy to the trustee. Any unpaid distributions with respect to
the original transferee will be rescinded as void ab initio. In liquidation, the
original transferee stockholder's ratable share of the Company's assets would be
limited to the price paid by the original transferee for the Excess Shares or,
if no value was given, the price per share equal to the closing market price on
the date of the purported transfer. The trustee of the trust shall promptly sell
the shares to any person whose ownership is not prohibited, whereupon the
interest of the trust shall terminate. Proceeds of the sale shall be paid to the
original transferee up to its purchase price (or, if the original transferee did
not purchase the shares, the value on its date of acquisition) and any remaining
proceeds shall be paid to a charity to be named by the Company.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition or ownership of less than ___% or ___% of a
class or series of issued and outstanding Preferred Stock (or the acquisition or
ownership of an interest in an entity that owns shares of such series of
Preferred Stock) by an individual or entity could cause that individual or
entity (or another individual or entity) to own constructively in excess of ___%
or ___% of such class or series of Preferred Stock, and thus subject such stock
to the applicable 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.
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The Ownership Limit provisions will not be automatically removed even if
the REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration limitation
is increased.
The Articles of Incorporation 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 Shaw, Pittman, Potts & Trowbridge, and it is such firm's 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 ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND SALE OF
THE SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX 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 Shaw, Pittman, Potts & Trowbridge, commencing with the
Company's taxable year ending December 31, 1996, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on certain factual assumptions relating to the
organization and operation of the Company and is conditioned upon certain
representations made by the Company as to factual matters, such as the
organization and expected manner of operation of the Company. In
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addition, this opinion is based upon the factual representations of the Company
concerning its business and Mortgage Assets set forth in this Prospectus.
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 Shaw,
Pittman, Potts & Trowbridge 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.
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
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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 certain 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."
The Company believes that it will issue sufficient shares pursuant to the
Offering to allow it to satisfy conditions (v) and (vi) above. Because a
significant percentage of the Bank is considered to be held by two individuals,
and because the Bank owns 100% of the Common Stock of the Company, these two
individuals are considered to own a significant percentage of the Common Stock
of the Company. In order that the deemed Common Stock ownership of these two
individuals, in combination with the ownership by other holders of the Preferred
Stock, not result in a failure to satisfy condition (vi) above, it is necessary
to ensure that the value of the Common Stock not exceed ___% of the total value
of the Company. Accordingly, the Company's Articles of Incorporation authorize
the distribution of cash or property to holders of its Common Stock where the
value of the Common Stock would otherwise exceed __% of the total value of the
stock of the Company. In addition, the Company's Articles of Incorporation
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."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.
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 includable 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
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"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 a portion of such receipts or sales under
one or more leases is based on income or profits, only a proportionate amount of
the contingent interest paid by the borrower will be disqualified as interest.
The Company anticipates that all the interest on the Mortgage Assets will
satisfy the 75% and 95% gross income tests.
Relief Provisions. If the Company fails to satisfy one or both of the 75%
-----------------
or 95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "-- Taxation of the Company -- General," even
if these relief provisions apply, a tax would be imposed with respect to the
excess net income.
Asset Tests. At the close of each quarter of its taxable year, the Company
-----------
must satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company), cash, cash items, and
government securities. The Company anticipates that substantially all of its
assets will fall in this category. 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, the Bank may elect to be so treated. Furthermore,
if the Company should fail to distribute during each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of
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such required distribution over the amounts actually distributed. The Company
intends to make timely distributions sufficient to satisfy the annual
distribution requirement.
"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.
It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement the Company may find it necessary to arrange
for borrowings or to pay dividends in the form of taxable stock dividends if it
is practicable to do so.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions described above do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost, and will not be
permitted to requalify unless it distributes any earnings and profits
attributable to the period when it failed to qualify. In addition, it would be
subject to tax on any built-in gains on property held during the period during
which it did not qualify if it sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAXATION OF UNITED STATES STOCKHOLDERS
As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax purposes
(i) a citizen or resident or the United States, (ii) a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
Distributions Generally. As long as the Company qualifies as a REIT,
-----------------------
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gains
dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital 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
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first be treated as a tax-free return of capital, reducing the tax basis in the
United States Stockholder's Series A Preferred Shares, and a distribution in
excess of the United States Stockholder's tax basis in its Series A Preferred
Shares will be taxable gain realized from the sale of such shares. Dividends
declared by the Company in October, November or December of any year payable to
a stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company during
January of the following calendar year. Stockholders may not claim the benefit
of any tax losses of the Company on their own income tax returns.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed under
"-- Taxation of the Company -- General" and "-- Taxation of the Company --
Annual Distribution Requirements," above. As a result, stockholders may be
required to treat as taxable dividends certain distributions that would
otherwise result in a tax-free return 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 not constitute "unrelated business taxable income" unless the stockholder
has borrowed to acquire or carry its shares of the Company. A tax-exempt
employee's pension trust that holds more than 10% of the shares of the capital
stock of the Company may under certain circumstances be required to treat a
certain percentage of dividends as unrelated business taxable income if the
Company is "predominantly held" by qualified trusts. For these purposes, a
qualified trust is any trust defined under Section 401(a) of the Code and exempt
from tax under Section 501(a) of the Code. As a consequence of the look-through
provisions of Code Section 856(h)(3), which generally affects ownership by
pension trusts of shares of REITs, any qualified pension trust that owns more
than 10% of the shares of the capital stock of the Company might be required to
treat a certain portion of the dividends paid as unrelated business taxable
income, if the conditions set forth in Code Section 856(h)(3) are satisfied. The
Company does not anticipate that such conditions will be satisfied.
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,
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gain or loss realized on the sale or exchange of a "United States real property
interest" ("USRPI") by a foreign taxpayer is treated by statute as effectively
connected with a U.S. trade or business as a matter of law, without regard to
the particular facts and circumstances. Shares of a corporation are treated as a
USRPI only if the fair market value of USRPIs owned by the corporation equals or
exceeds 50% of the fair market value of its total assets. If at no time within
the five years preceding the sale or exchange of shares in the Company the
shares constituted a USRPI, gain or loss on the sale or exchange will not be
treated as effectively connected with a U.S. trade or business by reason of
FIRPTA. While ownership of real property within the U.S. (including ownership of
interests in certain entities) is always a USRPI, a loan secured by a mortgage
on U.S. real property constitutes a USRPI only if the amounts payable by the
borrower are contingent on the income or receipts of the borrower or the
property or otherwise based on the property. Because such contingent interest is
not likely to be present in the home mortgage loans to be owned by the Company
that are expected to represent approximately __% of the assets of the Company
(although such interest is fairly common in commercial loans) the Company
believes it is unlikely that its shares will be USRPIs or that it will derive
significant gain from the sale or exchange of USRPIs, although whether its
shares are a USRPI or it derives income from USRPIs will depend upon the facts
as they ultimately develop. A distribution of cash to a Foreign Stockholder that
is not attributable to gain from sales or exchanges by the Company of USRPIs and
not designated by the Company as capital gain dividend are 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 gain dividends is higher than
the 28% maximum rate on capital gains of individuals. Capital gains dividends
not attributable to gain on the sale or exchange of USRPIs are not subject to
United States taxation if there is no requirement of withholding.
If the shares of the Company do constitute a USRPI (or did so constitute
within the previous five years), gain or loss on the sale or exchange of the
shares will be treated as effectively connected with the conduct of a U.S. trade
or business unless one or more special rules apply to preclude U.S. taxation.
If the Company is a "domestically-controlled REIT," a sale of Series A
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, under Code attribution rules, by Foreign
Stockholders. Because the Series A Preferred Shares will be publicly traded, no
assurance can be given that the Company will constitute a domestically-
controlled REIT or that it will be possible to ascertain whether or not it is
domestically-controlled.
If the Company is not a domestically-controlled REIT, a sale of Series A
Preferred Shares would be subject to tax under FIRPTA as a sale of a USRPI and
gain or loss would be effectively connected with a United States trade or
business if either (i) the Series A Preferred Shares were not "regularly traded"
(as defined by applicable Treasury Regulations) on an established securities
market (e.g., the ______________________, on which the Series A Preferred Shares
will be listed) during the quarter in which the Series A Preferred Shares were
sold or (ii) even if the Series A Preferred Shares were "regularly traded," the
selling stockholder held, directly or indirectly, more than 5% of the Series A
Preferred Shares during the five-year period ending on the date of disposition.
The applicable Treasury Regulations that define "regularly traded" for this
purpose provide that a security will not be "regularly traded" for any calendar
quarter during which 100 or fewer persons (treating related persons as one
person) in the aggregate own 50% or more of such security or the quarterly
trading volume is less than 7.5% of the average
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number of the issued and outstanding shares of such security (2.5% if there are
2,500 or more stockholders of record). In the event that the Series A Preferred
Shares were not "regularly traded" and the Company did not at that time
constitute a domestically-controlled REIT, a Foreign Stockholder (without regard
to its ownership percentage of Series A Preferred Shares) must treat as
effectively connected with a United States trade or business any gain or loss on
any sale or other disposition of Series A Preferred Shares that occurs within a
calendar quarter during which the Series A Preferred Shares were not "regularly
traded" and the shares were a USRPI.
If the gain on the sale of the Company's Series A Preferred Shares were
subject to taxation under FIRPTA, the Foreign Stockholder would be subject to
the same treatment as a United States 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 the sale of shares of a REIT not subject to
FIRPTA will nonetheless be taxable to a Foreign Stockholder who is an individual
(under rules generally applicable to United States Stockholders) if such person
is in the United States for 183 days or more during the taxable year of
disposition and certain other conditions apply. In any event, a purchaser of
Series A Preferred Shares from a Foreign Stockholder will not be required under
FIRPTA to withhold on the purchase price if the purchased Series A Preferred
Shares are "regularly traded" on an established securities market or if the
Company is a domestically-controlled REIT. Otherwise, under FIRPTA the purchaser
of Series A Preferred Shares may be required to withhold 10% of the purchase
price and remit such amount to the IRS.
Shares of the Company owned by a nonresident alien decedent are subject to
United States federal estate tax (which is imposed at rates up to 55%) unless an
estate tax treaty binding upon the United States provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
United States Stockholders. Under certain circumstances, a United States
Stockholder of Series A Preferred Shares may be subject to backup withholding at
a rate of 31% on payments made with respect to, or cash proceeds of a sale or
exchange of, Series A Preferred Shares. Backup withholding will apply only if
the holder (i) fails to furnish the person required to withhold with its
Taxpayer Identification Number ("TIN") which, for an individual, would be his or
her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified
by the IRS that it has failed properly to report payments of interest and
dividends, or (iv) under certain circumstances, fails to certify, under penalty
of perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. A United States Stockholder should consult with a tax advisor
regarding qualification for exemption from backup withholding and the procedure
for obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
United States Stockholder will be allowed as a credit against such United States
Stockholder's United States federal income tax liability and may entitle such
United States Stockholder to a refund, provided that the required information is
furnished to the IRS.
Foreign Stockholders. Additional issues may arise pertaining to
--------------------
information reporting and backup withholding with respect to Foreign
Stockholders, and a Foreign Stockholder should consult with a tax advisor with
respect to any such information reporting and backup withholding requirements.
Backup withholding with respect to a Foreign Stockholder is not an additional
tax. Rather, the amount of any backup withholding with respect to a payment to a
Foreign Stockholder will be allowed as a credit against any United States
federal income tax liability of such Foreign Stockholder. If withholding results
in an overpayment of taxes, a refund may be obtained, provided that the required
information is furnished to the IRS.
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OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for self
employed individuals and their employees or any other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the owner ship of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and otherwise consistent with the
fiduciary's responsibilities and in compliance with the requirements of Part 4
of Title I of ERISA, including, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA and the prohibited transaction
provisions of Section 406 of ERISA and Section 4975 of the Code; (c) whether the
Company's assets are treated as assets of the Plan; and (d) the need to value
the assets of the Plan annually. In addition, the fiduciary of an individual
retirement arrangement under Section 408 of the Code (an "IRA") considering the
purchase of Series A Preferred Shares should consider whether the ownership of
Series A Preferred Shares would result in a non-exempt prohibited transaction
under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment considerations
relevant to Plans and, where indicated, IRAs. This summary is based on the
current provisions of ERISA and the Code and regulations and rulings thereunder,
and may be changed (perhaps adversely and with retroactive effect) by future
legislative, administrative or judicial actions. PLANS AND IRAS THAT ARE
PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD CONSULT WITH AND RELY
UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the assets
of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation," 29
C.F.R. Sec. 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 periods specified in the Plan Asset Regulation.
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The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable." The Company believes that any restrictions
imposed on the transfer of the Series A Preferred Shares are limited to the
restrictions on transfer generally permitted under the Plan Asset Regulation and
are not likely to result in the failure of the Series A Preferred Shares to be
"freely transferable."
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan. However,
the Company believes that under the Plan Asset Regulation the Series A Preferred
Shares should be treated as "publicly-offered securities" and, accordingly, the
underlying assets of the Company should not be considered to be assets of any
Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and
that the trustee, or an investment manager (within the meaning of Section 3(38)
of ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, the assets of the Company under current
law do not appear likely to be assets of the Plans receiving Series A Preferred
Shares as a result of the Offering. However, if the assets of the Company were
deemed to be assets of the Plans under ERISA, certain directors and officers of
the Company might be deemed fiduciaries with respect to the Plans that invest in
the Company and the prudence and other fiduciary standards set forth in ERISA
would apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with respect
to the investing Plan or IRA could be prohibited transactions unless a statutory
or administrative exemption is available. In addition, investment authority
would also have been improperly delegated to such fiduciaries, and, under
certain circumstances, Plan fiduciaries who make the decision to invest in the
Series A Preferred Shares could be liable as co-fiduciaries for actions taken by
the Company that do not conform to the ERISA standards for investments under
Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in 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.
49
<PAGE>
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 or her
beneficiary, the IRA would lose its tax-exempt status. The other penalties for
prohibited transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank 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 (an 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 Stockholder -- Treatment of Tax-Exempt Stockholders."
EXPERTS
The audited financial statement as of _________, 1996 included in this
Prospectus has been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and is included
herein in reliance of said firm as experts in giving said reports.
RATINGS
It is expected that the Series A Preferred Shares will be rated by two of
the following: Moody's Investors Service, Inc., Standard and Poor's Services,
Duff & Phelps or Fitch Investors Service, L.P. 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.
50
<PAGE>
CERTAIN LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby and certain
tax matters described under "Federal Income Tax Considerations" will be passed
upon for the Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C. The
validity of the Series A Preferred Shares will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom.
51
<PAGE>
GLOSSARY
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the Company
pursuant to which the Bank will (i) administer the day-to-day operations of the
Company, (ii) monitor the credit quality of the Mortgage Assets held by the
Company and (iii) advise the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets.
"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.
"Balancing Distribution" means a distribution made to the holders of the
Common Stock at any point in time, or from time to time, when the value of the
Common Stock exceeds ___% of the total value of the stock of the Company, but
not in an amount in excess of the distribution required to reduce the value of
the Common Stock (measured after such distribution) to less than ___% of the
total value of the stock of the Company.
"Bank" means Chevy Chase Bank, F.S.B., a federally chartered and federally
insured stock savings bank, and the parent of the Company.
"Board of Directors" means the board of directors of the Company.
"By-laws" means the by-laws of the Company.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loan" means a whole loan secured by a first mortgage
or deed of trust on a commercial real estate property.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock, par value $___ per share, of the
Company.
"Company" means Chevy Chase Preferred Capital Corporation, a Maryland
corporation.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1914, 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.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
52
<PAGE>
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"5/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a one-year non-convertible ARM in the month in which the 60th
monthly payment is due.
"Five or Fewer Test" means the Code requirement that not more than 50% in
value of the Company's outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code).
"FNMA" means the Federal National Mortgage Association.
"FNMA Required Net Yield" means (i) with respect to any Mortgage Loan with
an original term of 20, 25 or 30 years, FNMA's required net yield for 30-year
fixed rate mortgages (covered by 60-day mandatory commitments) that was in
effect 45 days prior to the effective date of any conversion of such Mortgage
Loan and (ii) with respect to any Mortgage Loan with an original term of 15
years, FNMA's required net yield for 15-year fixed rate mortgages (covered by
60-day mandatory commitments) that was in effect 45 days prior to the effective
date of any conversion of such Mortgage Loan.
"Foreign Stockholders" means holders of Series A Preferred Shares that are
for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii) foreign
trusts and estates.
"Gross Margin" means, with respect to a Residential Mortgage Loan that is
an ARM, the applicable fixed percentage which is added to the applicable index
to calculate the current interest rate paid by the borrower of the adjustable
rate Mortgage Loan (without taking into account any interest rate caps or
minimum interest rates). Gross Margin is inapplicable to fixed rate loans.
"Independent Directors" means the members of the Board of Directors who are
not current officers or employees of the Company, the Bank or any affiliate of
the Bank.
"Initial Portfolio" means the initial portfolio of Mortgage Assets
purchased by the Company from the Bank, affiliates of the Bank and unrelated
third parties.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Inter-Bank Offered Rate.
"Lifetime interest rate cap" means, with respect to Mortgage Loans that are
ARMs, the maximum interest rate that may accrue during any period over the term
of such Mortgage Loan as stated in the governing instruments evidencing such
Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the mortgaged
property underlying such Mortgage Loan and (ii) if the Mortgage Loan was made to
finance the acquisition of property, the purchase price of the mortgaged
property.
"Mortgage Assets" means real estate mortgage assets, including but not
limited to Residential Mortgage Loans, Commercial Mortgage Loans and
Mortgage-Backed Securities.
53
<PAGE>
"Mortgage-Backed Securities" means securities rated by at least one
nationally recognized independent rating organization and representing interests
in or obligations backed by pools of Mortgage Loans.
"Mortgage-Backed Securities Purchase Agreements" means the mortgage-backed
securities purchase agreements between the Company and the Bank, affiliates of
the Bank and unrelated third parties.
"Mortgage Loans" means whole loans secured by single-family (one- to four-
unit) residential real estate properties or by commercial real estate
properties.
"Mortgage Loan Purchase Agreements" means the mortgage loan purchase
agreements between the Company and the Bank, affiliates of the Bank and
unrelated third parties.
"Offering" means the offering of Series A Preferred Shares pursuant to the
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 beginning in the month in
which the 12th monthly payment is due.
"OTS" means the Office of Thrift Supervision.
"Ownership Limit" means the provision in the Company's Articles of
Incorporation limiting any person from owning (including shares deemed to be
owned by the attribution provisions of the Code) more than ___% of any issued
and outstanding class or series of Preferred Stock.
"Periodic interest rate cap" means, with respect to ARMs, the maximum
change in the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic interest rate caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.
"Plan" means a pension, profit-sharing, retirement or other employee
benefit plan.
"Plan Asset Regulation" means the DOL regulations determining the assets of
the Plan for purposes of ERISA and the related prohibited transaction excise tax
provisions of the Code.
"Preferred Stock" means preferred stock, par value $25 per share, of the
Company.
"Prime Rate" for any date means the lowest prime rate as published in the
"Money Rates" table of The Wall Street Journal for that date.
"Prospectus" means this prospectus, as the same may be amended.
"Rate Adjustment Date" means, with respect to any ARM, a date on which the
interest rate on such ARM adjusts.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.
54
<PAGE>
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.
"REIT taxable income" shall have the meaning set forth in "Federal Income
Tax Considerations -- Taxation of the Company -- Annual Distribution
Requirements."
"Residential Mortgage Loan" means a whole loan secured by a first mortgage
or deed of trust on a single family (one- to four-unit) residential real estate
property.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.
"7/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a one-year non-convertible ARM in the month in which the 84th
monthly payment is due.
"Servicing Agreements" means the servicing agreements between the Bank
and/or one or more of the Bank's affiliates and the Company.
"Tax Event" means the receipt by the Company of an opinion of a nationally
recognized law firm experienced in such matters to the effect that, as a result
of (i) any amendment to, clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, (ii) any judicial decision, official administrative
pronouncement, ruling, regulatory procedure, notice or announcement (including
any notice or announcement of intent to adopt such procedures or regulations)
("Administrative Action") or (iii) any amendment to, clarification of, or change
in the official position or the interpretation of such Administrative Action or
Judicial decision or any interpretation or pronouncement that provides for a
position with respect to such Administrative Action or judicial decision that
differs from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body, irrespective
of the manner in which such amendment, clarification or change is made known,
which amendment, clarification, or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Series A Preferred
Shares, there is more than an insubstantial risk that (a) dividends payable by
the Company with respect to the capital stock of the Company are not, or will
not be, fully deductible for United States federal income tax purposes or (b)
the Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"10/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a one-year non-convertible ARM in the month in which the 120th
monthly payment is due.
"3/1 ARM" means a fixed rate Residential Mortgage Loan that automatically
converts to a One-Year ARM in the month in which the 36th monthly payment is
due.
"TIN" means Taxpayer Identification Number.
"Treasury Index" means the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release 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.
55
<PAGE>
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means those underwriters to which the Company will sell the
Series A Preferred Shares pursuant to the terms of the Underwriting Agreement.
"Underwriting Agreement" means the underwriting agreement by and among the
Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A Preferred Shares
that are for United States federal income tax purposes (i) citizens or residents
of the United States, (ii) corporations, partnerships, or other entities created
or organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.
"USRPI" means United States real property interest.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom
____________________ is acting as representative (the "Representative"), has
severally agreed to purchase Series A Preferred Shares with the liquidation
amount set forth opposite its name below. In the Underwriting Agreement, the
several Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all the Series A Preferred Shares offered hereby if any are
purchased. In the event of default by an Underwriter, the Underwriting Agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting Underwriters may be increased or the Underwriting Agreement may be
terminated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES A
UNDERWRITER PREFERRED STOCK
- --------------------------------------------------------- -----------------
<S> <C>
____________________..................................... _________
____________________..................................... _________
____________________..................................... _________
Total............................................ 4,000,000
=========
</TABLE>
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 pubic, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of _________
additional Series A Preferred Shares solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of Series A Preferred Shares to be
purchased by each of them, as shown in the foregoing table, bears to the
__________ Series A Preferred Shares offered hereby.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially similar to the
Series A Preferred Shares or which are convertible or exchangeable into
securities which are substantially similar to the Series A Preferred Shares
without the prior written consent of the representative, except for the Series A
Preferred Shares offered in connection with the Offering.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Series A
Preferred Shares offered by them.
U-1
<PAGE>
Prior to the Offering, there has been no public market for the shares.
The Company and the Bank 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 affiliates of the Company, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
U-2
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY 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 FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
__________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
The Company............................................................... 8
Use of Proceeds........................................................... 8
Capitalization............................................................ 8
Special Considerations.................................................... 10
Business and Strategy..................................................... 15
Management................................................................ 30
Certain Transactions Constituting
The Formation........................................................... 33
Description of Series A Preferred Shares.................................. 34
Description of Capital Stock.............................................. 37
Federal Income Tax Considerations......................................... 40
ERISA Considerations...................................................... 48
Experts................................................................... 50
Ratings................................................................... 50
Certain Legal Matters..................................................... 51
Glossary.................................................................. 52
Underwriting.............................................................. U-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE
COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
4,000,000 SHARES
[LOGO]
CHEVY CHASE PREFERRED CAPITAL
CORPORATION
___% NONCUMULATIVE
PREFERRED STOCK, SERIES A
__________________
PROSPECTUS
__________________
____________________
_________, 1996
================================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee ........................................... $ 34,482.76
_______ 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.
See response to Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of the Company, the Company will issue 100
shares of Common Stock, par value $1 per share, to Chevy Chase Bank, F.S.B.
Prior to the consummation of the Offering, the Company will amend its Articles
of Incorporation to change the par value of its Common Stock to $___ per share.
Simultaneously with the consummation of the Offering, the Company will issue an
aggregate of ________ shares of Common Stock to Chevy Chase Bank, F.S.B. 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 will be issued in reliance upon the exemption from
registration under Section 4(2) of the Securities Act.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Maryland General Corporation Law ("MGCL"), a corporation
may indemnify any director or officer in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than a derivative action by or in the right of such
corporation) who is or was a director, officer, employee or agent of such
corporation, or serving at the request of such corporation in such capacity for
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding, if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
The MGCL also permits indemnification by a corporation under similar
circumstances for expenses (including attorneys' fees) actually and reasonably
incurred by such persons in connection with the defense or settlement of a
derivative action, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to such corporation unless the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
II-1
<PAGE>
The MGCL provides that the indemnification described above shall not be
deemed exclusive of other indemnification that may be granted by a corporation
pursuant to its By-laws, disinterested directors' vote, stockholders' vote,
agreement or otherwise. The MGCL also provides corporations with the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation in a similar capacity for another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her in any such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability as described above.
The Amended and Restated Articles of Incorporation of Chevy Chase Preferred
Capital Corporation (the "Registrant") provide that, to the fullest extent that
the MGCL as from time to time in effect permits the limitation or elimination of
the liability of directors, no director of the Registrant shall be personally
liable to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director.
The Amended and Restated Articles of Incorporation empower the Registrant
to indemnify any director, officer, employee or agent of the Registrant or any
other person who is serving at the Registrant'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 MGCL 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.
The Amended and Restated Articles of Incorporation also empower the
Registrant 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 Registrant or any other person who is serving at the
Registrant'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 such individual or
incurred by such individual in any such capacity arising out of such
individual's 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 MGCL as from time to time in effect, whether or not the
Registrant would have the power or be required to indemnify any such individual
under the terms of any agreement or by-law or the MGCL.
In addition, the Registrant'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 clear and unconditional 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
Registrant or, at the request of the Registrant, 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 Registrant and entitle them to have all
expenses incurred in advance of the final disposition of a proceeding paid by
the Registrant. 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 Registrant's By-laws also provide that the Registrant may enter into
contracts with any director, officer, employee or agent of the Registrant in
furtherance of the indemnification provisions in the By-laws, as well
II-2
<PAGE>
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.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Not applicable.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ---------------- -----------------------------------------------------------
<S> <C>
1* --Form of Underwriting Agreement between the Company, the
Bank and the Underwriters
3(a)(i) --Articles of Incorporation of the Company
3(a)(ii)* --Form of Certificate of Designation establishing
the Series A Preferred Shares
3(b)* --By-laws of the Company
4* --Specimen of certificate representing Series A Preferred
Shares
5* --Opinion of Shaw, Pittman, Potts & Trowbridge, counsel to
the Company, relating to Series A Preferred Shares
8* --Opinion of Shaw, Pittman, Potts & Trowbridge, counsel to
the Company, relating to certain tax matters
10(a)* --Form of Mortgage Loan Purchase Agreement
10(b)* --Form of Mortgage Loan Servicing Agreement
10(c)* --Form of Mortgage-Backed Securities Purchase Agreement
10(d)* --Form of Advisory Agreement between the Company and
the Bank
23(a)* --Consent of Arthur Andersen LLP
23(b)* --Consent of Shaw, Pittman, Potts & Trowbridge
(included in Exhibit 5)
</TABLE>
__________________
* To be filed by 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
II-3
<PAGE>
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 Chevy Chase, Maryland, on the 20th day of August, 1996.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Issuer)
By: /s/ B. Francis Saul II
--------------------------------
B. Francis Saul II
Chairman of the Board,
Chief Executive Officer
and President
II-5
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- ------------------
<S> <C> <C>
/s/ Alexander R.M. Boyle Director August 20, 1996
- -----------------------------
Alexander R.M. Boyle
/s/ Joel A. Friedman Senior Vice President and Controller August 20, 1996
- ----------------------------- (Principal Accounting Officer)
Joel A. Friedman
/s/ Stephen R. Halpin, Jr. Executive Vice President, Chief August 20, 1996
- ----------------------------- Financial Officer, Treasurer and
Stephen R. Halpin, Jr. Director (Principal Financial Officer)
/s/ Leslie A. Nicholson Executive Vice President, General August 20, 1996
- ----------------------------- Counsel and Director
Leslie A. Nicholson
/s/ B. Francis Saul II Chairman of the Board, Chief August 20, 1996
- ----------------------------- Executive Officer and President
Francis Saul II (Principal Executive Officer)
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ---------------- -----------------------------------------------------------
<S> <C>
1* --Form of Underwriting Agreement between the Company, the
Bank and the Underwriters
3(a)(i) --Articles of Incorporation of the Company
3(a)(ii)* --Form of Certificate of Designation establishing
the Series A Preferred Shares
3(b)* --By-laws of the Company
4* --Specimen of certificate representing Series A Preferred
Shares
5* --Opinion of Shaw, Pittman, Potts & Trowbridge, counsel to
the Company, relating to Series A Preferred Shares
8* --Opinion of Shaw, Pittman, Potts & Trowbridge, counsel to
the Company, relating to certain tax matters
10(a)* --Form of Mortgage Loan Purchase Agreement
10(b)* --Form of Mortgage Loan Servicing Agreement
10(c)* --Form of Mortgage-Backed Securities Purchase Agreement
10(d)* --Form of Advisory Agreement between the Company and
the Bank
23(a)* --Consent of Arthur Andersen LLP
23(b)* --Consent of Shaw, Pittman, Potts & Trowbridge
(included in Exhibit 5)
</TABLE>
____________________
* To be filed by amendment
II-7
<PAGE>
Exhibit 3(a)(i)
ARTICLES OF INCORPORATION
OF
CHEVY CHASE PREFERRED CAPITAL CORPORATION
FIRST: I, Mary Ellen D. Lench, whose post office address is 2300 N
Street, N.W., Washington, D.C. 20037, being at least eighteen years of age, do
hereby form a corporation under the Laws of the State of Maryland.
SECOND: The name of the corporation is:
CHEVY CHASE PREFERRED CAPITAL CORPORATION (the "Corporation").
THIRD: The purposes for which the Corporation is formed are to conduct
any business for which corporations may be organized under the laws of the State
of Maryland including, but not limited to, the following: (i) to acquire, hold,
own, develop, construct, improve, maintain, operate, sell, lease, transfer,
encumber, convey, exchange and otherwise dispose of or deal with real and
personal property; and (ii) to enter into any partnership, joint venture or
other similar arrangement to engage in any of the foregoing.
In general, to possess and exercise all the purposes, powers, rights and
privileges granted to, or conferred upon corporations by the Laws of the State
of Maryland now or hereafter in force, and to exercise any powers suitable,
convenient or proper for the accomplishment of any of the purposes herein
enumerated, implied or incidental to the powers or purposes herein specified, or
which at any time may appear conducive to or expedient for the accomplishment of
any of such purposes.
The foregoing shall, except where otherwise expressed, be in no way limited
or restricted by reference to or inference from
<PAGE>
the terms of any other clause of this or any other article of these Articles of
Incorporation or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as purposes.
FOURTH: The post office address of the principal office of the
Corporation in Maryland is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
The name and address of the resident agent is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland, 21202. Said resident agent
is a Maryland corporation.
FIFTH: The total number of shares of stock which the corporation shall
have authority to issue is One Hundred (100) shares of common stock, all of one
class, of the par value of One Dollar ($1.00) each and of the aggregate par
value of One Hundred Dollars ($100).
SIXTH: The number of directors of the Corporation shall be four (4),
which number may be increased or decreased pursuant to the Bylaws of the
Corporation, but shall never be less than three (3) nor more than eleven (11);
provided that if there is no stock outstanding, the number of directors may be
less than three but not less than one; and if at any time, the Corporation has
less than three stockholders, the number of directors may be less than three but
not less than the number of stockholders. The names of the initial directors who
shall act until the first annual meeting or until their successors are duly
chosen and qualified are: Alexander R.M. Boyle; Stephen R. Halpin, Jr.; Leslie
A. Nicholson; and B. Francis Saul II.
SEVENTH: The following provisions are hereby adopted for the purpose of
defining, limiting and regulating the powers of the Corporation and of the
directors and stockholders:
The board of directors is authorized to make, alter or repeal the
Corporation's Bylaws.
Election of directors need not be by written ballot.
2
<PAGE>
The board of directors of the Corporation is hereby empowered to authorize
the issuance from time to time of shares of its stock of any class, whether now
or hereafter authorized, or securities convertible into shares of its stock of
any class or classes, whether now or hereafter authorized.
No holder of shares of stock of any class shall be entitled as a matter of
right to subscribe for or purchase or receive any part of any new or additional
issue of shares of stock of any class or of securities convertible into shares
of stock of any class, whether now or hereafter authorized or whether issued for
money, for consideration other than money, or by way of dividend.
EIGHTH: Stockholders of the Corporation shall not have preemptive rights
to acquire additional shares of the Corporation.
NINTH: The duration of the Corporation shall be perpetual.
TENTH: Each person who is or was or who agrees to become a director or
officer of the Corporation, or each person who, while a director of the
Corporation, is or was serving or who agrees to serve, at the request of the
Corporation, as a director, officer, partner, joint venturer, employee or
trustee of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise (including the heirs, executor, administrators
or estate of such person), shall be indemnified by the Corporation, and shall be
entitled to have paid on his behalf or be reimbursed for reasonable expenses in
advance of final disposition or a proceeding, in accordance with the Bylaws of
the Corporation, to the full extent permitted from time to time by the Maryland
General Corporation Law as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted to the Corporation to provide prior to such amendment) or any other
3
<PAGE>
applicable laws presently or hereafter in effect. The Corporation shall have
the power, with the approval of the board of directors, to provide such
indemnification and advancement of expenses to any employee or agent of the
Corporation, in accordance with the Bylaws of the Corporation. Without limiting
the generality or the effect of the foregoing, the Corporation may enter into
one or more agreements with any person which provides for indemnification
greater or different than that provided in this Article TENTH. Any amendment or
repeal of this Article TENTH shall not adversely affect any right or protection
existing hereunder immediately prior to such amendment or repeal and shall not
adversely affect any right or protection then existing pursuant to any such
indemnification agreement.
ELEVENTH: No director or officer of the Corporation shall be liable to the
Corporation or to its stockholders for money damages except (i) to the extent
that it is established that such director or officer actually received an
improper benefit or profit in money, property or services, for the amount of the
benefit or profit in money, property or services actually received, or (ii) to
the extent that a judgment or other final adjudication adverse to such director
or officer is entered in a proceeding based on a finding in such proceeding that
such director's or officer's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding.
TWELFTH: Notwithstanding any other provision of these Articles of
Incorporation or any contrary provision of law, Title 3, subtitle 6 of the
Maryland General Corporation Law, as amended from time to time, or any successor
statute thereto, shall not apply to any "business combination" (as defined in
Section 3-601(e) of the Maryland General Corporation Law, as amended from time
to time, or any successor statute thereto) of the Corporation and any or all of
B. Francis Saul II and lineal descendants, Chevy Chase Bank, F.S.B., the B.
4
<PAGE>
F. Saul Company, the B. Saul Real Estate Investment Trust, and any and all
other, entities whether currently existing or formed in the future affiliated
with any of the foregoing.
THIRTEENTH: Notwithstanding any other provision of these Articles of
Incorporation or any contrary provision of law, Title 3, subtitle 7 of the
Maryland General Corporation Law, as amended from time to time, or any successor
statute thereto shall not apply to any acquisition of shares of stock of the
Corporation by any and all of the following persons or entities:
(1) B. Francis Saul II and lineal descendants, Chevy Chase Bank, F.S.B.,
the B.F. Saul Company, the B.F. Saul Real Estate Investment Trust,
and any and all other entities whether currently existing or formed in
the future affiliated with any of the foregoing;
(2) Directors, officers and employees of the Corporation and of any
partnership in which the Corporation is a general partner; and
(3) Any persons authorized by resolution of the board of directors of the
Corporation, in its discretion.
FOURTEENTH: Except as otherwise provided by these Articles of
Incorporation or any contrary provision of the Maryland General Corporation Law,
as amended, any resolution adopted by the board of directors authorizing a
series of preferred stock, or any resolution adopted by a majority of the entire
board of directors, all matters submitted to the stockholders at any meeting
(other than the election of directors) shall be decided by a majority of the
votes cast with respect thereto.
(signature page follows)
5
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of CHEVY CHASE PREFERRED
CAPITAL CORPORATION, who executed the foregoing Articles of Incorporation,
hereby acknowledges the same to be her act and further acknowledges that, to the
best of her knowledge, the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
Dated this 20th day of August, 1996.
/s/ Mary Ellen D. Lench
-----------------------------
Mary Ellen D. Lench
Incorporator
6
