<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
------------------------
BANKAMERICA PREFERRED CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
------------------------
555 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 622-3530
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHERYL SOROKIN
BANKAMERICA CORPORATION
BANK OF AMERICA CENTER
555 CALIFORNIA STREET
SAN FRANCISCO, CA 94104
(415) 622-3530
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C> <C>
RALPH C. WALKER, ESQ. CAROLYN CHEW HAMILTON, ESQ. STANLEY F. FARRAR, ESQ.
ORRICK, HERRINGTON & SUTCLIFFE LLP BANK OF AMERICA NATIONAL TRUST SULLIVAN & CROMWELL
OLD FEDERAL RESERVE BANK BUILDING AND SAVINGS ASSOCIATION 444 SOUTH FLOWER STREET
400 SANSOME STREET 555 CALIFORNIA STREET LOS ANGELES, CALIFORNIA 90071
SAN FRANCISCO, CALIFORNIA 94111 SAN FRANCISCO, CALIFORNIA 94104 TEL: (213) 955-8000
TEL: (415) 773-5765 TEL: (415) 622-0943 FAX: (213) 683-0457
FAX: (415) 773-5759 FAX: (415) 622-6291
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the
effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
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Noncumulative Preferred Stock,
Series 1, par value $1.00 per
share............................. 40,000 shares $25.00 $1,000,000 $303.03
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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.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED OCTOBER 16, 1996
,000,000 SHARES
BANKAMERICA PREFERRED CAPITAL CORPORATION
(A SUBSIDIARY OF BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION)
% NONCUMULATIVE PREFERRED STOCK, SERIES 1
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------------
Dividends on the % Noncumulative Preferred Stock, Series 1, par value
$1.00 per share, liquidation preference $25.00 per share (the "Series 1
Preferred Shares"), of BankAmerica Preferred Capital Corporation (the "Company")
will be noncumulative and, if authorized and declared, will be payable quarterly
in arrears on February 28, May 31, August 31 and November 30 of each year,
commencing February 28, 1997. The initial dividend shall be $ per share, and
thereafter the dividend rate shall be % per annum of the liquidation
preference per share (equivalent to $ per annum per share).
Dividends on the Series 1 Preferred Shares are not cumulative and, if for
any reason a dividend on the Series 1 Preferred Shares is not authorized and
declared for a dividend period, the Company will have no obligation to pay a
dividend for such period, whether or not dividends on the Series 1 Preferred
Shares are authorized and declared for any future dividend period.
The Series 1 Preferred Shares are not redeemable prior to , 2001
(except upon the occurrence of a Tax Event as described herein). On and after
, 2001, the Series 1 Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at a redemption price of $25.00 per
share, plus an amount equal to the dividend (whether or not authorized and
declared) for the then-current quarterly dividend period accrued to but
excluding the date of such redemption, without accumulation of unpaid dividends
on the Series 1 Preferred Shares for prior dividend periods. The Series 1
Preferred Shares will not be subject to any sinking fund or mandatory redemption
and will not be convertible into any other securities of the Company.
The Company has been formed for the purpose of acquiring, holding and
managing real estate mortgage assets. The Company expects that substantially all
of its mortgage assets will be acquired from Bank of America National Trust and
Savings Association, a national banking association (the "Bank"), and affiliates
of the Bank. All of the shares of the Company's common stock, par value $1.00
per share (the "Common Stock"), are owned by the Bank. BankAmerica Corporation,
a Delaware corporation ("BAC") and the parent of the Bank, has indicated to the
Company that, so long as any Series 1 Preferred Shares are outstanding, BAC
intends to maintain direct or indirect ownership of at least 80% of the
outstanding shares of Common Stock.
The Company expects to qualify as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the taxable year ending
December 31, 1996, and as a result, dividends on the Series 1 Preferred Shares
are not eligible for the dividends received deduction for corporations for
federal income tax purposes. No person or persons acting as a group is permitted
to beneficially own more than 9.9% of any series of preferred stock of the
Company, including the Series 1 Preferred Shares, with limited exceptions. See
"Description of Capital Stock--Restrictions on Ownership and Transfer".
Prior to the offering, there has been no market for the Series 1 Preferred
Shares. Application will be made to list the Series 1 Preferred Shares on the
New York Stock Exchange.
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DESCRIPTION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SERIES 1 PREFERRED
SHARES. THESE RISKS INCLUDE:
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- No Prior Operating History of Company - Risks Associated with Noncumulative Dividends
- Dependence Upon Bank as Advisor and Servicer - Adverse Consequences of Failure to Qualify as a REIT
- Possible Conflicts of Interest Between Company and Bank - No Third Party Valuation of Mortgage Loans
and Its Affiliates - Risks Associated with Mortgage Loans, Including Interest Rate
- Bank Regulatory Restrictions on Operations of the
Company Fluctuations, Prepayment Risks and Risks of Geographical
Concentration
</TABLE>
A PURCHASE OF SERIES 1 PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK OR BAC. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY
THE BANK OR BAC. THESE SECURITIES DO NOT EVIDENCE DEPOSITS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
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.
------------------------
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<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO THE
OFFERING PRICE DISCOUNT(1)(2) COMPANY(2)(3)
------------------- ------------------- -------------------
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Per Share..................................................... $25.00 $ $
Total......................................................... $ ,000,000 $ $
</TABLE>
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(1) 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".
(2) The Underwriting Discount will be $ per share with respect to shares
that have been initially allocated for sale to certain institutions. The
estimated total Proceeds to the Company and Underwriting Discount set forth
above reflect that initial allocation. The actual total Underwriting
Discount and Proceeds to the Company will depend on the number of shares
that are actually sold to institutions, which may be greater or less than
the initial allocation.
(3) Before deducting expenses payable by the Company estimated at $ . See
"Underwriting".
------------------------
The Series 1 Preferred Shares are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Series 1
Preferred Shares will be ready for delivery through the facilities of The
Depository Trust Company in New York, New York on or about , 1996,
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus is , 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 1
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY...................... 3
The Company........................... 3
Risk Factors.......................... 3
The Offering.......................... 5
Business and Strategy................. 8
Tax Status of the Company............. 10
RISK FACTORS............................ 11
No Prior Operating History............ 11
Dependence upon Bank as Advisor and
Servicer........................... 11
Relationship with Bank and Its
Affiliates; Conflicts of
Interest........................... 11
Bank Regulatory Restrictions on
Operations of the Company.......... 11
Risks Associated with Noncumulative
Dividends.......................... 12
Tax Risks............................. 12
No Formal Third Party Valuation of the
Mortgage Loans; No Arm's-Length
Negotiations with Affiliates....... 13
Risk of Declines in Net Interest
Income Due to Interest Rate
Fluctuations;
Prepayment Risks of Mortgage
Loans.............................. 13
Risks Associated with Mortgage Loans
Generally.......................... 14
Risk of Future Revisions in Policies
and Strategies by Board of
Directors.......................... 15
Risks Associated with Leverage........ 16
No Prior Market for Series 1 Preferred
Shares............................. 16
THE COMPANY............................. 17
USE OF PROCEEDS......................... 18
CAPITALIZATION.......................... 19
BUSINESS AND STRATEGY................... 20
General............................... 20
Commencement of Operations............ 20
Dividend Policy....................... 20
Liquidity and Capital Resources....... 22
General Description of Mortgage
Assets; Investment Policy.......... 22
Acquisition of Initial Portfolio...... 24
Management Policies and Programs...... 24
Description of Initial Portfolio...... 27
Servicing............................. 33
Delinquency, Foreclosure and Loss
Experience of the Bank............. 35
Officers.............................. 36
Competition........................... 36
Legal Proceedings..................... 36
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PAGE
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MANAGEMENT.............................. 37
Directors and Executive Officers...... 37
Independent Directors................. 38
Audit Committee....................... 39
Credit Committee...................... 39
Compensation of Directors and
Officers........................... 39
Limitation on Liability and
Indemnification of Directors and
Officers........................... 39
The Advisor........................... 40
BENEFITS OF THE OFFERING TO THE BANK AND
ITS AFFILIATES........................ 41
DESCRIPTION OF SERIES 1 PREFERRED
SHARES................................ 42
General............................... 42
Dividends............................. 42
Voting Rights......................... 43
Redemption............................ 44
Rights Upon Liquidation............... 45
Independent Director Approval......... 45
Restrictions on Ownership............. 46
DESCRIPTION OF CAPITAL STOCK............ 47
Common Stock.......................... 47
Preferred Stock....................... 47
Power to Issue Additional Shares of
Common Stock and Preferred Stock... 48
Restrictions on Ownership and
Transfer........................... 48
Business Combinations................. 49
FEDERAL INCOME TAX CONSIDERATIONS....... 51
Taxation of the Company............... 51
Failure to Qualify.................... 55
Taxation of United States
Stockholders....................... 55
Taxation of Foreign Stockholders...... 56
Information Reporting Requirements and
Backup Withholding Tax............. 58
Other Tax Consequences................ 59
ERISA CONSIDERATIONS.................... 60
General............................... 60
Plan Asset Regulation................. 60
Effect of Plan Asset Status........... 61
Prohibited Transactions............... 61
Unrelated Business Taxable Income..... 62
EXPERTS................................. 62
RATINGS................................. 62
CERTAIN LEGAL MATTERS................... 62
ADDITIONAL INFORMATION.................. 62
GLOSSARY................................ 64
INDEX TO FINANCIAL STATEMENT............ F-1
UNDERWRITING............................ U-1
</TABLE>
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" at page 64
for the definitions of certain terms used in this Prospectus.
THE COMPANY
BankAmerica Preferred Capital Corporation (the "Company") is a newly-formed
Maryland corporation incorporated on October 4, 1996 and created for the purpose
of acquiring, holding and managing real estate mortgage assets ("Mortgage
Assets"). The Company will elect to be subject to tax as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"), and will generally not be subject to federal income tax to the
extent that it distributes its earnings to its stockholders and maintains its
qualification as a REIT. All of the outstanding shares of the Company's common
stock, par value $1.00 per share (the "Common Stock"), are owned by Bank of
America National Trust and Savings Association, a national banking association
(the "Bank"). BankAmerica Corporation, a Delaware corporation ("BAC") that owns
all of the issued and outstanding shares of the capital stock of the Bank, has
indicated to the Company that, so long as any shares of the % Noncumulative
Preferred Stock, Series 1, par value $1.00 per share, liquidation preference
$25.00 per share (the "Series 1 Preferred Shares"), are outstanding, BAC intends
to maintain direct or indirect ownership of at least 80% of the outstanding
shares of Common Stock.
The Company has been formed by the Bank to provide the Bank and BAC with an
additional means of raising capital for regulatory purposes. The Bank has
informed the Company that the Bank anticipates that the Series 1 Preferred
Shares will be treated as capital for both the Bank and BAC for regulatory
purposes. Issuance of the Series 1 Preferred Shares by the Company is a more
cost-effective means of raising capital for the Bank and BAC than if either the
Bank or BAC were to issue preferred stock itself, because of the Company's
ability to deduct for federal income tax purposes the dividends payable on the
Series 1 Preferred Shares as a result of its qualification as a REIT. See
"Benefits of the Offering to the Bank and Its Affiliates".
A PURCHASE OF SERIES 1 PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK OR BAC. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY
THE BANK OR BAC.
The principal executive offices of the Company are located at 555
California Street, San Francisco, California 94104, telephone number (415)
622-3530.
RISK FACTORS
Purchase of the Series 1 Preferred Shares is subject to certain risks. See
"Risk Factors" commencing on page 11. Among such risks are the following:
- The Company is a newly organized corporation with no prior operating
history and no revenues to date.
- The Bank and its affiliates will have significant involvement in the
Company's existence and planned operations. The Bank is the sole holder
of the Common Stock of the Company, will administer the Company's affairs
in its role as Advisor pursuant to the Advisory Agreement and will
service the Mortgage Loans under the Servicing Agreement.
- Except for the two Independent Directors (defined below), all of the
directors and officers of the Company are also employees of the Bank or
its affiliates. As the holder of all of the outstanding voting stock, the
Bank will be able to elect all of the directors of the Company, including
the Independent Directors, subject to certain limited voting rights in
holders of the Company's Preferred Stock if six dividends on such
Preferred Stock are unpaid. The Company is therefore dependent on the
officers and employees of the Bank, who may have conflicts of interest
3
<PAGE> 5
regarding such matters as selection of the Initial Portfolio, availability and
selection of additional Mortgage Loans from the Bank and possible modifications
of the Advisory Agreement and the Servicing Agreement.
- As a subsidiary of the Bank, the Company is subject to the risk that
banking authorities will restrict the Company's ability to transfer
assets, to make distributions to its stockholders (including dividends on
the Series 1 Preferred Shares) or to redeem shares of Preferred Stock.
Such actions could result in the Company failing to qualify as a REIT.
- Dividends on the Series 1 Preferred Shares are not cumulative.
Consequently, if a dividend is not authorized and declared for any
quarter, the holders of the Series 1 Preferred Shares would not be
entitled to recover such omitted dividend, whether or not sufficient
funds subsequently become available.
- If the Company fails to maintain its qualification as a REIT, the Company
would be subject to tax as a regular corporation for federal income tax
purposes, which would reduce the amounts available for distribution to
the Company's stockholders.
- No formal third party valuations of the Mortgage Loans in the Initial
Portfolio were obtained, and there can be no assurance that the fair
market value of the Initial Portfolio is not less than the purchase price
payable by the Company. Moreover, it is not anticipated that formal third
party valuations will be obtained for future acquisitions of Mortgage
Loans by the Company from the Bank.
- All of the Mortgage Loans in the Initial Portfolio are adjustable rate
mortgage loans ("ARMs") which bear interest at fixed rates for the first
three to ten years of their terms, and thereafter at adjustable rates for
the remainder of their terms. In addition, the Initial Portfolio contains
certain Mortgage Loans which provide for the payment of interest only
during the first 60 months of their terms, after which they amortize
fully over their remaining terms. If there is a decline in interest rates
(as measured by the indices specified for such Mortgage Loans), the
Company will experience a decrease in net interest income, to the extent
the Company's Mortgage Loans at the time bear interest at adjustable
rates. Because the dividend rate on the Series 1 Preferred Shares is
fixed, a significant decline in mortgage interest rates generally may
affect the Company's ability to pay dividends on the Series 1 Preferred
Shares. In such an interest rate environment, the Company may experience
an increase in prepayments on its Mortgage Loans and may find it more
difficult to purchase additional Mortgage Loans bearing interest rates
sufficient to support payment of dividends on the Series 1 Preferred
Shares.
- An investment in the Series 1 Preferred Shares may be affected by a
decline in the values of the properties securing the Mortgage Loans,
which could cause a substantial number of the Mortgage Loans to become
nonperforming, in which event the Company may not have sufficient funds
to pay dividends on the Series 1 Preferred Shares. Factors which could
affect the values of the Mortgage Loans or the properties securing the
Mortgage Loans include the following:
-- The Company does not intend to obtain third party credit enhancements
for the Mortgage Loans, such as mortgagor bankruptcy insurance or
special hazard insurance. Therefore, the Company will be subject to
risks of borrower defaults and bankruptcies and special hazard losses
not covered by the standard hazard insurance policies required by the
Bank's underwriting standards, such as losses from earthquakes or
floods. In addition, the Company will bear the risk of loss of
principal on a defaulted Mortgage Loan to the extent the value of the
related mortgaged property is less than the principal amount of such
loan.
-- The results of the Company's operations will be affected by factors
outside the Company's control, such as local, regional or national
economic conditions, prevailing interest rate levels and the
availability of credit to refinance Mortgage Loans prior to maturity.
No assurance can be given that the values of the properties securing
Mortgage Loans in the Initial Portfolio have remained or will remain
at their origination levels.
4
<PAGE> 6
-- If the Company is forced to foreclose on a defaulted Mortgage Loan to
recover its investment, the Company may be subject to environmental
liabilities in connection with the foreclosed property which could
exceed the value of the property.
- Approximately 89% in principal amount of the Mortgage Loans included in
the Initial Portfolio are secured by residential properties in
California, which may from time to time experience natural disasters
and/or weaker regional economic conditions and housing markets than other
geographic regions. Such concentration may present risks of higher
delinquency and loss rates than those present with respect to mortgage
loans generally.
- The board of directors of the Company (the "Board of Directors") may
change, in some instances subject to the approval of a majority of the
Independent Directors, the policies of the Company set forth herein,
including the policy regarding the incurrence of indebtedness.
- Prior to the Offering, there has been no public market for the Series 1
Preferred Shares, and there can be no assurance that an active trading
market will develop.
THE OFFERING
For a more complete description of the terms of the Series 1 Preferred
Shares specified in the following summary, see "Description of Series 1
Preferred Shares".
ISSUER....................... BankAmerica Preferred Capital Corporation, a
newly-formed Maryland corporation created for
the purpose of acquiring, holding and managing
Mortgage Assets.
SECURITIES OFFERED........... ,000,000 Series 1 Preferred Shares.
RANKING...................... With respect to the payment of dividends and
amounts upon liquidation, the Series 1
Preferred Shares will rank senior to the
Company's Common Stock. Additional shares of
preferred stock of the Company (the "Preferred
Stock") ranking senior to or on a parity with
the Series 1 Preferred Shares may not be issued
without the approval of a majority of the
Independent Directors.
USE OF PROCEEDS.............. The net proceeds to the Company from the
Offering, together with proceeds received in
connection with the sale of shares of Common
Stock to the Bank, will be used to purchase the
Initial Portfolio from the Bank and to pay the
expenses of the Offering and the formation of
the Company (currently estimated to be
approximately $ million in the
aggregate). See "Use of Proceeds".
DIVIDENDS.................... Holders of Series 1 Preferred Shares will be
entitled to receive, when, as and if authorized
and declared by the Board of Directors in its
sole discretion, out of assets of the Company
legally available for payment, an initial cash
dividend of $ per share and thereafter
cash dividends at the annual rate of
% of the liquidation preference per
share (equivalent to $ per share per
annum). Dividends on the Series 1 Preferred
Shares will not be cumulative and, if for any
reason a dividend on the Series 1 Preferred
Shares is not authorized and declared for a
dividend period, the Company will have no
obligation to pay a dividend for such period,
whether or not dividends on the Series 1
Preferred Shares are authorized and declared
for any future dividend period. Dividends on
the Series 1 Preferred Shares, if authorized
and declared, will be
5
<PAGE> 7
payable quarterly on February 28, May 31,
August 31 and November 30 of each year, at such
annual rate, commencing on February 28, 1997.
Dividends will accrue from the later of the
date of original issue or the most recent
dividend payment date (whether or not dividends
were paid on such date). See "Description of
Series 1 Preferred Shares -- Dividends".
LIQUIDATION PREFERENCE....... The liquidation preference for each Series 1
Preferred Share is $25.00, plus an amount equal
to the dividend (whether or not authorized and
declared) for the then-current quarterly
dividend period accrued to but excluding the
date of such liquidation payment, without
accumulation of unpaid dividends on the Series
1 Preferred Shares for prior dividend periods.
See "Description of Series 1 Preferred
Shares -- Rights Upon Liquidation".
REDEMPTION................... The Series 1 Preferred Shares are not redeemable
prior to , 2001 (except upon the
occurrence of a Tax Event as defined in
"Description of Series 1 Preferred Shares --
Redemption"). On and after ,
2001, the Series 1 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 an amount equal to the dividend
(whether or not authorized and declared) for
the then-current quarterly dividend period
accrued to but excluding the date of such
redemption, without accumulation of unpaid
dividends on the Series 1 Preferred Shares for
prior dividend periods. Upon the occurrence of
a Tax Event, the Company will have the right
for a period of 120 days to redeem the Series 1
Preferred Shares in whole (but not in part) at
a redemption price of $25.00 per share, plus an
amount equal to the dividend (whether or not
authorized and declared) for the then-current
quarterly dividend period accrued to but
excluding the date of such redemption, without
accumulation of unpaid dividends for prior
dividend periods. The Series 1 Preferred Shares
will not be subject to any sinking fund or
mandatory redemption and will not be
convertible into any other securities of the
Company. See "Description of Series 1 Preferred
Shares -- Redemption".
VOTING RIGHTS................ Except as described herein with respect to
certain limited voting rights, holders of
Series 1 Preferred Shares will not have any
voting rights. In any matter on which the
Series 1 Preferred Shares may vote (as
expressly provided herein), each Series 1
Preferred Share will be entitled to one vote.
See "Description of Series 1 Preferred
Shares -- Voting Rights".
OWNERSHIP LIMITS............. Ownership of more than 9.9% of any outstanding
series of Preferred Stock, including the Series
1 Preferred Shares offered hereby, is
restricted in order to preserve the Company's
status as a REIT for federal income tax
purposes. See "Description of Capital
Stock -- Restrictions on Ownership and
Transfer".
6
<PAGE> 8
FEDERAL INCOME TAX
CONSIDERATIONS............. Dividends on the Series 1 Preferred Shares are
not eligible for the dividends received
deduction for corporations. See also "Federal
Income Tax Considerations".
ERISA CONSIDERATIONS......... See "ERISA Considerations".
TRADING...................... Application will be made to list the Series 1
Preferred Shares on the New York Stock
Exchange.
RATINGS...................... It is expected that the Series 1 Preferred Shares
will be rated
by Moody's Investors Service, Inc. and by
Standard and Poor's Ratings Services. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization.
7
<PAGE> 9
BUSINESS AND STRATEGY
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to its
stockholders. The Company expects that substantially all of its Mortgage Assets
will be acquired from the Bank or affiliates of the Bank as whole loans secured
by first mortgages or deeds of trust on single-family (one- to four-unit)
residential properties ("Mortgage Loans"). The Company may also from time to
time acquire Mortgage-Backed Securities (defined below).
Simultaneously with the consummation of the Offering, the Bank will
purchase shares of Common Stock for a price of $500 million, and will
purchase additional shares of Common Stock for a price approximately equal to
the aggregate amount of underwriting discount and expenses incurred by the
Company in connection with its formation and the Offering, to provide the
Company with funds sufficient to pay such expenses. The Company will use the
aggregate net proceeds of approximately $1 billion to be received in connection
with both the Offering and such sale of shares of Common Stock to the Bank to
purchase a portfolio of Mortgage Loans (the "Initial Portfolio") from the Bank.
See "Use of Proceeds".
On October 1, 1996, the Mortgage Loans included in the Initial Portfolio
had an aggregate outstanding principal balance of approximately $1.158 billion.*
The Bank will enter into a servicing agreement with the Company with respect to
the Mortgage Loans (the "Servicing Agreement") pursuant to which it will service
the Mortgage Loans in the Initial Portfolio and will be entitled to receive fees
in connection with the servicing of such Mortgage Loans. The Bank in its role as
servicer under the Servicing Agreement is hereinafter referred to as the
"Servicer". See "Business and Strategy -- Servicing".
The Company and the Bank believe that the fair market value of the Initial
Portfolio will approximately equal the amount (approximately $1 billion) that
the Company will pay for the Initial Portfolio. No formal third party valuations
of the Mortgage Loans constituting the Initial Portfolio have been obtained for
purposes of the Offering; however, the Bank and the Company solicited estimates
of the fair market value of the Initial Portfolio from three securities
broker-dealers who regularly participate in the residential secondary mortgage
market, and took such estimates into account in determining the purchase price
of the Initial Portfolio. See "Risk Factors -- No Formal Third Party Valuation
of the Mortgage Loans; No Arm's-Length Negotiations with Affiliates" and
"Business and Strategy -- Acquisition of Initial Portfolio".
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 Advisory
Agreement is hereinafter referred to as the "Advisor". The Advisor will be
responsible for (i) monitoring the credit quality of Mortgage Assets held by the
Company; (ii) advising the Company with respect to the acquisition, management,
financing, servicing and disposition of the
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*The description herein of the Initial Portfolio is based upon a pool of
Mortgage Loans which the Bank has identified and segregated in contemplation of
the Offering, for transfer to the Company at the time of consummation of the
Offering. Information regarding the Initial Portfolio reflects the
characteristics of such pool of Mortgage Loans as of October 1, 1996, and
assumes that all payments on the Mortgage Loans due on such date have been made.
It is expected that the outstanding principal balances of such Mortgage Loans
will decline prior to the consummation of the Offering due to scheduled
principal payments and unscheduled prepayments which will occur, and certain of
such Mortgage Loans may be removed from the pool if they become ineligible due
to delinquencies or other factors. In addition, the current aggregate principal
balance of such Mortgage Loans exceeds the anticipated net proceeds to be
available to the Company to purchase Mortgage Loans, and the Company and the
Bank intend to exclude from the Initial Portfolio a number of Mortgage Loans
sufficient that the aggregate purchase price for the Initial Portfolio
approximately equals the net proceeds available to the Company. In such event,
Mortgage Loans will be selected for exclusion in such a fashion that the
characteristics of the Initial Portfolio remain substantially consistent with
those set forth herein.
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Company's Mortgage Assets; and (iii) holding documents relating to the Mortgage
Assets as custodian on behalf of the Company. The Advisor may from time to time
subcontract all or a portion of its obligations under the Advisory Agreement to
one or more of its affiliates involved in the business of managing Mortgage
Assets. If no affiliate of the Advisor is engaged in the business of managing
Mortgage Assets, the Advisor may, with the approval of a majority of the
Company's 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 one year, and may be renewed
for successive additional one-year periods upon a majority vote of the
Independent Directors. The Advisory Agreement may be terminated by the Company
at any time upon 90 days' prior notice. As long as any Series 1 Preferred Shares
remain outstanding, any decision by the Company to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee of $ . See "Management -- The Advisor".
The Company's Board of Directors is composed of seven members, two of whom
will be Independent Directors. An "Independent Director" is a director who is
not a current officer or employee of the Company, BAC, the Bank or any affiliate
of the Bank or of any other person or persons that in the aggregate own more
than 50% of the outstanding Common Stock, or is a director elected by the
holders of Preferred Stock. Certain actions by the Company require the prior
approval of a majority of the Independent Directors. So long as there are only
two Independent Directors, any action that requires the approval of a majority
of the Independent Directors must be approved by both Independent Directors. The
Company currently has eight executive officers, each of whom is an employee of
the Bank and whose salary and related benefits are paid by the Bank. The Company
has no employees and does not anticipate that it will require employees. See
"Management".
The Company may from time to time purchase additional Mortgage Loans out of
proceeds received in connection with the repayment or disposition of Mortgage
Loans or the issuance of additional shares of Common Stock and Preferred Stock.
Additional shares of Preferred Stock ranking senior to or on a parity with the
Series 1 Preferred Shares may not be issued by the Company without the approval
of a majority of the Independent Directors. See "Description of Series 1
Preferred Shares -- Voting Rights" and "-- Independent Director Approval". The
Company does not currently intend to issue any additional shares of Preferred
Stock unless it simultaneously issues additional shares of Common Stock to the
Bank, and the aggregate proceeds to be received from such issuance of Common
Stock approximately equals the sum of the aggregate offering price of such
additional Preferred Stock and the Company's expenses (including any
underwriting discount or placement fees) incurred in connection with the
issuance of such additional shares of Preferred Stock. It is currently
anticipated that any determination by the Company to issue additional shares of
Preferred Stock will take into account the Bank's and BAC's regulatory capital
requirements and the cost of raising and maintaining such capital at the time.
See "Benefits of the Offering to the Bank and Its Affiliates".
The Company currently anticipates that substantially all of the Mortgage
Loans that it may acquire in the future will be purchased from the Bank and
affiliates of the Bank. No arrangements or procedures are currently in place
regarding the acquisition by the Company of Mortgage Loans from unaffiliated
third parties. The Company expects that any additional Mortgage Loans acquired
by the Company will be whole loans, will represent first lien positions, will be
acquired on a basis consistent with secondary market standards and will have
been originated and underwritten in conformity with standards generally applied
by the Bank or affiliates of the Bank at the time the Mortgage Loans were
originated. The Company's current policy prohibits the acquisition of any
Mortgage Loan which (i) at the time of acquisition is delinquent in the payment
of principal or interest, (ii) was at any time during the 12 months preceding
acquisition renegotiated due to financial deterioration of the borrower or (iii)
has been, more
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than once during the 12 months preceding acquisition, more than 30 days past due
in the payment of principal or interest. The Company anticipates that the
Mortgage Loans acquired by the Company in the future will be serviced by the
Bank or an affiliate of the Bank.
As a newly-formed entity, the Company has no prior operating history. As of
the date hereof, it has $1,000 in assets, $1,000 in stockholder's equity and no
indebtedness. Immediately after the issuance by the Company of the Series 1
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 there are
$ million in aggregate Offering and organizational expenses) will have
approximately $1 billion in fair market value of Mortgage Assets, $20 million of
capital attributable to the Series 1 Preferred Shares, $ million of capital
attributable to the Common Stock and $ million of additional paid-in
capital. See "Capitalization".
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any material amount
of indebtedness. Pursuant to the Amended and Restated Articles of Incorporation
of the Company (the "Charter"), the Company may not, without the approval of a
majority of the Independent Directors, incur debt for borrowed money other than
debt not in excess of 20% of the aggregate amount of net proceeds received in
connection with the issuance of all outstanding Preferred Stock and Common Stock
of the Company. The Charter does not contain any other limitation on the amount
or percentage of debt, funded or otherwise, which the Company may incur. Any
such debt incurred may include intercompany advances made by the Bank to the
Company.
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under the REIT Provisions of
the Code (as defined under "Federal Income Tax Considerations -- Taxation of the
Company -- General"), 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 1 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" (defined below).
Notwithstanding qualification for taxation as a REIT, the Company may be subject
to federal, state and/or local tax. See "Risk Factors -- Tax Risks" and "Federal
Income Tax Considerations".
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RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
purchasing Series 1 Preferred Shares in the Offering.
NO PRIOR OPERATING HISTORY
The Company is a newly organized corporation with no operating history and
no revenues to date.
DEPENDENCE UPON BANK AS ADVISOR AND SERVICER
The Company will be dependent for the selection, structuring and monitoring
of its Mortgage Assets on the diligence and skill of its officers (all of whom
are also officers of the Bank or its affiliates) and the officers and employees
of the Bank, as Advisor. See "Management". In addition, the Company will be
dependent upon the expertise of the Bank, as Servicer, for the servicing of its
Mortgage Loans. The Advisor may subcontract all or a portion of its obligations
under the Advisory Agreement and the Servicer may subcontract all or a portion
of its obligations under the Servicing Agreement to one or more affiliates, and
under certain conditions to non-affiliates, involved in the business of managing
or servicing, as the case may be, Mortgage Assets. In the event the Advisor or
the Servicer subcontracts its obligations in such a manner, the Company will be
dependent upon the subcontractor to provide any such services. See
"Management -- The Advisor" and "Business and Strategy -- Servicing".
RELATIONSHIP WITH BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock of the
Company and administers the day-to-day activities of the Company in its role as
Advisor under the Advisory Agreement. The Bank also services the Company's
Mortgage Loans in its role as Servicer under the Servicing Agreement. In
addition, except for the Independent Directors, all of the officers and
directors of the Company are also employees or officers of the Bank or its
affiliates. The Company's officers and directors will not devote their exclusive
efforts to the operations of the Company. 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, except in
certain limited circumstances. See "Description of Series 1 Preferred
Shares -- Voting Rights".
The Bank and its affiliates may have interests which are not identical to
those of the Company. Consequently, conflicts of interest may arise with respect
to transactions, including without limitation: the Company's acquisition of the
Initial Portfolio; future acquisitions of Mortgage Loans from the Bank or its
affiliates; servicing of Mortgage Loans; future dispositions of Mortgage Loans
to BAC or any of its subsidiaries; and the renewal or modification of the
Advisory Agreement or the Servicing Agreement.
It is the intention of the Company, BAC and the Bank that any agreements
and transactions between the Company, on the one hand, and BAC, the Bank or any
of their affiliates, on the other hand, will be fair to all parties and
consistent with market terms, including the prices paid and received for
Mortgage Loans (including those in the Initial Portfolio) on their acquisition
or disposition by the Company, or in connection with the servicing of such
Mortgage Loans. The requirement in the Charter 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 BAC, the Bank and their
respective affiliates. However, there can be no assurance that such agreements
or transactions will be on terms as favorable to the Company as those that could
have been obtained from unaffiliated third parties. See "Business and
Strategy -- Management Policies and Programs -- Conflict of Interest Policies".
BANK REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of the Bank, federal banking
authorities will have the right to examine the Company and its activities. Under
certain circumstances, including any determination that the Bank's relationship
to the Company results in an unsafe and unsound banking practice, such banking
authorities will have the authority to issue orders which could restrict the
ability of the Company to transfer assets, to make distributions to its
stockholders (including dividends to the holders of Series 1
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Preferred Shares) or to redeem shares of Preferred Stock. Such actions could
result in the Company failing to qualify as a REIT. See "-- Tax Risks".
RISKS ASSOCIATED WITH NONCUMULATIVE DIVIDENDS
Dividends on the Series 1 Preferred Shares are not cumulative.
Consequently, if a dividend is not authorized and declared for any quarter, the
holders of the Series 1 Preferred Shares would not be entitled to recover such
omitted dividend, whether or not sufficient funds subsequently become available.
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 Orrick, Herrington & Sutcliffe LLP 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 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 Orrick, Herrington & Sutcliffe LLP, 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 Orrick, Herrington & Sutcliffe
LLP, 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 1 Preferred Shares. See "Description of Series 1 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
interests of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. As long as any Series 1 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 REIT Provisions
prohibit the Company from electing treatment as a REIT for the four taxable
years following the year of such revocation. See "Federal Income Tax
Considerations".
REIT REQUIREMENTS WITH RESPECT TO STOCKHOLDER DISTRIBUTIONS
To obtain favorable tax treatment as a REIT qualifying under the Code, the
Company generally will be required each year to distribute as dividends to its
stockholders at least 95% of its REIT Taxable Income (excluding capital gains).
Failure to comply with this requirement would result in the Company's income
being subject to tax at regular corporate rates. In addition, the Company will
be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions considered as paid by it with respect to any calendar year
are less than the sum of 85% of its ordinary income for the calendar
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year, 95% of its capital gain net income for the calendar year and any
undistributed taxable income from prior periods.
REDEMPTION UPON OCCURRENCE OF A TAX EVENT
For a period of 120 days following the occurrence of a Tax Event, even if
such Tax Event occurs prior to , 2001, the Company will have the right
to redeem the Series 1 Preferred Shares in whole but not in part. See
"Description of Series 1 Preferred Shares -- Redemption". Upon the occurrence of
a Tax Event, should the Company not redeem the Series 1 Preferred Shares, the
Company's ability to pay dividends on the Series 1 Preferred Shares may be
adversely affected.
NO FORMAL THIRD PARTY VALUATION OF THE MORTGAGE LOANS; NO ARM'S-LENGTH
NEGOTIATIONS WITH AFFILIATES
The Company and the Bank intend that the fair market value of the Initial
Portfolio will approximately equal the amount (approximately $1 billion) that
the Company will pay for the Initial Portfolio. However, no formal third party
valuations of the Mortgage Loans constituting the Initial Portfolio were
obtained for purposes of the Offering, and there can be no assurance that the
fair market value of the Initial Portfolio does not differ from the purchase
price payable by the Company. See "Business and Strategy -- Acquisition of
Initial Portfolio".
In addition, it is not anticipated that formal third party valuations will
be obtained in connection with future acquisitions and dispositions of Mortgage
Loans, even in circumstances where an affiliate of the Company is selling the
Mortgage Loans to, or purchasing the Mortgage Loans from, the Company.
Accordingly, although the Company, the Bank and BAC intend that future
acquisitions or dispositions of Mortgage Loans will be on a fair market value
basis, there can be no assurance that the consideration to be paid (or received)
by the Company to (or from) the Bank, BAC or any of their respective affiliates
in connection with future acquisitions or dispositions of Mortgage Loans will
not differ from the fair market value of such Mortgage Loans.
RISK OF DECLINES IN NET INTEREST INCOME DUE TO INTEREST RATE FLUCTUATIONS;
PREPAYMENT RISKS OF MORTGAGE LOANS
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. All of the Mortgage Loans in the Initial Portfolio
are ARMs which bear interest at fixed rates for the first three to ten years of
their terms and thereafter at adjustable rates for the remainder of their terms.
In addition, the Initial Portfolio contains certain Mortgage Loans which provide
for the payment of interest only during the first 60 months of their terms,
after which they amortize fully over their remaining terms. See "Business and
Strategy -- Description of Initial Portfolio -- Mortgage Loans". The Company may
also acquire Mortgage Loans that bear an adjustable rate of interest for their
entire terms. If there is a decline in interest rates (as measured by the
indices upon which the interest rates of the Mortgage Loans are based), the
Company will experience a decrease in income available to be distributed to its
stockholders, to the extent the Mortgage Loans at the time bear adjustable rates
of interest. Also, in such an interest rate environment, the Company may
experience an increase in prepayments on its Mortgage Loans and may find it more
difficult to purchase additional Mortgage Loans bearing interest rates
sufficient to support payment of dividends on the Series 1 Preferred Shares. In
addition, Mortgage Loans which the Company may hold in the future could bear
fixed rates of interest for their entire terms or allow borrowers to convert an
ARM to a fixed rate mortgage, thus potentially "locking in" a low fixed interest
rate. Because the rate at which dividends are required to be paid on the Series
1 Preferred Shares is fixed, there can be no assurance that an interest rate
environment in which there is a significant decline in interest rates would not
adversely affect the Company's ability to pay dividends on the Series 1
Preferred Shares.
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RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series 1 Preferred Shares may be affected by, among
other things, a decline in the values of the properties securing the Mortgage
Loans, which could cause a substantial number of the Mortgage Loans to become
nonperforming. In the event a substantial portion of the Mortgage Assets held by
the Company becomes nonperforming, the Company may not have funds sufficient to
pay dividends on the Series 1 Preferred Shares. Factors that could affect the
values of the Mortgage Loans or the properties securing the Mortgage Loans
include the following:
GEOGRAPHICAL CONCENTRATIONS OF MORTGAGE LOANS
Certain geographic regions of the United States from time to time will
experience natural disasters or weaker regional economic conditions and housing
markets than other regions, 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 present
with respect to Mortgage Loans generally. Approximately 89% of the aggregate
outstanding principal balance of the Mortgage Loans included in the Initial
Portfolio is secured by properties located in California. 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 California and the ability of property owners in
California to make payments of principal and interest on the underlying
mortgages. The Company will not maintain any special hazard insurance policies
which could mitigate any damages caused by natural disasters (such as
earthquakes and floods) which may occur in California or elsewhere. In the event
of any such natural disaster, the Company's ability to pay dividends on the
Series 1 Preferred Shares could be adversely affected. See "Business and
Strategy -- Description of Initial Portfolio -- Geographic Distribution" herein
for further information regarding the geographic concentration of the Mortgage
Loans in the Initial Portfolio.
NO CREDIT ENHANCEMENTS OR SPECIAL HAZARD INSURANCE
The Company generally does not intend to obtain credit enhancements such as
mortgagor bankruptcy insurance or to obtain special hazard insurance for its
Mortgage Loans, other than primary mortgage insurance on Mortgage Loans with
Loan-to-Value Ratios (defined below) greater than 80% and standard hazard
insurance for the properties securing all Mortgage Loans, 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 and (ii) the amount owing on the Mortgage Loan.
REAL ESTATE MARKET CONDITIONS
The results of the Company's operations will be affected by various
factors, many of which are beyond the control of the Company, such as local and
other economic conditions affecting real estate values, interest rate levels and
the availability of credit to refinance its Mortgage Loans prior to maturity.
The results of the Company's operations will depend on, among other things, the
level of interest income generated by the Company's Mortgage Assets, the market
value of such Mortgage Assets and the supply of and demand for such Mortgage
Assets. Further, no assurance can be given that the values of the properties
securing the Mortgage Loans included in the Company's Initial Portfolio have
remained or will remain at the levels existing on the dates of origination of
such Mortgage Loans.
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DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS
Even assuming that the properties subject to 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. In California and certain other states, an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a mortgaged
property. A judicial proceeding 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. In the event of a
default by a mortgagor, these restrictions, among other things, may impede the
ability of the Company to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due on the related Mortgage
Loan. In addition, the Servicer will be entitled to deduct from collections
received on all Mortgage Loans any unrecovered advances and 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 federal and state laws generally regulate interest rates and
other charges and require certain disclosures to borrowers. In addition, there
are federal and state laws, public policies and general principles of equity
relating to the protection of consumers and unfair and deceptive practices which
may apply to the servicing, collection and foreclosure of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, 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 limit enforceability of certain provisions of the
Mortgage Loans, may entitle the borrower to a refund of amounts previously paid,
may interfere with or affect the ability of the Company to realize upon its
collateral or enforce a deficiency judgment and, in addition, could subject the
Company to damages and administrative sanctions.
ENVIRONMENTAL CONSIDERATIONS
In the event that the Company is forced to foreclose on a defaulted
Mortgage Loan to recover its investment in such Mortgage Loan, the Company may
be subject to environmental liabilities in connection with the underlying
property which could exceed the value of the 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 that the
Company has acquired by foreclosure or similar proceedings, 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 cost 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
users of neighboring properties and others for any personal injury or property
damage suffered with respect to the property. In addition, the Company may find
it difficult or impossible to sell the property prior to or following any such
clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and
operating policies and strategies of the Company, certain of which are described
in this Prospectus. These policies, which are discussed herein, may be changed
from time to time at the discretion of the Board of Directors (in some instances
subject to the approval of a majority of the Independent Directors) without a
vote of the Company's
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stockholders, including holders of the Series 1 Preferred Shares. The ultimate
effect of any change in the policies and strategies set forth in this Prospectus
on a holder of Series 1 Preferred Shares may be positive or negative. See
"Business and Strategy -- Management Policies and Programs".
RISKS ASSOCIATED WITH LEVERAGE
Although the Company does not currently intend to incur any material amount
of indebtedness in connection with the acquisition and holding of Mortgage
Loans, the Company may do so at any time (although indebtedness in excess of 20%
of the aggregate amount of net proceeds received in connection with the issuance
of Preferred Stock and Common Stock may not be incurred without the approval of
a majority of the Independent Directors of the Company). To the extent the
Company changes its policy with respect to the incurrence of indebtedness, the
Company would be subject to risks associated with leverage, including, without
limitation, changes in interest rates, prepayment risk and risks of various
hedging strategies.
NO PRIOR MARKET FOR SERIES 1 PREFERRED SHARES
Prior to the Offering, there has been no public market for the Series 1
Preferred Shares and there can be no assurance that an active trading market
will develop or be sustained or that the Series 1 Preferred Shares may be resold
at or above the initial public offering price.
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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 in general all of
its portfolio of Mortgage Assets will be Mortgage Loans acquired as whole loans
from the Bank or affiliates of the Bank. The Bank will administer the day-to-day
operations of the Company in its role as Advisor under the Advisory Agreement.
The Company will elect to be subject to tax as a REIT under the Code, and will
generally not be subject to federal income tax to the extent that it distributes
its earnings to its stockholders and maintains its qualification as a REIT.
The Company has been formed by the Bank to provide the Bank and BAC with an
additional means of raising capital for regulatory purposes. The Bank has
informed the Company that the Bank anticipates that the Series 1 Preferred
Shares will be treated as capital for both the Bank and BAC for regulatory
purposes. Issuance of the Series 1 Preferred Shares by the Company is a more
cost-effective means of raising capital for the Bank and BAC than if either the
Bank or BAC were to issue preferred stock itself, because of the Company's
ability to deduct for federal income tax purposes the dividends payable on the
Series 1 Preferred Shares as a result of its REIT status.
All of the outstanding shares of Common Stock of the Company are owned by
the Bank, and all of the outstanding shares of common stock of the Bank are
owned by BAC. BAC is a bank holding company organized under the laws of Delaware
in 1968 and registered under the Bank Holding Company Act of 1956, as amended.
With more than $163 billion in assets as of December 31, 1995, the Bank is
currently the third largest commercial bank in the United States and the largest
in California, and is the primary subsidiary of BAC, which is the nation's third
largest bank holding company. In California, the Bank operates more than 1,000
full-service branches as well as major consumer lending, residential lending,
small business banking and commercial banking operations. It also maintains
corporate banking offices in major U.S. cities, and branches and other
facilities in more than 30 countries and territories around the world. Its
residential lending and home loan servicing operation, combined with those of
its affiliates, ranks among the top ten in the United States, according to
Inside Mortgage Finance, with originations of more than $10 billion for 1995 and
with a combined servicing portfolio of $63 billion as of December 31, 1995.
The Bank has been approved as a mortgagee and seller/servicer by the
Federal Housing Administration, the Veterans Administration, the Government
National Mortgage Association, the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). The Bank has
been originating and servicing residential mortgage loans since 1913. It
originates both fixed and adjustable rate loans and purchases mortgage loans in
negotiated transactions from other affiliated and unaffiliated sellers. See
"Business and Strategy -- General Description of Mortgage Assets; Investment
Policy" and "-- Delinquency, Foreclosure and Loss Experience of the Bank" for a
description of the Bank's loan servicing operations and activities.
BAC has indicated to the Company that, so long as any Series 1 Preferred
Shares are outstanding, BAC intends to maintain direct or indirect ownership of
at least 80% of the outstanding shares of Common Stock of the Company.
A PURCHASE OF SERIES 1 PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK OR BAC. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY
THE BANK OR BAC.
For a further description of the operations of the Company, see "Business
and Strategy", "Management", "Risk Factors" and "Federal Income Tax
Considerations".
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<PAGE> 19
USE OF PROCEEDS
The proceeds to the Company from the sale of the Series 1 Preferred Shares
offered hereby are expected to be $500,000,000. Simultaneously with the
consummation of the Offering, the Bank will purchase shares of Common Stock for
a price of $500,000,000. The Bank will also purchase additional shares of Common
Stock for a price equal to the aggregate amount of underwriting discount and
expenses incurred by the Company in connection with its formation and the
Offering, to provide the Company with funds sufficient to pay such expenses. The
Company will use the aggregate net proceeds of approximately $1 billion expected
to be received in connection with both the Offering and the sale of shares of
Common Stock to the Bank to purchase the Initial Portfolio from the Bank. See
"Business and Strategy".
The following table illustrates the use of proceeds by the Company from the
sale of the Series 1 Preferred Shares offered hereby and the sale of shares of
Common Stock to the Bank described above.
<TABLE>
<S> <C>
Gross proceeds from the offering of Series 1 Preferred Shares....... $ 500,000,000
Gross proceeds from the issuance of shares of Common Stock to the
Bank.............................................................. $ ,000,000(1)
Public Offering Expenses:
Underwriting discount............................................. $ (2)
Other expenses of formation and the Offering...................... $ (1)
--------------
$ ,000,000
Net proceeds to be applied to the purchase of Mortgage Loans from
the Bank.......................................................... $1,000,000,000
==============
</TABLE>
- ---------------
(1) Assumes that expenses incurred by the Company in connection with its
formation and the Offering, other than underwriting discount, are
$ . If such expenses are in excess of $ , the Bank will
purchase additional shares of Common Stock for a purchase price equal to
such excess.
(2) Assumes that shares of Series 1 Preferred Shares are sold to
institutions.
Neither the Bank nor any of its affiliates will receive any transaction
fees upon completion of the Offering, including any advance payment in respect
of servicing or advisory fees.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 14, 1996 (the date of the most recent audited financial statement of the
Company) and as adjusted to reflect (i) the consummation of the Offering and
(ii) the transactions described in "Business and Strategy -- Commencement of
Operations" and the use of the net proceeds therefrom as described under "Use of
Proceeds".
<TABLE>
<CAPTION>
OCTOBER 14, 1996
-------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(IN THOUSANDS)
<S> <C> <C>
DEBT
Total long-term debt................................................. $ -- $ --
--- ----------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $1.00 per share: none authorized, none
issued and outstanding, actual; and 100,000,000 shares authorized,
20,000,000 shares, liquidation preference $25.00 per share, issued
and outstanding, as adjusted....................................... --
Common Stock, par value $1.00 per share: 1,000 shares authorized,
1,000 shares issued and outstanding, actual; and 5,000,000 shares
authorized, shares issued and outstanding, as adjusted........ 1
Additional paid-in capital........................................... --
--- ----------
Total stockholders' equity................................. $ 1 $1,000,000
--- ----------
TOTAL CAPITALIZATION................................................. $ 1 $1,000,000
=== ==========
</TABLE>
- ---------------
(1) The Company was formed with an initial capitalization of $1,000. Immediately
prior to consummation of the Offering, the Charter of the Company will be
amended to increase the authorized capital stock of the Company. The
purchase price of the Series 1 Preferred Shares will be $25.00 per share,
or $500 million in the aggregate, of which $20 million will represent
Preferred Stock capital. The purchase price of the additional Common Stock
to be purchased by the Bank will be $1,000 per share and the Bank will
acquire ,000 shares of Common Stock upon the consummation of the
Offering, for an aggregate purchase price of $ million, including
Common Stock to be acquired by the Bank in order to provide sufficient
funds to pay aggregate Offering and organization expenses, currently
estimated by the Company to be approximately $ million. As a
result of these issuances of Common Stock, the Common Stock account, upon
consummation of the Offering, will equal $ million. The additional
paid-in capital of $ million represents the excess of the purchase
price for the Series 1 Preferred Shares and the Common Stock over the par
value of such shares after deducting the aggregate amount of Offering and
organization expenses.
19
<PAGE> 21
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 Loans from the Bank
for an aggregate purchase price of approximately $1 billion. See
"-- Commencement of Operations".
In order to preserve its status as a REIT under the Code, substantially all
of the assets of the Company will consist of Mortgage Loans and other qualified
REIT real estate assets of the type set forth in the REIT Provisions of the
Code. See "Federal Income Tax Considerations".
COMMENCEMENT OF OPERATIONS
Prior to or simultaneously with the consummation of the Offering, the
Company, BAC, the Bank and its affiliates will engage in the transactions
described below which are designed (i) to facilitate the Offering, (ii) to
transfer the ownership of the Initial Portfolio to the Company and (iii) to
enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1996.
The transactions constituting the formation of the Company will include the
following:
- The Charter will be amended to provide for 5,000,000 authorized shares of
Common Stock and 100,000,000 authorized shares of Preferred Stock, and to
establish the terms of the Series 1 Preferred Shares.
- The Company will sell to the public 20,000,000 Series 1 Preferred Shares
in the Offering.
- The Bank will acquire 500,000 shares of Common Stock for an aggregate
purchase price of $500,000,000. In addition, the Bank will acquire
additional shares of Common Stock for a purchase price equal to the
aggregate amount of underwriting discount and expenses of the Offering
and the formation of the Company.
- The Bank will sell the Initial Portfolio to the Company for an aggregate
purchase price equal to approximately $1 billion, pursuant to the
Mortgage Purchase Agreement.
- The Company will enter into the Advisory Agreement with the Bank pursuant
to which the Bank, as Advisor, will manage the Mortgage Assets held by
the Company and administer the day-to-day operations of the Company.
- The Company will enter into the Servicing Agreement with the Bank
pursuant to which the Bank, as Servicer, will service the Mortgage Loans
in the Initial Portfolio.
DIVIDEND POLICY
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to approximately 100%
of the Company's REIT Taxable Income (excluding capital gains). In order to
remain qualified as a REIT, the Company must distribute annually at least 95% of
its REIT Taxable Income (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the Series 1 Preferred Shares will
constitute non-taxable returns of capital.
Dividends will be authorized and declared at the discretion of the Board of
Directors after considering the Company's distributable funds, financial
requirements, tax considerations and other factors. Because (i) the Mortgage
Assets are interest-bearing, (ii) the Series 1 Preferred Shares represent only
approximately 50% of the Company's capitalization and (iii) the Company does not
anticipate incurring any material amount of indebtedness, the Company currently
expects that both its cash available for distribution and its REIT Taxable
Income will be significantly in excess of amounts
20
<PAGE> 22
needed to pay accrued dividends on the Series 1 Preferred Shares, even in the
event of a significant drop in interest rate levels. Accordingly, the Company
expects that it will, after paying all accrued and unpaid dividends on the
Series 1 Preferred Shares, pay dividends on an annual basis to holders of its
Common Stock. Assuming (i) the Mortgage Loans included in the Initial Portfolio
are held for a 12-month period following completion of the Offering, (ii)
principal repayments are reinvested in additional Mortgage Loans with
characteristics similar to those of the Mortgage Loans included in the Initial
Portfolio and (iii) mortgage interest rates remain constant during such 12-month
period, the Company anticipates that the Initial Portfolio will generate REIT
Taxable Income (excluding capital gains) of approximately $
million, after payment of servicing and advisory fees and other operating
expenses during such 12-month period. Since the aggregate annual dividend
payment on the Series 1 Preferred Shares is $ million, based on the
foregoing, the Company anticipates that $ million would be available for
payment of dividends on the Common Stock held by the Bank.
There are several limitations on the Company's ability to pay dividends on
the Common Stock (none of which should adversely affect either the ability of
the Company to pay dividends in respect of the Series 1 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 for any year to the extent that, after taking into
account such proposed distribution, total cash or property distributions on the
Company's outstanding shares of Preferred Stock and Common Stock with respect to
that year would exceed an amount equal to the sum of 105% of the Company's REIT
Taxable Income (excluding capital gains) for that year plus net capital gains of
the Company for that year. This policy regarding the limitations on payment of
dividends in respect of Common Stock may not be modified without the approval of
a majority of the Independent Directors. Second, no full dividend shall be
authorized and declared or paid or set apart for payment on any series of
capital stock of the Company ranking, as to dividends, on a parity with the
Series 1 Preferred Shares for any period unless full dividends for the
then-current dividend period on the Series 1 Preferred Shares have been or
contemporaneously are authorized and declared and paid, or authorized and
declared and a sum sufficient for the payment thereof is set apart for such
payments on the Series 1 Preferred Shares. Unless full dividends on the Series 1
Preferred Shares have been or contemporaneously are authorized and declared and
paid, or are authorized and declared and a sum sufficient for the payment
thereof set apart for payment, for the then-current quarterly dividend period,
(i) no dividends (other than dividends paid in shares of, or options, warrants
or rights to subscribe for or purchase shares of, the Common Stock of the
Company or any other stock of the Company ranking junior to the Series 1
Preferred Shares as to the payment of dividends and upon liquidation) shall be
authorized and declared or paid or set aside for payment and no other
distribution shall be authorized and declared or made upon the Common Stock or
any other capital stock of the Company ranking junior to the Series 1 Preferred
Shares as to dividends or amounts upon liquidation, and (ii) no Common Stock or
any other capital stock of the Company ranking junior to or on a parity with the
Series 1 Preferred Shares as to dividends or amounts upon liquidation may be
redeemed, purchased or acquired for any consideration (or any moneys to be paid
to or made available for a sinking fund for the redemption of any such stock) by
the Company (except by conversion into or exchange for other capital stock of
the Company ranking junior to the Series 1 Preferred Shares as to dividends and
amounts upon liquidation). Third, the Maryland General Corporation Law, as
amended (the "MGCL") provides two tests for the payment of dividends and other
distributions with respect to stock: First, after the distribution is paid, the
corporation must be able to pay its debts in the usual course of business.
Second, after the distribution is paid, the corporation's assets must at least
equal the sum of its liabilities plus, unless its charter provides otherwise
(and the Company's Charter does not), the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
on dissolution are superior to those receiving the distribution.
Under certain circumstances, including a determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
federal banking authorities will have the authority to issue an order which
restricts the ability of the Company to make dividend payments to its
stockholders, which might in turn jeopardize its ability to maintain REIT
qualification.
21
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Loans as Mortgage Loans held by the Company are repaid. The
acquisition of such additional Mortgage Loans will be funded with the proceeds
of principal repayments on its portfolio of Mortgage Loans. The Company does not
anticipate that it will have any other material capital expenditures. The
Company believes that cash generated from the payment of interest and principal
on its Mortgage Loan portfolio will provide sufficient funds to meet both
operating requirements and payment of dividends by the Company in accordance
with the REIT Provisions for the foreseeable future.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
MORTGAGE LOANS
The Company may from time to time acquire both conforming and nonconforming
Mortgage Loans; however, the Company expects that substantially all of the
Mortgage Loans it acquires (including 100% of the Initial Portfolio) will be
nonconforming. Conforming Mortgage Loans comply with the requirements for
purchase by either FHLMC or FNMA. Currently, the maximum principal balance
allowed on conforming Mortgage Loans ranges from $207,000 for one-unit
residential loans ($315,000 in either Alaska or Hawaii) to $397,800 for
four-unit residential loans ($596,700 in either Alaska or Hawaii). Nonconforming
Mortgage Loans are Mortgage Loans that do not qualify in one or more respects
for purchase by FNMA or FHLMC under their standard programs. The Company expects
that a majority of the nonconforming 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. It is expected that
a substantial portion of the Company's nonconforming Mortgage Loans will meet
the requirements for sale to national private mortgage conduit programs or other
investors in the secondary mortgage market.
Each 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. Properties
underlying Mortgage Loans consist of individual dwelling units, individual
condominium units, two- to four-family dwelling units, planned unit developments
and townhouses. The Company currently expects that most of the Mortgage Loans to
be acquired by it will be ARMs with fixed interest rates for an initial period
after origination; however, the Company may also purchase Mortgage Loans that
bear a fixed or adjustable rate for their entire terms or that are initially
adjustable and subsequently convert to a fixed rate.
A substantial portion of the Initial Portfolio consists of Mortgage Loans
secured by properties in California, and the Company expects that a
preponderance of subsequently-acquired Mortgage Loans will also be secured by
California properties. Substantially all Mortgage Loans originated by the Bank
in California are secured by deeds of trust, the most commonly used real
property security device in California. Although a deed of trust is similar to a
mortgage with power of sale, the deed of trust formally has three parties -- a
debtor-trustor (similar to a mortgagor), the third party grantee called the
trustee and the lender-creditor (similar to a mortgagee) called the beneficiary.
The trustor grants the property, irrevocably until the debt is paid, "in trust,
with power of sale" to the trustee to secure payment of the obligation. The
trustee's authority is governed by law, the express provisions of the deed of
trust and the directions of the beneficiary.
MORTGAGE-BACKED SECURITIES
The Company may from time to time acquire securities representing interests
in or obligations backed by pools of Mortgage Loans ("Mortgage-Backed
Securities") in connection with the temporary investment of funds or for
interest rate risk management purposes. It is not currently anticipated that the
Company will hold a significant amount of Mortgage-Backed Securities. The
Mortgage Loans underlying any Mortgage-Backed Securities will be secured only by
single-family residential properties. The
22
<PAGE> 24
Company intends to acquire Mortgage-Backed Securities only if they are
investment grade and qualify as real estate assets under the REIT Provisions.
The Company will not be precluded from investing in Mortgage-Backed Securities
where the Bank or one of its affiliates is the sponsor or issuer.
FORECLOSURE
In California, foreclosure of a deed of trust is accomplished in most cases
by a non-judicial trustee's sale under the power-of-sale provision in the deed
of trust. Prior to such sale, the trustee must record a notice of default and
send a copy to the trustor, to any person who has recorded a request for a copy
of a notice of default and notice of sale, to any successor in interest to the
trustor, to the beneficiary of any junior deed of trust and to certain other
persons. The trustor or any person having a junior lien or encumbrance of record
may, during a three-month reinstatement period, cure the default by paying the
entire amount of the debt then due, exclusive of principal due only because of
acceleration upon default, plus costs and expenses actually incurred in
enforcing the obligation and statutorily limited attorney's and trustee's fees.
Thereafter, and at least 20 days before the trustee's sale, notice of sale must
be posted in a public place and published once a week over such period. A copy
of the notice of sale must be posted on the property and sent to the trustor, to
each person who has requested a copy, to any successor in interest to the
trustor and to the beneficiary of any junior deed of trust, at least 20 days
before the sale, and must be recorded in the county in which the property is
located at least 14 days before the sale. Following the sale, neither the
trustor nor a junior lienor has any right of redemption, and the beneficiary may
not obtain a deficiency judgment against the trustor.
A judicial foreclosure (in which the beneficiary's purpose is usually to
obtain a deficiency judgment where otherwise available) is subject to most of
the delays and typical expenses of other lawsuits, sometimes requiring up to
several years to complete. Following a judicial foreclosure sale, provided a
deficiency judgment is not waived or prohibited, the trustor or his successors
in interest may redeem the foreclosed property for a period of one year (or a
period of only three months if the entire amount of the debt is bid at the
foreclosure sale).
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
California has four principal statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust. Two statutes limit the
beneficiary's right to obtain a deficiency judgment against the trustor
following foreclosure of a deed of trust, one based on the method of foreclosure
and the other on the type of debt secured. Under one statute, a deficiency
judgment is barred where the foreclosure was accomplished by means of a
non-judicial trustee's sale. Under the other statute, a deficiency judgment is
barred where the foreclosed deed of trust secured a "purchase money" obligation
of either of two types: (i) a promissory note in favor of the seller of the
property evidencing the balance of the purchase price; or (ii) a promissory note
in favor of a third party lender to secure repayment of a loan used to pay all
or part of the purchase price of a one-to-four family dwelling occupied, at
least in part, by the purchaser. Another statute, commonly known as the
"one-form-of-action" rule, requires the beneficiary to exhaust the security
under the deed of trust by foreclosure before bringing a personal action against
the trustor on the promissory note. The fourth statutory provision limits any
deficiency judgment obtained by the beneficiary following a judicial sale to the
excess of the outstanding debt over the fair market value of the property at the
time of sale, thereby preventing a beneficiary from obtaining a large deficiency
judgment against the debtor as a result of low bids at the judicial sale. Since
a significant percentage of the Mortgage Loans in the Initial Portfolio are
"purchase money" deeds of trust, it is anticipated that in most instances the
Bank as Servicer of any defaulted Mortgage Loans will utilize the nonjudicial
foreclosure remedy and not seek deficiency judgments against defaulting
mortgagors.
Other statutory provisions, such as the federal bankruptcy laws and laws
giving certain priorities to federal tax liens, may have the effect of delaying
enforcement of the lien of a defaulted Mortgage Loan and may in certain
circumstances reduce the amount realizable from sale of a foreclosed property.
23
<PAGE> 25
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Initial Portfolio from the Bank pursuant to the terms of a Mortgage
Loan Purchase and Warranties Agreement (the "Mortgage Purchase Agreement") dated
as of , 1996. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the Mortgage Purchase Agreement (the "Mortgage Loan
Schedule"). The Mortgage Loan Schedule will specify, among other things, with
respect to each Mortgage Loan: the interest rate or interest rate formula
applicable to each Mortgage Loan, the current interest rate, the original
principal amount and the unpaid principal balance as of the purchase date, the
monthly payment, maturity date, the mortgagor, the type of mortgaged property
and the location of the mortgaged property.
In addition, the Bank will deliver or cause to be delivered to the Company
the mortgage note with respect to each Mortgage Loan (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
agreement to prepare, execute and record an assignment of the mortgage upon
request by the Company, together with a power of attorney authorizing the
officers of the Company to prepare, execute and record such assignment if the
Bank fails to do so. Such documents will initially be held by the Bank, as
Advisor, acting as custodian for the Company. See "-- Servicing" and
"-- Description of Initial Portfolio -- General".
The Bank will make certain representations and warranties with respect to
the Mortgage Loans in the Initial Portfolio for the benefit of the Company and
will be obligated to repurchase any Mortgage Loan sold by it to the Company as
to which there is a material breach of any such representation or warranty,
unless the Bank elects to substitute a qualified Mortgage Loan for such Mortgage
Loan. The Bank will also indemnify the Company for damages or costs resulting
from any such breach. The repurchase price for any such Mortgage Loan will be
its outstanding principal amount plus accrued and unpaid interest on the date of
repurchase. Such repurchase will constitute the sole remedy available to the
Company for a breach of such representations or warranties. Further, under the
terms of the Mortgage Purchase Agreement, the Company will acquire, in addition
to the Mortgage Loans included in the Initial Portfolio, (i) all amounts,
including payments of principal and interest (other than payments of principal
and interest due on or before October 1, 1996) held in one or more accounts
maintained for the benefit of or in the name of the Company pursuant to the
Servicing Agreement and (ii) all insurance policies relating to the mortgaged
properties and the proceeds thereof.
The Company and the Bank believe that the fair market value of the Initial
Portfolio will approximately equal the amount (approximately $1 billion) which
the Company will pay the Bank for the Initial Portfolio. Although no formal
third party valuations of the Initial Portfolio have been obtained for purposes
of the Offering, the Bank and the Company solicited estimates of the fair market
value of the Initial Portfolio from three securities broker-dealers who
regularly participate in the residential secondary mortgage market, and took
such estimates into account in determining the purchase price of the Initial
Portfolio.
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, conflicts of interest and certain other activities. These
policies, which are discussed below, may be changed from time to time at the
discretion of the Board of Directors (in some instances subject to the approval
of a majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series 1 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 Loans
from the Bank or its affiliates, although Mortgage Loans may be
24
<PAGE> 26
acquired from unaffiliated third parties, out of proceeds received in connection
with the repayment or disposition of Mortgage Loans or the issuance of
additional shares of Common Stock and Preferred Stock. The Company anticipates
that additional Mortgage Loans purchased from the Bank or its affiliates will be
purchased at prices that are substantially identical to those that could be
obtained by the Company if such additional Mortgage Loans were purchased from
third parties unaffiliated with the Company. In addition, the Company expects to
obtain an estimate of the fair market values of any additional Mortgage Loans to
be purchased from the Bank from one or more securities broker-dealers active in
the residential secondary mortgage market, and to consider such estimates in
establishing the purchase price of such Mortgage Loans. No arrangements or
procedures are currently in place regarding the purchase of additional Mortgage
Loans from unaffiliated third parties. The Company currently anticipates that
additional Mortgage Loans acquired by the Company will be of the types described
in "-- Description of Initial Portfolio", although if the Bank or its affiliates
develop additional Mortgage Loan products, the Company may purchase such
additional types of Mortgage Loans. In addition, the Company may purchase
Mortgage-Backed Securities from the Bank or its affiliates, or in the secondary
market. 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 with the Bank
will contain fees and other terms comparable to those that would be contained in
servicing arrangements entered into with third parties unaffiliated with the
Company.
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 the proposed
acquisition, (ii) was at any time during the preceding 12 months 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 may choose, at any time subsequent to its acquisition of any
Mortgage Loan, to require the Servicer of the Mortgage Loan to dispose of such
Mortgage Loan for any reason. The Bank has indicated that it will not purchase
any Mortgage Loan of the Company that (i) is delinquent in the payment of
principal or interest at the time of the proposed purchase or (ii) has been,
more than once during the then preceding 12 months, more than 30 days past due
in the payment of principal or interest (except in either case for any such
Mortgage Loan as to which there was a breach of any representation by the Bank
at the time of the Company's acquisition of the loan). Accordingly, the Company
currently anticipates that any such Mortgage Loan that the Company chooses to
dispose of would be sold at its then current fair market value by the Company
only to BAC, a non-bank subsidiary of BAC or an unrelated third party.
CAPITAL AND LEVERAGE POLICIES
To the extent that the Board of Directors determines that additional
funding is required, the Company may raise such funds through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Code requiring the distribution by a REIT of at least 95% of
its REIT Taxable Income and taking into account taxes that would be imposed on
undistributed taxable income), or a combination of these methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any material amount
of indebtedness. Pursuant to the Charter, the Company may not, without the
approval of a majority of the Independent Directors, incur debt for borrowed
money other than debt not in excess of 20% of the aggregate amount of net
proceeds received in connection with the issuance of all outstanding Preferred
Stock and Common Stock of the Company. The Charter does not contain any other
limitation on the amount or percentage of debt, funded or otherwise, which the
Company may incur. Any such debt incurred may include intercompany advances made
by the Bank to the Company.
25
<PAGE> 27
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to or on a
parity with the Series 1 Preferred Shares without the approval of a majority of
the Company's Independent Directors. The Company does not currently intend to
issue any additional series of Preferred Stock unless it simultaneously issues
additional Common Stock to the Bank for an amount approximately equal to the
aggregate offering price of such additional Preferred Stock plus the Company's
expenses (including underwriting discount or placement fees) in connection with
the issuance of such additional shares of Preferred Stock. It is currently
anticipated that any determination by the Company to issue additional shares of
Preferred Stock will take into account the Bank's and BAC's regulatory capital
requirements and the cost of raising and maintaining such capital at the time.
See "Benefits of the Offering to the Bank and Its Affiliates".
CREDIT RISK MANAGEMENT POLICIES
The Company expects that each Mortgage Loan acquired from the Bank or one
of its affiliates in the future will be a whole loan, will represent a first
lien position and have been originated by the Bank or such affiliate in the
ordinary course of its real estate lending activities based on the underwriting
standards generally applied (at the time of origination) for its own account by
the Bank or the affiliate of the Bank which originated the Mortgage Loan. See
"-- Description of Initial Portfolio -- Underwriting Standards". The Company
also expects that all Mortgage Loans held by the Company will be serviced
pursuant to the Servicing Agreement, which requires servicing in conformity with
the Bank's procedures and policies for servicing loans held by the Bank for its
own account, with any servicing guidelines promulgated by the Company and with
FNMA or FHLMC guidelines and procedures. The Company may choose, at any time
subsequent to its acquisition of any Mortgage Loan, to require the Servicer to
sell such Mortgage Loan for any reason.
CONFLICT OF INTEREST POLICIES
Because of the nature of the Company's relationship with the Bank and its
affiliates, it is likely that conflicts of interest will arise with respect to
certain transactions, including, without limitation, the Company's acquisition
of Mortgage Loans from, or disposition of Mortgage Loans to, the Bank, BAC or
their respective affiliates and the renewal or modification of the Advisory
Agreement or the Servicing Agreement. It is the Company's policy that the terms
of any financial dealings with the Bank, BAC and their respective affiliates
will be consistent with those available from third parties in the mortgage
lending industry. In addition, neither the Advisory Agreement nor the Servicing
Agreement may be modified or terminated by the Company, nor may the Advisory
Agreement be renewed, 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 which the Bank or one of its affiliates may have with the borrower
under a Mortgage Loan. Conflicts could also arise in connection with actions
taken by the Bank as a controlling person in the Company. It is the intention of
the Company, the Bank and BAC that any agreements and transactions between the
Company, on the one hand, and BAC, the Bank or any of their affiliates, on the
other hand (including, without limitation the Mortgage Purchase Agreement and
the Servicing Agreement), will be fair to all parties and consistent with market
terms for such types of transactions. The Servicing Agreement provides that
foreclosures and dispositions of the Mortgage Loans are to be performed with a
view to maximizing the recovery by the Company as owner of the Mortgage Loans.
The requirement in the Charter 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 BAC, the Bank and their respective affiliates.
However, there can be no assurance that any such agreement or transaction will
be on terms as favorable to the Company as could have been obtained from
unaffiliated third parties.
There are no provisions in the Charter 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, nor limiting
any
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<PAGE> 28
such person or entity 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 1 Preferred Shares and other shares
of its capital stock in the open market or otherwise; provided, however, that
the Company will not redeem or repurchase any shares of its Common Stock for so
long as any Series 1 Preferred Shares are outstanding without the approval of a
majority of the Independent Directors. The Company has no present intention of
repurchasing any shares of its capital stock, and any such action would be taken
only in conformity with applicable federal and state laws and regulations and
the REIT Provisions.
The Company intends to publish and distribute to stockholders, in
accordance with New York Stock Exchange rules, annual reports containing
financial statements prepared in accordance with generally accepted accounting
principles and certified by the Company's independent auditors. The Charter
provides that the Company shall maintain its status as a reporting company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for so
long as any of the Series 1 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 REIT Provisions of
the Code. However, future economic, market, legal, tax or other considerations
may cause the Board of Directors, subject to approval by a majority of
Independent Directors, to determine that it is in the best interests of the
Company and its stockholders to revoke its REIT status.
DESCRIPTION OF INITIAL PORTFOLIO
Information with respect to the Initial Portfolio is presented as of
October 1, 1996. The composition of the Initial Portfolio to be actually
purchased by the Company contemporaneously with the consummation of the Offering
will differ from the Initial Portfolio, as described in this Prospectus, only to
the extent it is discovered prior to the consummation of the Offering that a
Mortgage Loan included in the Initial Portfolio described herein (i) is
delinquent in the payment of principal or interest, (ii) was at any time during
the 12 months preceding acquisition renegotiated due to financial deterioration
of the borrower or (iii) has been, more than once during the preceding 12
months, more than 30 days past due in the payment of principal or interest. In
such event a Mortgage Loan similar in aggregate outstanding principal balance
and product type will be substituted for such non-purchased Mortgage Loan.
References herein to percentages of Mortgage Loans included in the Initial
Portfolio refer in each case to the percentage of the aggregate outstanding
principal balance of the Mortgage Loans in the Initial Portfolio as of October
1, 1996, based on the outstanding principal balances of such Mortgage Loans as
of such date, after giving effect to scheduled monthly payments due on or prior
to such date, whether or not received.
The detailed information set forth in this Prospectus with respect to the
Mortgage Loans applies only to the Initial Portfolio. The Company's portfolio of
Mortgage Assets in the future may or may not have the characteristics described
below.
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<PAGE> 29
GENERAL
The Initial Portfolio contains 2,512 Mortgage Loans. On October 1, 1996,
the Mortgage Loans included in the Initial Portfolio had an aggregate
outstanding principal balance of approximately $1.158 billion.
All of the Mortgage Loans included in the Initial Portfolio were originated
by the Bank or its affiliates in the ordinary course of their real estate
lending activities. All of the Mortgage Loans included in the Initial Portfolio
were originated generally in accordance with the underwriting standards
customarily employed by the Bank and its affiliates during the period in which
such Mortgage Loans were originated.
All of the Mortgage Loans included in the Initial Portfolio were originated
between December 1993 and June 1996, and have original terms to stated maturity
between 15 and 30 years. All of the Mortgage Loans in the Initial Portfolio have
original principal balances in excess of $207,000. The average principal balance
of a Mortgage Loan is approximately $461,000. The weighted average number of
months since origination of the Mortgage Loans included in the Initial Portfolio
(calculated as of October 1996) was approximately nine months. The average
Loan-to-Value Ratio (defined below) of the Mortgage Loans included in the
Initial Portfolio is 74.87%; however, 17.18% of the Mortgage Loans have
Loan-to-Value Ratios of greater than 80%.
Upon any proposed transfer of the property subject to a Mortgage Loan
included in the Initial Portfolio, the mortgage note generally will not preclude
assumption of the related Mortgage Loan by the proposed transferee if the
proposed transferee satisfies certain criteria with respect to ability to repay
the Mortgage Loan. However, certain 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 accelerate the maturity of the
Mortgage Loan in the event of such a transfer. "Due-on-sale" provisions in ARMs
may be applicable in the period prior to the first Rate Adjustment Date (as
defined herein).
As of October 1, 1996, none of the Mortgage Loans included in the Initial
Portfolio (i) is currently delinquent in the payment of principal or interest,
(ii) was at any time during the preceding 12 months 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.
MORTGAGE LOANS
The following different types of Mortgage Loan products, each of which is
more fully described below, are included in the Initial Portfolio: 3 year FIRM,
5 year FIRM, 7 year FIRM, 10 year FIRM and Net 5 ARM.
The following table sets forth certain information with respect to each
type of Mortgage Loan included in the Initial Portfolio:
<TABLE>
<CAPTION>
PERCENTAGE
OF INITIAL WEIGHTED
AGGREGATE PORTFOLIO BY WEIGHTED AVERAGE
PRINCIPAL AGGREGATE AVERAGE INITIAL MONTHS
BALANCE PRINCIPAL LOAN TO REMAINING TO
TYPE (IN THOUSANDS) BALANCE VALUE RATIO MATURITY
- ---------------------------------- -------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
3 year FIRM....................... $ 79,302 6.85% 74.05% 352
5 year FIRM....................... $ 370,185 31.97% 73.61% 353
7 year FIRM....................... $ 117,938 10.19% 74.02% 353
10 year FIRM...................... $ 79,474 6.86% 74.59% 355
Net 5 ARM......................... $ 510,924 44.13% 76.15% 348
---------- ------ ----- ---
Total................... $1,157,823 100.00% 74.87% 351
========== ====== ===== ===
</TABLE>
28
<PAGE> 30
All of the Mortgage Loans included in the Initial Portfolio are ARMs
(although they bear interest at a fixed rate during an initial period). The
interest rate on 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
and/or payment caps. The current interest rates of the Mortgage Loans included
in the Initial Portfolio ranged from 6.0% per annum to 9.0% per annum as of
October 1, 1996. The weighted average current interest rate of the Mortgage
Loans included in the Initial Portfolio as of October 1, 1996 was approximately
7.23% per annum. The following table contains certain additional data with
respect to the interest rates of the Mortgage Loans included in the Initial
Portfolio as of October 1, 1996:
CURRENT INTEREST RATES OF ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL PORTFOLIO
AGGREGATE BY
NUMBER OF PRINCIPAL BALANCE AGGREGATE PRINCIPAL
INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) BALANCE
--------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
6.000% to 6.49%.................. 37 $ 16,748 1.45%
6.500% to 6.99%.................. 678 $ 328,882 28.40%
7.000% to 7.49%.................. 969 $ 457,714 39.53%
7.500% to 7.99%.................. 665 $ 286,445 24.74%
8.000% to 8.49%.................. 145 $ 60,755 5.25%
8.500% to 8.99%.................. 17 $ 6,951 0.60%
9.000%........................... 1 $ 328 0.03%
----- ---------- ------
Total.................. 2,512 $ 1,157,823 100.00%
===== ========== ======
</TABLE>
"Gross Margin", with respect to an ARM, means the applicable percentage
which, when added to the applicable index, totals the current interest rate
payable by the borrower under such ARM (without taking into account any interest
rate caps or minimum interest rates). As of October 1, 1996, the weighted
average Gross Margin of the Mortgage Loans included in the Initial Portfolio was
approximately 2.76%.
The following table sets forth certain additional data as of October 1,
1996 with respect to the Gross Margins of the Mortgage Loans included in the
Initial Portfolio:
GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL PORTFOLIO
AGGREGATE BY
NUMBER OF PRINCIPAL BALANCE AGGREGATE PRINCIPAL
GROSS MARGIN MORTGAGE LOANS (IN THOUSANDS) BALANCE
--------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
2.250% to 2.49%.................. 1 $ 210 0.02%
2.500% to 2.74%.................. 32 $ 14,454 1.25%
2.750% to 2.875%................. 2,479 $ 1,143,159 98.73%
-
----- ------
Total.................. 2,512 $ 1,157,823 100.00%
===== = ======
</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 Mortgage Loans in the Initial Portfolio,
to maximum annual or semi-annual interest rate increases or decreases, each as
specified in the mortgage note relating to the ARM. Information set forth below
regarding lifetime interest rate caps, minimum interest rates and maximum annual
or semi-annual interest rate increases or decreases 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, minimum interest
rates and maximum annual or semi-annual interest rate increases or decreases.
29
<PAGE> 31
Each ARM bears interest at its initial interest rate until its first Rate
Adjustment Date. Effective with each adjustment in interest rate on a Rate
Adjustment Date, the monthly principal and interest payment on the Mortgage
Loans included in the Initial Portfolio will be adjusted to an amount that will
fully amortize the then-outstanding principal balance of such Mortgage Loan over
its remaining term to stated maturity and that will be sufficient to pay
interest at the adjusted interest rate.
The Bank and its affiliates currently offer various types of ARMs, five of
which types are included in the Initial Portfolio and are described below. Four
of the five loan types which are included in the Initial Portfolio provide for
fixed interest rates for a prescribed initial period and then adjust annually as
if each loan were a One-Year ARM (defined below). The fifth loan type provides
for a fixed interest rate for five years and then adjusts semi-annually as
described below. There are no One-year ARMs in the Initial Portfolio. The
following is a description of the characteristics of the One-Year ARM and each
of the ARMs included in the Initial Portfolio.
One-Year ARM. A One-Year ARM is a mortgage loan with an interest rate
which adjusts annually to a rate equal to the then-current Treasury Index
(defined below) plus the Gross Margin set forth in the related mortgage note,
subject to a maximum annual interest rate increase or decrease of 2.00%, a
lifetime interest rate cap specified in such mortgage note and a minimum
interest rate no less than the Gross Margin. The sum of the Treasury Index and
the Gross Margin is generally rounded upwards to the nearest 0.125%. The
"Treasury Index" with respect to a 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) and
G.13 (415) 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 Servicer. Should the Treasury Index not be published or become
otherwise unavailable, the Servicer will select a comparable alternative index
over which it has no control and which is readily available.
Three-Year Fixed Initial Rate Mortgage Loan. The three-year fixed initial
rate mortgage loan (a "3 year FIRM") bears interest at a rate that is fixed for
the first 36 monthly payments and adjusts annually thereafter as if the Mortgage
Loan were a One-Year ARM, with a lifetime interest rate cap specified in the
related mortgage note; provided that, on the first Rate Adjustment Date, the
interest rate may be increased or decreased by no more than 3% with respect to
approximately 96% of the 3 Year FIRMs in the Initial Portfolio, and by no more
than 2% with respect to the remaining 3 Year FIRMs in the Initial Portfolio.
Five-Year Fixed Initial Rate Mortgage Loan. The five-year fixed initial
rate mortgage loan (a "5 year FIRM") bears interest at a rate that is fixed for
the first 60 monthly payments and adjusts annually thereafter as if the Mortgage
Loan were a One-Year ARM, with a lifetime interest rate cap specified in the
related mortgage note; provided that, on the first Rate Adjustment Date, the
interest rate may be increased or decreased by no more than 3%.
Seven-Year Fixed Initial Rate Mortgage Loan. The seven-year fixed initial
rate mortgage loan (a "7 year FIRM") bears interest at a rate that is fixed for
the first 84 monthly payments and adjusts annually thereafter as if the Mortgage
Loan were a One-Year ARM, with a lifetime interest rate cap specified in the
related mortgage note; provided that, on the first Rate Adjustment Date, the
interest rate may be increased or decreased by no more than 3%.
Ten-Year Fixed Initial Rate Mortgage Loan. The ten-year fixed initial rate
mortgage loan (a "10 year FIRM") bears interest at a rate that is fixed for the
first 120 monthly payments and adjusts annually thereafter as if the Mortgage
Loan were a One-Year ARM, with a lifetime interest rate cap specified in the
related mortgage note; provided that, on the first Rate Adjustment Date, the
interest rate may be increased or decreased by no more than 5%.
Net 5 Treasury Average ARM. The Net 5 Treasury Average ARM (a "Net 5 ARM")
bears interest at a rate that is fixed for the first 60 monthly payments, and
such payments consist of interest only. Thereafter, the monthly payments consist
of principal and interest and the interest rate adjusts semi-
30
<PAGE> 32
annually on the date specified in the related mortgage note to bear interest at
a rate equal to the then current Treasury Average Index (defined below) plus the
Gross Margin set forth in such mortgage note, subject to a maximum semi-annual
interest rate increase or decrease of no more than 1.00%, a lifetime interest
cap specified in the related mortgage note and a minimum interest rate no less
than the Gross Margin. The sum of the Treasury Average Index and the Gross
Margin is generally rounded upwards to the nearest 0.125%. The "Treasury Average
Index" with respect to a Net 5 ARM is the twelve-month average of the monthly
yield on actively traded U.S. Treasury securities adjusted to a constant
maturity of one year as published by the Federal Reserve Board in Statistical
Release G.13 (415) or any similar publication.
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 standards customarily employed by the Bank and its affiliates
at the time at which the Mortgage Loans in the Initial Portfolio were
originated.
The underwriting standards of the Bank are intended to assess the
prospective borrower's ability and willingness to repay the debt and the
adequacy of the property as collateral for the loan requested. Credit policies
require that loan underwriters be satisfied that the value of the property being
financed supports the outstanding loan balance with sufficient value at loan
origination to mitigate the effects of adverse shifts in real estate values. The
emphasis, however, remains on the borrower's ability to repay debt.
The real estate lending processes of the Bank for one- to four-family
residential mortgage loans follow standard procedures, designed to comply with
applicable federal and state laws and regulations. Initially, a prospective
borrower is required to fill out a detailed application designed to provide to
the underwriter pertinent information about the prospective borrower the
property to be financed and the type of loan desired. Information regarding the
property to be financed may be provided by the prospective borrower after the
Bank has approved, subject to review of the property to be financed, a loan to
the prospective borrower. As part of the description of the prospective
borrower's financial condition, the Bank requires a description of assets and
liabilities and income and expenses and an authorization to the Bank to apply
for a credit report which summarizes the prospective borrower's credit history
with merchants and lenders and any public records, such as bankruptcy. In most
cases, employment verification is obtained providing current and historical
income information. Such employment verification is obtained either through the
Bank's analysis of the prospective borrower's W-2 forms for the most recent two
years and year-to-date earnings statement or most recent two years' tax returns
or from the prospective borrower's employer, wherein the employer reports the
length of employment and current salary with that organization. Self-employed
prospective borrowers are required to submit their federal tax returns for the
past two years plus year-to-date financial statements if the loan application is
made 120 days or longer after the end of the most recent tax year for which a
federal tax return was provided. In general, an employment verification is
obtained, and with respect to certain loans, a telephonic employment
confirmation is obtained by the Bank.
In April 1994, the Bank began using an automated process to assist in
making credit decisions on certain residential mortgage loans. A prospective
borrower's credit history is assigned a score based on standard criteria
designed to predict the possibility of a default by the prospective borrower on
a mortgage loan. An application from a prospective borrower whose score
indicates a high probability of default may be declined on the basis of the
score, although applications for certain types of mortgage loans will receive a
judgmental review from an underwriter who may override a decision based on the
credit score. An application from a prospective borrower whose score indicates a
low probability of default is subject to less stringent underwriting guidelines
and documentation standards to verify the information in the application.
31
<PAGE> 33
Once the employment verification (or confirmation) and the credit report
are received by the underwriter considering the loan application, a
determination is made as to whether the prospective borrower has sufficient
monthly income available to meet the borrower's monthly obligations on the
proposed loan and other expenses related to the residence, as well as to meet
other financial obligations and monthly living expenses. The Bank has
established as general lending guidelines that the mortgage payments plus
applicable real property taxes, condominium or homeowner association common
charges, hazard insurance premiums and premiums on any primary mortgage
insurance policy generally should not exceed 33% of the borrower's gross income,
and that all monthly payments, including those mentioned above and other
obligations, such as car payments, generally should not exceed 38% of gross
income. However, other credit considerations may cause an underwriter to depart
from these guidelines. The Bank follows standard exceptions procedures pursuant
to which underwriters generally have delegated authority to approve or recommend
the approval of loan applications when certain lending guidelines are not met.
Where there are two individuals co-signing any mortgage note, the income and
payment obligations of both may be included in the computation. With respect to
ARMs with interest rates that adjust initially five or more years after their
origination, including Net 5 ARMs, these ratios are calculated using the initial
interest rates. With respect to all other ARMs, these ratios are generally
calculated using the fully-indexed interest rate.
Prior to final loan approval, a prospective borrower generally is expected
to have liquid assets sufficient to cover the down-payment, closing costs and
cash reserves that could be used to pay future housing expenses in a depository
or related account of the borrower. However, the Bank does not require
prospective borrowers to have such liquid assets when it originates refinance
loans.
An appraisal is made of each property to be financed. The appraisal is
conducted by either a staff appraiser of the Bank or, in some instances, an
independent fee appraiser licensed in the jurisdiction where the property is
located. Generally, as part of the loan origination process, the appraiser
personally visits the property and estimates its market value on the basis of
comparable properties and other factors.
The Bank's policy is generally not to make one- to four-family mortgage
loans having Loan-to-Value Ratios above 80% unless it has obtained or caused the
borrowers to obtain primary mortgage insurance policies.
GEOGRAPHIC DISTRIBUTION
Approximately 89% of the outstanding principal balance of the Mortgage
Loans included in the Initial Portfolio is secured by properties located in
California. Consequently, 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 (earthquakes,
wildfires and mud slides, for example) in California that may affect the ability
of property owners in California to make payments of principal and interest on
the underlying mortgages. Standard hazard insurance required to be maintained
with respect to Mortgage Loans held by the Company does not protect the Company
against losses occurring from earthquakes and other natural disasters.
Consequently, in the event of an earthquake or other natural disaster, the
Company's ability to pay dividends on the Series 1 Preferred Shares could be
adversely affected, as the Company will not maintain special hazard insurance to
protect against such losses.
LOAN-TO-VALUE RATIOS; INSURANCE
All of the Mortgage Loans having a Loan-to-Value Ratio (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 of the underlying mortgaged
property at origination and (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property) of
greater than 80% are insured under primary mortgage insurance policies. At the
time of origination of the Mortgage Loans, each of the primary mortgage insurers
was approved by FNMA or FHLMC. A standard hazard insurance policy is
32
<PAGE> 34
required to be maintained by the mortgagor with respect to each Mortgage Loan in
an amount equal to the maximum insurable value of the improvements securing such
Mortgage Loan or the principal balance of such Mortgage Loan, whichever is less.
If the property underlying a Mortgage Loan is located in a flood zone, such
Mortgage Loan may also be covered by a flood insurance policy as required by
law. No mortgagor bankruptcy insurance will be maintained by the Company with
respect to the Mortgage Loans in the Initial Portfolio, nor will any Mortgage
Loan be insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. The Company will not maintain any special hazard
insurance policy with respect to any Mortgage Loan which could mitigate damages
caused by any earthquake or other natural disaster. In addition, the standard
hazard insurance required to be maintained with respect to Mortgage Loans does
not protect the Company against losses occurring from earthquakes and other
natural disasters. In the event of any such natural disaster, the Company's
ability to pay dividends on the Series 1 Preferred Shares could be adversely
affected.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be sold to the
Company by the Bank on a servicing retained basis. The Bank will service the
Mortgage Loans included in the Initial Portfolio pursuant to the terms of the
Servicing Agreement. The Servicer will receive a monthly servicing fee with
respect to each Mortgage Loan held by the Company equal to 1/12 of .375% of the
then-outstanding principal balance of such Mortgage Loan.
The Servicing Agreement requires the Bank as Servicer to service the
Company's Mortgage Loans in a manner generally consistent with that followed by
the Bank in servicing similar loans held for its own account, with any servicing
guidelines promulgated by the Company and with FNMA or FHLMC guidelines and
procedures. The Servicer will collect and remit principal and interest payments,
administer mortgage escrow accounts, submit and pursue insurance claims and
initiate and supervise foreclosure proceedings on the Mortgage Loans it
services. The Servicer will also provide accounting and reporting services
required by the Company for such Mortgage Loans. The Servicing Agreement
requires the Servicer to follow such collection procedures as are customary in
the industry, including contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in a
manner generally consistent with servicing guidelines promulgated by the Bank
for servicing similar loans held for its own account. The Servicer may, in its
discretion, arrange with a defaulting borrower a schedule for the liquidation of
delinquencies, provided that no primary mortgage insurance coverage is adversely
affected. The Servicer may also be directed by the Company, at any time during
the servicing process, to sell any Mortgage Loan for any reason. The Servicer
may from time to time subcontract all or a portion of its servicing obligations
under the Servicing Agreement to one or more of its affiliates or to an
unaffiliated third party; provided that the Servicer may not, without the
approval of a majority of the Independent Directors, subcontract to an
unaffiliated third party any servicing obligations that the Servicer does not
also subcontract with respect to a substantial portion of the residential
mortgage loans serviced for the Bank's own account. The Servicer will not, in
connection with subcontracting any of its obligations under the Servicing
Agreement, be discharged or relieved in any respect from its obligation to the
Company to perform its obligations under the Servicing Agreement.
The Mortgage Loans are currently serviced by the Bank at its servicing
facility located in Cypress, California (the "Cypress Center"). As of June 30,
1996, the Cypress Center was servicing approximately 397,000 mortgage loans with
an aggregate principal balance of approximately $46 billion. The Cypress Center
is responsible for answering customers' inquiries, receiving loan payments,
reporting to investors, maintaining hazard insurance or a blanket hazard policy,
monitoring payment of taxes, assessments and, when applicable, primary mortgage
insurance policies, and all mortgage accounting and record keeping. The Cypress
Center is also responsible for collection efforts on delinquent residential
mortgage loans and foreclosures thereon. Separate units exist within affiliates
of BAC to manage and dispose of other real estate owned.
Commencing in June, 1996, the Bank began a reorganization of its
residential mortgage servicing activities, including the transfer of
responsibility for certain servicing activities from the Cypress Center to
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<PAGE> 35
the servicing facility of an affiliate of the Bank in Richmond, Virginia (the
"Richmond Center"), and the transfer from the Richmond Center to the Cypress
Center of responsibility for certain servicing activities on mortgage loans
previously serviced entirely by the Richmond Center. As of June 30, 1996, the
Richmond Center was servicing approximately 354,000 mortgage loans with an
aggregate principal balance of approximately $29 billion. Upon completion of the
reorganization, certain aspects of the servicing of the residential mortgage
loans serviced by the Bank and its affiliates will be divided between the
Cypress Center and the Richmond Center.
Because both the Cypress Center and the Richmond Center service loans for
governmental and quasi-governmental agencies of the U.S. Government, they are
regularly examined by the Bank's internal and external auditors and periodically
by FNMA, FHLMC, the Government National Mortgage Association, the Office of the
Comptroller of the Currency (the "Comptroller") and the U.S. Department of
Housing and Urban Development. Certain financial records of the Bank relating to
its mortgage servicing activities are reviewed annually by its independent
auditors.
The Servicing Agreement requires the Servicer to pay all expenses related
to the performance of its duties under the Servicing Agreement. In addition, the
Servicer will be required to make advances of taxes and required insurance
premiums (but not principal and interest) that are due from mortgagors. If such
advances are made, the Servicer generally will be reimbursed prior to the
Company out of proceeds related to such Mortgage Loan. The Servicer also will be
entitled to reimbursement by the Company, from any funds available, for
unrecovered advances and for expenses incurred by it in connection with the
liquidation of defaulted Mortgage Loans serviced by it and in connection with
the restoration of mortgaged property. If claims are not made or paid under
applicable insurance policies or if coverage thereunder has ceased, the Company
will suffer a loss to the extent that the proceeds from liquidation of the
mortgaged property, after reimbursement of the Servicer's expenses in the sale,
are less than the outstanding principal balance of the related Mortgage Loan.
The Servicer will be responsible to the Company for any loss suffered as a
result of the Servicer's failure to make and pursue timely claims under
applicable insurance policies or as a result of actions taken or omissions made
by it which cause the policies to be cancelled by the insurer.
In connection with any foreclosure proceedings that the Servicer may
institute, the Servicer may exercise the power of sale contained in the deed of
trust or in any mortgage, obtain a deed in lieu of foreclosure or otherwise
acquire title to a property underlying a Mortgage Loan by operation of law or
otherwise in accordance with the terms of the Servicing Agreement.
The Company may terminate the Servicing Agreement upon the occurrence 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
terminate the Servicing Agreement without cause upon 30 days' notice and payment
of a termination fee equal to 2% of the aggregate outstanding principal amount
of the Mortgage Loans then serviced under the Servicing Agreement. As long as
any Series 1 Preferred Shares remain outstanding, the Company may not modify,
terminate or elect not to renew the Servicing Agreement without the approval of
a majority of the Independent Directors.
As is customary in the mortgage loan servicing industry, the Servicer will
be entitled to retain any late payment charges, prepayment fees, penalties and
assumption fees collected in connection with the Mortgage Loans serviced by it.
In addition, the Servicer will receive any benefit derived from interest earned
on collected principal and interest payments between the date of collection and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds with respect to Mortgage Loans serviced by it. The
Servicing Agreement requires the Servicer to remit to the Company no later than
the 18th day of each month all principal and interest (less the servicing fee
and any reimbursements due to the Servicer) due from borrowers under Mortgage
Loans on the first day of such month and received by the Servicer on or prior to
the 15th 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
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<PAGE> 36
under applicable law and governmental regulations. The terms of a particular
Mortgage Loan or applicable law, however, may provide that the exercise of the
"due-on-sale" clause is prohibited under certain circumstances related to the
security underlying the Mortgage Loan and the buyer's ability to fulfill the
obligations under the related mortgage note. Upon any assumption of a Mortgage
Loan by a transferee, a fee equal to a specified percentage of the outstanding
principal balance of the Mortgage Loan is typically required, which sum will be
retained by the Servicer as additional servicing compensation.
As a result of the relationship between the Servicer and the Company,
certain conflicts of interest may arise. See "Risk Factors -- Relationship with
Bank and Its Affiliates; Conflicts of Interest".
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE OF THE BANK
The delinquency, foreclosure and loss experience on the portfolio of one-
to four-family first mortgage loans owned and serviced by the Bank, excluding
certain loans originated by its private banking unit, is set forth in the
following table. The portfolio of mortgage loans serviced by the Bank includes
both fixed and adjustable interest rate mortgage loans, including loans with
stated maturities of 15 to 40 years and other types of mortgage loans having a
variety of payment characteristics, and includes mortgage loans secured by
mortgaged properties in geographic locations that may not be representative of
the geographic distribution or concentration of the mortgaged properties
securing the Mortgage Loans. There can be no assurance that the delinquency,
foreclosure and loss experience set forth below with respect to the portfolio of
one- to four-family first mortgage loans owned and serviced by the Bank will be
similar to the results that may be experienced by the Company with respect to
the Mortgage Loans.
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE OF THE BANK
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------- AT OR FOR THE SIX-
MONTH PERIOD ENDED
1993 1994 1995 JUNE 30, 1996
----------------------- ----------------------- ----------------------- -----------------------
BY DOLLAR BY DOLLAR BY DOLLAR BY DOLLAR
BY AMOUNT OF BY AMOUNT OF BY AMOUNT OF BY AMOUNT OF
NO. OF LOANS NO. OF LOANS NO. OF LOANS NO. OF LOANS
LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS)
------- ------------- ------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio........ 173,825 $25,118.5 175,323 $25,513.8 170,017 $25,460.0 166,305 $26,288.7
Average Portfolio
Balance(1)........... 170,520 $24,430.7 173,760 25,286.6 175,018 25,777.7 168,285 26,099.8
Period of Delinquency
31 to 59 days........ 2,759 356.6 2,317 299.1 2,673 360.2 2,737 360.3
60 to 89 days........ 687 106.2 652 98.4 776 117.3 682 102.5
90 days or more(2)... 1,179 243.1 1,017 194.8 876 161.4 649 112.5
------- --------- ------- --------- ------- --------- ------- ---------
Total Delinquent
Loans................ 4,625 $ 705.9 3,986 592.4 4,325 $ 638.9 4,068 $ 575.2
Delinquency Ratio...... 2.66% 2.81% 2.27% 2.32% 2.54% 2.51% 2.45% 2.19%
Foreclosures
Pending(3)........... 956 $ 233.6 693 $ 162.9 1,099 $ 215.7 $ 1,064 $ 198.8
Foreclosure Ratio...... 0.55% 0.93% 0.40% 0.64% 0.65% 0.85% 0.64% 0.76%
Losses(4).............. 608 $ 68.4 975 $ 101.6 1,286 $ 112.6 465 $ 28.5
Loss Ratio(5).......... 0.36% 0.28% 0.56% 0.40% 0.73% 0.44% 1.10% 0.44%
Excess Recovery(6)..... (7) (7) (7) (7) 12 $ 0.3 1 $ 0.1
</TABLE>
- ---------------
(1) Average Portfolio Balance for the period indicated is based on end of month
balances divided by the number of months in the period indicated.
(2) Does not include Foreclosures Pending.
(3) Includes mortgage loans for which foreclosure proceedings had been
instituted and title to which had not been acquired by the Bank, a third
party or by an insurer at the date indicated.
(4) Losses are the sum of losses less net gains (Excess Recoveries) on all
mortgage loans liquidated during the period indicated. Loss for any
mortgage loan is equal to the difference between (a) the
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<PAGE> 37
sum of the outstanding principal balance plus accrued interest, lost
interest income accrued at the Bank's internal reinvestment rate from the
date title to the property securing such mortgage loan was acquired in
foreclosure or by deed in lieu of foreclosure until the date such property
was liquidated, amounts advanced by servicers or subservicers and all
liquidation expenses related to such mortgage loan and (b) all amounts
received in connection with the liquidation of the related mortgaged
property. Losses are included in the year in which they were expensed or
written down.
(5) Loss Ratios are computed by dividing the Losses during the period indicated
by the Average Portfolio Balance during such period.
(6) Excess Recovery is calculated only with respect to defaulted mortgage loans
as to which the liquidation of the related mortgaged property resulted in
recoveries in excess of the sum of the outstanding principal balance plus
accrued interest thereon, amounts advanced by servicers or subservicers and
all liquidation expenses related to such mortgage loan.
(7) Excess Recovery cannot be computed for the indicated period.
OFFICERS
The Company has eight executive officers, each of whom is described further
below under "Management". The Company does not anticipate that it will require
any employees because it has retained the Advisor to perform certain functions
pursuant to the Advisory Agreement described below under "Management -- The
Advisor". It is currently anticipated that all of the officers of the Company
will also be officers or employees of BAC, the Bank or their affiliates. The
Company will maintain corporate records and audited financial statements that
are separate from those of the Bank or any of its affiliates. None of the
officers, employees or directors of the Company will have any direct or indirect
pecuniary interest in any Mortgage Asset to be acquired or disposed of by the
Company or in any transaction in which the Company has an interest.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and that substantially all
of these Mortgage Loans will be purchased from the Bank or affiliates of the
Bank. The Company does not expect to compete with mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers or insurance companies in
acquiring its Mortgage Loans, except to the extent that the Bank may sell
Mortgage Loans to such other types of investors.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, the Advisor, the Bank or any of its affiliates is currently involved in
nor, to the Company's knowledge, currently threatened with any material
litigation with respect to the Mortgage Loans to be included in the Initial
Portfolio, other than litigation that would not have a material adverse effect
on the Company's interest in the Mortgage Loans.
36
<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors will initially be composed of seven
members, two of whom will be Independent Directors. These directors will serve
until the first annual meeting of Stockholders and until their successors are
duly elected and qualify. There is no current intention to alter the number of
directors comprising the Board of Directors. The Company currently has eight
executive officers. The Company has no employees and does not anticipate that it
will require employees. See "Business and Strategy -- Officers".
The directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Arthur D. Ringwald................... 50 Chairman of the Board and Chief Executive
Officer
Richard A. Laiderman................. 45 Director and President
Nancy M. Abreu....................... 46 Director and Chief Credit Officer
Jacqueline Legorreta Erdman.......... 39 Director
Claus Lund........................... 45 Director
Raymond R. Peters.................... 54 Director
[Additional Independent Director].... Director
</TABLE>
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Arthur D. Ringwald................... 50 Chief Executive Officer and Chairman of the
Board
Richard A. Laiderman................. 45 President and Director
John D. Kelleghan.................... 44 Chief Operating Officer
Nancy M. Abreu....................... 46 Chief Credit Officer and Director
Shaun M. Maguire..................... 46 Chief Financial Officer
George T. Hansen..................... 49 Chief Accounting Officer
Stephen E. Wagner.................... 36 Treasurer
Jeffrey L. Moering................... 51 Vice President
</TABLE>
The following is a summary of the experience of the executive officers and
directors of the Company:
NANCY M. ABREU is a Senior Vice President of the Bank. She currently is the
Senior Credit Officer of the BankAmerica Mortgage Group ("BAMG") a division of
the Bank and its affiliate, Bank of America, FSB, and is responsible for credit
risk management for BAMG's residential real estate loan portfolio. Ms. Abreu
joined the Bank in 1971.
JACQUELINE LEGORRETA ERDMAN is a Senior Consultant with Andrew Davidson &
Co., Inc., a consulting firm which provides advice regarding the management of
fixed-income securities. Ms. Erdman has also served since July 1996 as a
director of BA Mortgage Securities, Inc., a wholly-owned subsidiary of BAC. She
was a Vice President of the Bank from 1991 to 1994, when she joined Andrew
Davidson & Co., Inc.
GEORGE T. HANSEN is a Senior Vice President and Manager of External
Reporting of the Bank. Mr. Hansen joined the Bank in 1988.
JOHN D. KELLEGHAN is a Senior Vice President of the Bank and Group Finance
Officer for BAMG, with responsibility for providing finance and accounting
services to BAMG. Mr. Kelleghan joined the Bank in 1986.
RICHARD A. LAIDERMAN is a Senior Vice President of the Bank and a Senior
Vice President and Assistant Treasurer of BAC. Mr. Laiderman has responsibility
for debt and capital raising activities of the
37
<PAGE> 39
Bank and BAC, as well as short term funding, affiliate treasury operations and
employee benefit plan management. Mr. Laiderman joined the Bank in 1985.
CLAUS LUND is a Senior Vice President of the Bank and head of secondary
mortgage sales for BAMG. Mr. Lund is responsible for mortgage asset management,
sales of mortgages and other receivables and management of BAMG's mortgage
portfolio. Mr. Lund joined the Bank in 1992. Prior to 1992, Mr. Lund was
director of residential mortgage investments for SunAmerica, Inc., an insurance
holding company.
SHAUN M. MAGUIRE is a Senior Vice President of the Bank and a Senior Vice
President and Assistant Treasurer of BAC. Mr. Maguire has responsibility for
securities issuance and other capital markets transactions used for the funding
and capital management of the Bank and BAC. Mr. Maguire joined the Bank in 1988.
JEFFREY L. MOERING is a Vice President of the Bank and Portfolio Manager
for BAMG. Mr. Moering is responsible for managing the performance and
composition of the BAMG residential mortgage portfolio through loan origination
programs and capital markets transactions. Mr. Moering joined the Bank in 1985.
RAYMOND R. PETERS is a Group Executive Vice President and the Treasurer of
the Bank and an Executive Vice President and the Treasurer of BAC. Mr. Peters is
responsible for BAC's global funding, interest rate risk, investment portfolio
and capital management activities. Mr. Peters joined the Bank in 1968.
ARTHUR D. RINGWALD is a Group Executive Vice President of the Bank. As the
head of BAMG, Mr. Ringwald is responsible for management of the residential real
estate portfolio and the development of new residential real estate first
mortgage products for the Bank and its affiliates. Mr. Ringwald joined the Bank
in 1993. From 1989 to 1993, he was Executive Vice President and head of the
Residential Production Division for Sears Mortgage Corporation.
STEPHEN E. WAGNER is a Vice President of the Bank with day-to-day
responsibility for BAC's term funding and other capital markets activities. Mr.
Wagner joined the Bank in 1984.
INDEPENDENT DIRECTORS
The Charter requires that, so long as any Series 1 Preferred Shares are
outstanding, certain actions by the Company must be approved by a majority of
the Independent Directors of the Company. See "Description of Series 1 Preferred
Shares -- Independent Director Approval". For so long as there are only two
Independent Directors, any action that requires the approval of a majority of
Independent Directors must be approved by both Independent Directors.
Ms. Erdman and are the Company's initial Independent Directors.
Ms. Erdman's firm, Andrew Davidson & Co., Inc., has provided consulting services
to the Bank with regard to the Company and with regard to the Bank's management
of its residential mortgage loan program.
If, at the time of any annual meeting of the Company's stockholders, the
aggregate amount of unpaid dividends for prior dividend periods on any series of
Preferred Stock, including the Series 1 Preferred Shares, equals or exceeds an
amount equal to six quarterly dividend payments on such series of Preferred
Stock, the number of directors then constituting the Board of Directors of the
Company will be increased by two (if not already increased by two due to prior
nonpayment of dividends on Preferred Stock), and the holders of Series 1
Preferred Shares, voting together with the holders of all other outstanding
series of Preferred Stock as to which a default in dividend payments exists, 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 1 Preferred Shares -- Voting
Rights".
38
<PAGE> 40
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement and independence of its auditors. The
audit committee will also review the adequacy of the Company's internal
accounting controls. The audit committee will be comprised of Ms. Erdman, Mr.
Laiderman and .
CREDIT COMMITTEE
Upon consummation of the Offering, the Company will establish a credit
committee which will review and approve the acquisition of any additional
Mortgage Loans by the Company, will review the status of Mortgage Loans which
are delinquent and will review the terms and conditions upon which any such
Mortgage Loans are to be modified or sold by the Company. The credit committee
will initially be comprised of Ms. Abreu and Mr. Ringwald.
COMPENSATION OF DIRECTORS AND OFFICERS
For their services as directors, the Independent Directors will receive
annual compensation from the Company of $ plus a fee of $ for
attendance (in person or by telephone) at each meeting of the Board of Directors
and $ for attendance (in person or by telephone) at each committee
meeting.
The Company will not pay any compensation to its officers or to directors
who are not Independent Directors.
LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision, which eliminates such liability to the
maximum extent permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director, officer or employee or (b) any individual who, while a
director, officer or employee of the Company and at the request of the Company,
serves or has served another corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, from and against any claim or liability to which such
person may become subject or which such person may incur by reason of his or her
status as a present or former director, officer or employee of the Company. The
bylaws of the Company (the "Bylaws") obligate it, to the maximum extent
permitted by the MGCL and other applicable law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director, officer or employee who is made a party to
the proceeding by reason of service in that capacity or (b) any individual who,
while a director, officer or employee of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise and who is made a party to
the proceeding by reason of service in that capacity. The Charter and Bylaws
also permit the Company to indemnify and advance expenses to any employee or
agent of the Company.
The MGCL requires a corporation (unless its Charter provides otherwise,
which the Company's does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which such a person is made a party by reason of service in that capacity. The
MGCL permits a corporation to indemnify its present and former directors and
officers, among others,
39
<PAGE> 41
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities, unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b)the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation. In addition, the MGCL
requires the Company, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director or officer of a good faith belief that he or
she has met the standard of conduct necessary for indemnification by the Company
as authorized by the Bylaws and (b) a written agreement by or on such person's
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
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 as Advisor to administer the day-to-day operations of
the Company. The Advisor will be responsible for (i) monitoring the credit
quality of the Mortgage Assets held by the Company, (ii) advising the Company
with respect to the acquisition, management, financing, servicing and
disposition of the Company's Mortgage Assets and (iii) holding documents
relating to the Company's Mortgage Assets as custodian on behalf of the Company.
The Advisor may from time to time subcontract all or a portion of its
obligations under the Advisory Agreement to one or more of its affiliates
involved in the business of managing Mortgage Assets. If no affiliate of the
Advisor is engaged in the business of managing Mortgage Assets, the Advisor may,
with the approval of a majority of the Board of Directors, as well as a majority
of the Independent Directors, subcontract all or a portion of its obligations
under the Advisory Agreement to unrelated third parties. The Advisor will not,
in connection with the subcontracting of any of its obligations under the
Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement.
The Advisory Agreement has an initial term of one year, and may be renewed
for successive additional one-year periods upon a majority vote of the
Independent Directors. The Advisory Agreement may be terminated by the Company
at any time upon 90 days' prior notice. As long as any Series 1 Preferred Shares
remain outstanding, any decision by the Company either not to renew the Advisory
Agreement or to modify or terminate the Advisory Agreement must be approved by a
majority of the Independent Directors. The Advisor will be entitled to receive
an annual advisory fee of $ with respect to the advisory and
management services provided by it to the Company.
As a result of the relationship between the Bank and the Company, certain
conflicts of interest may arise. See "Risk Factors -- Relationship with Bank and
Its Affiliates; Conflicts of Interest".
The principal executive offices of the Advisor are located at 555
California Street, San Francisco, California 94104, telephone number (415)
622-3530.
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<PAGE> 42
BENEFITS OF THE OFFERING TO THE BANK AND ITS AFFILIATES
The Bank and its affiliates expect to realize the following benefits in
connection with the Offering and the formation of the Company:
- The Bank and BAC are required by the Comptroller and the Board of
Governors of the Federal Reserve System to maintain certain levels of
capital for regulatory purposes. The Bank has informed the Company that
the Bank anticipates that the Series 1 Preferred Shares will be treated
as capital of both the Bank and BAC for regulatory purposes. The Bank has
indicated to the Company that such treatment, together with the Company's
ability to deduct, for income tax purposes, the dividends payable on the
Series 1 Preferred Shares as a result of the Company's qualification as a
REIT, will provide each of the Bank and BAC with a more cost-effective
means of obtaining regulatory capital than if the Bank or BAC were to
issue preferred stock itself.
- The Bank will receive approximately $1 billion at the consummation of the
Offering in connection with the sale of the Initial Portfolio to the
Company (approximately $500 million of which represents new funds, after
giving effect to the Bank's purchase of the Company's Common Stock).
- The Bank will be entitled to receive advisory and servicing fees and
dividends in respect of the Common Stock. For the first 12 months
following completion of the Offering, these fees and dividends are
anticipated to be as follows:
<TABLE>
<S> <C>
Advisory Fee..................................................... $
Servicing Fee.................................................... (1)
Common Stock Dividend............................................ (2)
--------
$
========
</TABLE>
- ---------------
(1) Assumes that, for the first 12 months following completion of the Offering,
the Company holds Mortgage Loans with the same aggregate outstanding
principal balances as those Mortgage Loans included in the Initial
Portfolio. See "Business and Strategy -- Servicing" for a description of the
basis upon which the servicing fees will be calculated.
(2) The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's REIT Taxable Income
(excluding capital gains) over the amount of dividends paid in respect of
Preferred Stock. The aggregate annual dividend amount of the Series 1
Preferred Shares is $ million. Assuming that (i) the Mortgage Loans
included in the Initial Portfolio are held for a 12-month period following
completion of the Offering, (ii) principal repayments are reinvested in
additional Mortgage Loans with characteristics similar to those of the
Mortgage Loans included in the Initial Portfolio and (iii) mortgage interest
rates remain constant during such 12-month period, the Company anticipates
that the Initial Portfolio will generate REIT Taxable Income (excluding
capital gains) of approximately $ million, after payment of servicing
and advisory fees and other operating expenses, during such 12-month period.
- The Bank will also be entitled to retain any late payment charges,
prepayment fees, penalties and assumption fees collected in connection
with the Mortgage Loans serviced by it. In addition, the Bank, as
Servicer, will receive any benefit derived from interest earned on
collected principal and interest payments between the date of collection
and the date of remittance to the Company, and from net interest earned
on any tax and insurance impound funds with respect to Mortgage Loans
serviced by it.
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<PAGE> 43
DESCRIPTION OF SERIES 1 PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series 1 Preferred Shares, and is qualified in its entirety by reference to the
MGCL and to the terms and provisions of the Company's Charter, which has been
filed with the Securities and Exchange Commission (the "Commission") as an
exhibit to the Registration Statement of which this Prospectus forms a part. See
"Description of Capital Stock".
GENERAL
The Series 1 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 designation, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption as are determined by the
Company's Board of Directors. The Board of Directors has authorized the Company
to issue the Series 1 Preferred Shares.
When issued, the Series 1 Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series 1 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 1 Preferred Shares
will not be convertible into shares of Common Stock or any other class or series
of capital stock of the Company and will not be subject to any sinking fund or
other obligation of the Company for its repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Series 1 Preferred Shares will be ChaseMellon Shareholder Services, L.L.C. The
registrar for shares of Series 1 Preferred Shares will send notices to
stockholders of any meetings at which holders of the Series 1 Preferred Shares
have the right to elect directors of the Company or to vote on any other matter.
DIVIDENDS
Holders of Series 1 Preferred Shares will be entitled to receive, when, as
and if authorized and declared by the Board of Directors, out of assets of the
Company legally available for payment, an initial cash dividend of $
per share and thereafter cash dividends at the rate of % per annum of the
liquidation preference of the Series 1 Preferred Shares (equivalent to
$ per share per annum). Dividends on the Series 1 Preferred Shares, if
authorized and declared, will be payable quarterly in arrears on February 28,
May 31, August 31 and November 30 of each year, at such annual rate, commencing
on February 28, 1997. Dividends on the Series 1 Preferred Shares will not be
cumulative and, if for any reason a dividend on the Series 1 Preferred Shares is
not authorized and declared for a dividend period, the Company will have no
obligation to pay a dividend for such period, whether or not dividends on the
Series 1 Preferred Shares are authorized and declared for any future dividend
period. Each dividend will be payable to holders of record as they appear on the
stock register of the Company on such record dates, not exceeding 30 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors. Dividends will accrue from the later of the date of original issue or
the most recent dividend payment date (whether or not dividends were paid on
such date). Dividends payable on the Series 1 Preferred Shares for any period
less than a full dividend period shall be computed on the basis of twelve 30-day
months, a 360-day year and the actual number of days elapsed in a partial month
in the period. Dividends payable on the Series 1 Preferred Shares for each full
dividend period shall be computed by dividing the rate per annum by four.
So long as any Series 1 Preferred Shares are outstanding, no full dividend
shall be authorized and declared or paid or set apart for payment on any series
of capital stock of the Company ranking, as to dividends, on a parity with the
Series 1 Preferred Shares for any period unless full dividends for the then-
current dividend period on the Series 1 Preferred Shares have been or
contemporaneously are authorized and declared and paid, or authorized and
declared and a sum sufficient for the payment thereof is set apart for such
payments on the Series 1 Preferred Shares. When dividends are not so paid in
full (or a sum sufficient for such full payment is not set apart) upon the
Series 1 Preferred Shares and the shares
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of any other series of capital stock ranking on a parity as to dividends with
the Series 1 Preferred Shares, all dividends declared upon Series 1 Preferred
Shares and any other series of capital stock ranking on a parity as to dividends
with the Series 1 Preferred Shares shall be authorized and declared pro rata so
that the amount of dividends authorized and declared per share on the Series 1
Preferred Shares and such other series of capital stock shall in all cases bear
to each other the same ratio that accrued dividends per share on the Series 1
Preferred Shares (which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods) and on such other series of capital stock
bear to each other.
Unless full dividends on the Series 1 Preferred Shares have been or
contemporaneously are authorized and declared and paid, or authorized and
declared and a sum sufficient for the payment thereof set apart for payment, for
the then-current quarterly dividend period, (i) no dividends (other than
dividends paid in shares of, or options, warrants or rights to subscribe for or
purchase shares of, the Common Stock of the Company or any other stock of the
Company ranking junior to the Series 1 Preferred Shares as to the payment of
dividends and upon liquidation) shall be authorized and declared or paid or set
aside for payment and no other distribution shall be authorized and declared or
made upon the Common Stock or any other capital stock of the Company ranking
junior to the Series 1 Preferred Shares as to dividends or amounts upon
liquidation, and (ii) no Common Stock or any other capital stock of the Company
ranking junior to or on a parity with the Series 1 Preferred Shares as to
dividends or amounts upon liquidation may be redeemed, purchased or acquired for
any consideration (or any moneys to be paid to or made available for a sinking
fund for the redemption of any such stock) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series 1 Preferred Shares as to dividends and amounts upon liquidation).
Holders of Series 1 Preferred Shares will not be entitled to any dividends,
whether payable in cash or property, other than as described above, and will not
be entitled to interest, or any sum in lieu of interest, in respect of any
dividend payment.
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 indicated below, the holders of the Series 1 Preferred Shares
will not be entitled to vote. In the event the holders of Series 1 Preferred
Shares are entitled to vote as indicated below, each Series 1 Preferred Share
will be entitled to one vote on matters on which holders of the Series 1
Preferred Shares are entitled to vote.
If at any time the aggregate amount of unpaid dividends for prior dividend
periods on any series of Preferred Stock of the Company, including the Series 1
Preferred Shares, equals or exceeds an amount equal to six quarterly dividend
payments on such series of Preferred Stock, the number of directors then
constituting the Board of Directors will be increased by two (if not already
increased by two due to prior nonpayments of preference dividends), and the
holders of the Series 1 Preferred Shares, voting together with the holders of
all other series of Preferred Stock as to which such a default in dividend
payments exists, as a single class, will be entitled to elect such two
additional directors to serve on the Board of Directors. Each director elected
by the holders of shares of Preferred Stock shall continue to serve as a
director (subject to certain provisions on removal) until the annual meeting of
stockholders immediately after the Company shall have paid a full dividend on
all series of Preferred Stock for four consecutive quarters.
In the event any meeting of holders of any series of Preferred Stock,
including the Series 1 Preferred Shares, is required to elect directors, the
Secretary of the Company shall call such meeting as promptly as possible, but in
any event within 20 days after receipt of the written request of the holders of
at least 5% of any such series of Preferred Stock entitled to elect directors,
addressed to the Company at its principal office. Such meeting shall be held at
the place provided in the Bylaws of the Company for meetings of the Company's
stockholders, and upon not less than 10 nor more than 20 days' notice. If any
such meeting shall not be called within 20 days after receipt by the Secretary
of the Company of such a
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request, the holders of at least 5% of any such series of Preferred Stock
entitled to elect directors may, by written notice to the Secretary of the
Company, designate any person to call such meeting, and the person so designated
may call such meeting at the place above provided and upon not less than 10 nor
more than 20 days' notice, and for that purpose the Company will provide a list
of holders of Series 1 Preferred Shares which sets forth the name and address of
each stockholder. At any such meeting, or at any annual meeting held while the
holders of any such series of Preferred Stock have the right to elect directors,
the holders of such Preferred Stock who are present in person or by proxy will
be sufficient to constitute a quorum for such purpose at such meeting.
The affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding shares of all series of Preferred Stock of the Company, including
the Series 1 Preferred Shares, voting as a single class without regard to
series, will be required to alter or change the provisions of the Charter so as
to adversely affect the designation, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms and conditions of redemption 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 the holders of at least 66 2/3% of the outstanding shares of all
series of Preferred Stock adversely affected thereby; and provided further, that
the creation of any class or series of capital stock of the Company shall not be
deemed to have such an adverse effect, even if such class or series shall have
preference as to dividends or amounts upon liquidation over the outstanding
series of Preferred Stock.
REDEMPTION
The Series 1 Preferred Shares will not be redeemable prior to ,
2001 (except upon the occurrence of a Tax Event). On or after such date, the
Series 1 Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on not less than 30 nor more
than 60 days' notice by mail, at a redemption price of $25.00 per share, plus an
amount equal to the dividend (whether or not authorized and declared) for the
then-current quarterly dividend period accrued to but excluding the date of such
redemption, without accumulation of unpaid dividends on the Series 1 Preferred
Shares for prior dividend periods. If less than all of the outstanding Series 1
Preferred Shares are to be redeemed, the Company will select shares to be
redeemed from the outstanding shares not previously called for redemption by lot
or pro rata (as nearly as possible) or by any other method that the Board of
Directors, in its sole discretion, deems equitable.
Upon the occurrence of a Tax Event, the Company will also have the right,
for a period of 120 days, to redeem the Series 1 Preferred Shares, in whole (but
not in part) at a redemption price of $25.00 per share, plus an amount equal to
the dividend (whether or not authorized and declared) for the then-current
quarterly dividend period accrued to but excluding the date of such redemption,
without accumulation of unpaid dividends on the Series 1 Preferred Shares for
prior dividend periods. "Tax Event" means the receipt by the Company of an
opinion of a nationally recognized law firm experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of or change
(including any announced prospective change) in, the laws or treaties (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, (ii) any judicial
decision, official administrative pronouncement, published or private ruling,
regulatory procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or regulations) ("Administrative
Action") or (iii) any amendment to, clarification of or change in the official
position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification or change
is effective or such pronouncement or decision is announced on or after the date
of issuance of the Series 1 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
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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.
Any redemption may only be effected with the prior approval of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and the
Comptroller (unless at such time such approvals are not required). Under current
policies of the Federal Reserve Board and the Comptroller, such approval would
be granted only if the redemption were to be made out of the proceeds of the
issuance of another capital instrument, or if such regulators determine that the
condition and circumstances of BAC and the Bank warrant the reduction of a
source of permanent capital.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series 1 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 1 Preferred Shares upon liquidation, liquidating distributions in the
amount of $25 per share, plus an amount equal to the dividend (whether or not
authorized and declared) for the then-current quarterly dividend period, accrued
to but excluding the date of such liquidation payment, without accumulation of
unpaid dividends on the Series 1 Preferred Shares for prior dividend periods.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series 1 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 1 Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Series 1 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 1
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.
The consolidation or merger of the Company with or into any other entity,
the consolidation or merger of any other entity with or into the Company or the
sale, lease or conveyance of all or substantially all of the property or
business of the Company shall not be deemed to constitute a liquidation,
dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Charter requires that, so long as any Series 1 Preferred Shares are
outstanding, certain actions by the Company must be approved by a majority of
the Independent Directors. For so long as there are only two Independent
Directors, any action that requires the approval of a majority of Independent
Directors must be approved by both Independent Directors. See
"Management -- Independent Directors". In order to be considered "independent",
a director must not be a current officer or employee of the Company, BAC, the
Bank or any affiliate of the Bank or of any person or persons that, in the
aggregate, own more than 50% of the Common Stock of the Company. In addition,
any members of the Board of Directors elected by holders of Preferred Stock,
including the Series 1 Preferred Shares, will be deemed to be Independent
Directors for purposes of approving actions requiring the approval of a majority
of the Independent Directors.
The actions which may not be taken without the approval of a majority of
the Independent Directors include (i) the issuance of additional Preferred Stock
ranking senior to or on a parity with the Series 1 Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the aggregate amount
of net proceeds received in connection with the issuance of Preferred Stock and
Common Stock, (iii) the modification of the general dividend 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 cash or
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property distributions on the outstanding Preferred Stock and Common Stock with
respect to such year would exceed an amount equal to the sum of 105% of the
Company's REIT Taxable Income (excluding capital gains) for such year plus net
capital gains of the Company for that year, (iv) the acquisition of real estate
assets other than Mortgage Loans or Mortgage-Backed Securities (except pursuant
to foreclosure or any other remedy the Company may have in respect of a Mortgage
Loan), (v) the purchase or redemption of any shares of Common Stock, (vi) the
renewal, termination or modification of the Advisory Agreement, the termination
or modification of, or the election not to renew, the Servicing Agreement, the
subcontracting of any duties under the Advisory Agreement to third parties
unaffiliated with the Bank or the subcontracting of any servicing obligations
under the Servicing Agreement to third parties unaffiliated with the Bank if
such subcontracted servicing obligations are ones that the Bank does not
subcontract with respect to a substantial portion of the residential mortgage
loans serviced for its own account, (vii) any dissolution, liquidation or
termination of the Company prior to , 2001, (viii) any material
amendment to or modification of the Mortgage Purchase Agreement, including
without limitation any amendment to the representations, warranties and
covenants contained in such agreement made in connection with the acquisition of
additional Mortgage Loans and (ix) the determination to revoke the Company's
REIT status or the amendment of any of the Ownership Limits (defined below).
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series 1
Preferred Shares, see "Description of Capital Stock -- Restrictions on Ownership
and Transfer".
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the capital stock of the Company does
not purport to be complete and is subject in all respects to the applicable
provisions of the MGCL and the Charter.
COMMON STOCK
GENERAL
The Company is authorized by its Charter to issue up to 5,000,000 shares of
Common Stock, $1.00 par value per share. Upon consummation of the Offering and
the transactions described in "Business and Strategy -- Commencement of
Operations", the Company will have outstanding shares of Common Stock, all
of which will be held by the Bank. In addition, BAC has indicated to the Company
that, so long as any Series 1 Preferred Shares are outstanding, BAC intends to
maintain direct or indirect ownership of at least 80% of the outstanding shares
of Common Stock of the Company.
As the holder of at least 80% of the outstanding shares of Common Stock of
the Company, the Bank will be able, subject to the terms of the Series 1
Preferred Shares and of any other class or series of stock subsequently issued
by the Company, to elect and remove directors, amend the Charter and approve
other actions requiring stockholder approval under the MGCL or otherwise.
DIVIDENDS
Holders of Common Stock are entitled to receive dividends when, as and if
authorized and declared by the Board of Directors out of assets legally
available therefor, provided that, so long as any shares of Preferred Stock are
outstanding, no dividends or other distributions (including redemptions and
purchases) may be made with respect to the Common Stock unless full dividends on
the shares of all series of Preferred Stock, including accumulations in the case
of any cumulative Preferred Stock, have been paid. In order to remain qualified
as a REIT, the Company must distribute annually at least 95% of its annual REIT
Taxable Income (not including capital gains) to stockholders.
VOTING RIGHTS
Subject to the rights, if any, of the holders of any class or series of
Preferred Stock, all voting rights are vested in the Common Stock. The holders
of Common Stock are entitled to one vote per share. All of the issued and
outstanding shares of Common Stock are currently, and upon consummation of the
Offering will be, held by 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
The Company is authorized by its Charter to issue up to 100,000,000 shares
of Preferred Stock, $1.00 par value per share. Subject to limitations prescribed
by the MGCL and the Charter, the Board of Directors 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 or other rights, voting powers, restrictions,
limitations as to dividends and other distributions, 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.
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Shares of Preferred Stock, upon issuance against full payment of the
purchase price therefor and in the manner authorized by the Board of Directors,
will be fully paid and nonassessable. The specific terms of a particular class
or series of Preferred Stock other than the Series 1 Preferred Shares will be
described in Articles Supplementary to the Charter relating to that class or
series.
Articles Supplementary to the Charter relating to each class or series of
Preferred Stock other than the Series 1 Preferred Shares will set forth the
preferences and other terms of such class or series, including without
limitation the following: (1) the designation and par value of such class or
series; (2) the number of shares of such class or series, as applicable, 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 for such class or series; (4) whether dividends on such class or series
of Preferred Stock are cumulative or not and, if cumulative, the date from which
dividends on such class or series shall accumulate; (5) the provision for any
sinking fund for such class or series; (6) the terms and conditions of
redemption 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 or as otherwise deemed appropriate
by the Board of Directors; (8) any voting rights of such class or series; (9)
the relative ranking and preferences of such class or series as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company; (10) any limitations on issuance of any class or series of
Preferred Stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation, dissolution
or winding up of the affairs of the Company; and (11) any other specific terms,
preferences, rights, limitations or restrictions of such class or series.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common or Preferred Stock and
thereafter to cause the Company to issue such classified or reclassified shares
of stock will provide the Company with increased flexibility in structuring
possible future financings and in meeting other needs which might arise. The
additional shares of stock will be available for issuance without further action
by the Company's stockholders, unless such action is required by applicable law
or the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Charter contains certain restrictions on the number of shares of Common
Stock and Preferred Stock which individual stockholders may own. For the Company
to qualify as a REIT under the Code, no more than 50% in value of its
outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year (the "Five or Fewer Test"). The
capital stock of the Company must also be beneficially owned by 100 or more
persons during at least 335 days of a taxable year or during a proportionate
part of a shorter taxable year (the "One Hundred Persons Test"). The ownership
by the Bank of 100% of the shares of Common Stock of the Company will not
adversely affect the Company's REIT qualification because each stockholder of
BAC (the sole stockholder of the Bank) counts as a separate beneficial owner for
purposes of the Five or Fewer Test and the capital stock of BAC is widely held.
Further, the Charter contains restrictions on the acquisition of Preferred Stock
intended to ensure compliance with the One Hundred Persons Test. Such provisions
include a restriction that if any transfer of shares of capital stock of the
Company would cause the Company to be beneficially owned by fewer than 100
persons, such transfer shall be null and void and the intended transferee will
acquire no rights to the stock.
Subject to certain exceptions specified in the Charter, no holder of
Preferred Stock is permitted to own (including shares deemed to be owned by
virtue of the attribution provisions of the Code) more than 9.9% (the "Ownership
Limit") of the total number of the issued and outstanding shares of any class or
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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 Charter provides that shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a stockholder in excess of
the Ownership Limit (the "Excess Shares") will automatically be transferred, by
operation of law, to a trustee 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 must be repaid by the original transferee to the Company and
by the Company to the trustee; subject to applicable law, 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 in such shares shall terminate.
Proceeds of the sale shall be paid to the original transferee up to its purchase
price (or, if the original transferee did not purchase the shares, the value on
its date of acquisition) and any remaining proceeds shall be paid to a charity
to be named by the Company.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of a class or series of
issued and outstanding Preferred Stock (or the acquisition of an interest in an
entity that owns shares of such series of Preferred Stock) by an individual or
entity could cause that individual or entity (or another individual or entity)
to own constructively in excess of 9.9% of such class or series of Preferred
Stock, and thus subject such stock to the Ownership Limit. Direct or
constructive ownership in excess of the Ownership Limit would cause ownership of
the shares in excess of the limit to be transferred to the trustee.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if
the REIT Provisions are changed so as to eliminate any ownership concentration
limitation or if the ownership concentration limitation is increased. The
Charter may not be amended to alter, change, repeal or amend any of the
Ownership Limit provisions without the prior approval of a majority of the
Independent Directors.
The Charter requires that any person who beneficially owns 1% (or such
lower percentage as may be required by the Code or the Treasury Regulations) or
more 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.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder"),
or an
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affiliate of such an Interested Stockholder, are prohibited for five years after
the most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (a) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting stock of the corporation other than
shares held by the Interested Stockholder with whom (or with whose affiliate)
the business combination is to be effected, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. The Bank
beneficially owns more than ten percent of the Company's voting shares and
would, therefore, together with its affiliates (including BAC) be subject to the
business combination provisions of the MGCL. However, pursuant to the statute,
the Company has exempted any business combinations involving the Bank and any
present or future affiliate thereof and, consequently, the five-year prohibition
and the super-majority vote requirements will not apply to business combinations
between any of them and the Company. As a result, the Bank and any present or
future affiliate thereof may be able to enter into business combinations with
the Company that may not be in the best interests of its stockholders without
compliance by the Company with the super-majority vote requirements and the
other provisions of the statute.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering 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 Orrick, Herrington &
Sutcliffe LLP, and it is their opinion that such information is accurate in all
material respects. The discussion below is based on existing federal income tax
law, which is subject to change, with possible retroactive effect. The
discussion below does not address all aspects of taxation that may be relevant
in the particular circumstances of each stockholder or to certain types of
stockholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States, except to the extent discussed)
subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF
THE SERIES 1 PREFERRED 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 Provisions"),
which set forth 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 Provisions 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 Orrick, Herrington & Sutcliffe LLP, commencing with the
Company's taxable year ending December 31, 1996, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on certain factual assumptions relating to the
organization and operation of the Company and is conditioned upon certain
representations made by the Company as to factual matters, such as the
organization and expected manner of operation of the Company. In addition, this
opinion is based on the factual representations of the Company concerning its
business and Mortgage Assets set forth in this Prospectus. This opinion also is
based on existing law, which is subject to change, possibly retroactively.
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 Orrick, Herrington
& Sutcliffe LLP on a continuing basis. No assurance can be given that the actual
results of the Company's operation for any particular 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.
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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 preference 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 Provisions; (iv) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include 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.
For purposes of condition (v) above, beneficial ownership of both common
and preferred shares of a corporation will be taken into account. The Company
believes that the Series 1 Preferred Shares will be held by not less than 100
beneficial owners at all times any such Shares are outstanding. This expected
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ownership of the Series 1 Preferred Shares would allow the Company to meet
condition (v). In determining whether condition (vi) above is met, individual
shareholders of a corporation are treated as owning their proportionate shares
of any stock held by that corporation. The Company believes that the individual
ownership of stock of the Company and of BAC and of any corporate shareholders
of the Company and BAC will be sufficiently widely held for the Company to
satisfy condition (vi). In addition, the Company's Charter includes certain
restrictions regarding transfer of its shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such transfer and ownership restrictions are
described under "Description of Capital Stock -- Restrictions on Ownership and
Transfer".
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 (including interest on obligations
secured by mortgages on real property, certain "rents from real property", gain
from 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 from 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,
dividends, interest, 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 from the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) from the date of
acquisition must represent less than 30% of the Company's gross income
(including gross income from prohibited transactions) for each taxable year.
For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property", the obligation must be secured
by real property having a fair market value at the time of acquisition at least
equal to the principal amount of the loan. The term "interest" includes only an
amount that constitutes compensation for the use or forbearance of money. For
example, a fee received or accrued by a lender which is in fact a charge for
services performed for a borrower rather than a charge for the use of borrowed
money is not includible as interest; amounts earned as consideration for
entering into agreements to make loans secured by real property, although not
interest, are otherwise treated as within the 75% and 95% classes of gross
income so long as the determination of those amounts does not depend on the
income or profits of any person. By statute, the term interest does not include
any amount based on income or profits except that the Code provides that (i)
interest "based on a fixed percentage or percentages of receipts or sales" is
not excluded and (ii) when the REIT makes a loan that provides for interest
based on the borrower's receipts or sales and the borrower leases under one or
more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the event
that a REIT acquires by foreclosure property that generates income that does not
qualify as "rents from real property", such income may be treated as qualifying
for two years following foreclosure (which period may be extended by the IRS) so
long as (i) all leases entered into after foreclosure generate only qualifying
rent, (ii) only limited construction takes place and (iii) within 90 days of
foreclosure, any trade or business in which the property is used is conducted by
an independent contractor from which the REIT derives no income. In the event
the special foreclosure property rule applies to qualify otherwise
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unqualified income, the net income that qualifies only under the special rule
for foreclosure property will be subject to tax, as described above.
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 generally will be 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 tax 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,
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to monitor the purchase, holding and
disposition 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) 95% of the sum of (i) the Company's REIT Taxable Income
(computed without regard to the dividends paid deduction and the Company's net
capital gain) plus (ii) any net income from foreclosure property less the
special tax on such income, minus (B) the sum of certain items of noncash
income. Such distributions must be paid or deemed 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 corporate tax rates. The Code permits a
stockholder to elect to be treated for tax purposes as having (i) received a
distribution in the amount specified in the election and (ii) contributed the
amount thereof to the capital of the Company. In the event the Company fails to
distribute 100% of its income and capital gains, the Bank may elect to be so
treated. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirement and avoid imposition
of this excise tax.
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"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 and (iii) 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 and
distributions will not be required under the Code. 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 1 Preferred Shares that is for United States federal income tax purposes
(i) a citizen or resident of the United States, (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
DISTRIBUTIONS GENERALLY
As long as the Company qualifies as a REIT, distributions to a United
States Stockholder up to the amount of the Company's current or accumulated
earnings and profits (and not designated as capital gains dividends) will be
taken into account as ordinary income and will not be eligible for the
dividends-received deduction for corporations. Distributions that are designated
by the Company as capital gain dividends will be treated as long-term capital
gain (to the extent they do not exceed the Company's actual net capital gain for
the taxable year) without regard to the period for which the stockholder has
held its stock. However, corporate stockholders may be required to treat up to
20% of certain capital gains dividends as ordinary income, pursuant to Section
291(d) of the Code. A distribution in excess of current or accumulated earnings
and profits will first be treated as a tax-free return of capital, reducing the
tax basis in the United States Stockholder's Series 1 Preferred Shares, and a
distribution in excess of
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the United States Stockholder's tax basis in such 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 -- Annual Distribution Requirements" above. As a
result, stockholders may be required to treat as taxable dividends certain
distributions that would otherwise result in tax-free returns of capital.
Moreover, any "deficiency dividend" will be treated as a "dividend" (an ordinary
dividend or a capital gain dividend, as the case may be), regardless of the
Company's earnings and profits.
Losses incurred on the sale or exchange of Series 1 Preferred Shares held
for six months or less 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 generally 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% (by value) 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.
Distributions to certain types of tax-exempt stockholders exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code also may constitute unrelated business taxable income. Such
stockholders should consult their own tax advisors concerning the applicable
"set aside" and reserve requirements.
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 1 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, as amended
("FIRPTA"), significantly affects the federal income tax treatment of the sale
or exchange of shares in a REIT held by a Foreign
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Stockholder. Under FIRPTA, gain or loss realized on the sale or exchange of a
"United States real property interest" ("USRPI") by a foreign taxpayer is
treated by statute as effectively connected with a U.S. trade or business as a
matter of law, without regard to the particular facts and circumstances. Shares
of a corporation generally are treated as a USRPI only if the fair market value
of USRPIs owned by the corporation equals or exceeds 50% of the fair market
value of its total assets. If at no time within the five years preceding the
sale or exchange of shares in the Company the shares constituted a USRPI, gain
or loss on the sale or exchange will not be treated as effectively connected
with a U.S. trade or business by reason of FIRPTA. While ownership of real
property within the U.S. (including ownership of interests in certain entities)
is always a USRPI, a loan secured by a mortgage on U.S. real property
constitutes a USRPI only if the amounts payable by the borrower are contingent
on the income or receipts of the borrower or the property or otherwise based on
the property. Because such contingent interest is not likely to be present in
the Mortgage Loans that are expected to represent substantially all of the
assets of the Company, the Company believes it is unlikely that its shares will
be USRPIs or that it will derive significant gain from the sale or exchange of
USRPIs, although whether its shares are a USRPI or it derives income from USRPIs
will depend upon the facts as they ultimately develop. A distribution of cash to
a Foreign Stockholder that is not attributable to gain from sales or exchanges
by the Company of USRPIs and not designated by the Company as a capital gain
dividend is not subject to FIRPTA, but generally will be subject to the
withholding of United States federal income tax at a rate of 30%, unless (i) a
lower treaty rate applies or (ii) the Foreign Stockholder files an IRS Form 4224
with the withholding agent certifying that the investment to which the
distribution relates is effectively connected to a United States trade or
business of such Foreign Stockholder. A Foreign Stockholder who receives a
distribution that has been subject to such withholding tax may file a claim for
refund to the extent the withholding has been imposed on a portion of such
distributions representing amounts in excess of current and accumulated earnings
and profits. Under FIRPTA, distributions of proceeds attributable to gain from
the Company's sale or exchange of a USRPI are subject to income tax at the
normal capital gains rates applicable to United States stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of a nonresident alien individual). Also, these distributions may be
subject to a 30% branch profits tax in the hands of a corporate Foreign
Stockholder not entitled to a treaty exemption or reduced rate of tax. Treasury
Regulations require the withholding of 35% of any distribution that could be
designated by the Company as a capital gain dividend. This amount is creditable
against the Foreign Stockholder's tax liability. It should be noted that the 35%
withholding tax rate on capital gain dividends is higher than the 28% maximum
rate on capital gains of individuals. Capital gain dividends not attributable to
gain on the sale or exchange of USRPIs are not subject to United States taxation
if there is no requirement of withholding.
If the shares of the Company do constitute a USRPI (or did so constitute
within the previous five years), gain or loss on the sale or exchange of the
shares will be treated as effectively connected with the conduct of a U.S. trade
or business unless one or more special rules apply to preclude U.S. taxation.
If the Company is a "domestically-controlled REIT", a sale of Series 1
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, by Foreign Stockholders. Because the
Series 1 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 1
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 1 Preferred Shares were not "regularly traded"
(as defined by applicable Treasury Regulations) on an established securities
market (e.g., the New York Stock Exchange, on which the Series 1 Preferred
Shares will be listed) during the quarter in which the Series 1 Preferred Shares
were sold or (ii) even if the Series 1 Preferred Shares were "regularly traded",
the selling stockholder held, directly or indirectly, more than 5% of the Series
1 Preferred Shares at any time during the five-year period ending on the date of
disposition. The applicable Treasury Regulations
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that define "regularly traded" for this purpose provide that a security traded
on an established securities market located in the United States will be
"regularly traded" for any calendar quarter during which it is regularly quoted
by brokers or dealers making a market in such security. In the event that the
Series 1 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 1 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 1 Preferred Shares that
occurs within a calendar quarter during which the Series 1 Preferred Shares were
not "regularly traded" and the shares were a USRPI.
If the gain on the sale of the Company's Series 1 Preferred Shares were
subject to taxation under FIRPTA, the Foreign Stockholder would be subject to
the same treatment as a United States Stockholder with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of a nonresident alien individual). Notwithstanding the
foregoing, capital gain from sale of shares of a REIT not subject to FIRPTA will
nonetheless be taxable to a Foreign Stockholder who is an individual (under
rules generally applicable to United States Stockholders) if such person is in
the United States for 183 days or more during the taxable year of disposition
and certain other conditions apply. In any event, a purchaser of Series 1
Preferred Shares from a Foreign Stockholder will not be required under FIRPTA to
withhold on the purchase price if the purchased Series 1 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 1
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 1
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
1 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
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such information reporting and backup withholding requirements. Backup
withholding with respect to a Foreign Stockholder is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
Foreign Stockholder will be allowed as a credit against any United States
federal income tax liability of such Foreign Stockholder. If withholding results
in an overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
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ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series 1 Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the ownership of Series 1 Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series 1 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 1 Preferred Shares should consider whether the ownership of
Series 1 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 1 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 United States Department of Labor ("DOL") 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. Secs. 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 of 1933, as amended (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 1 Preferred Shares will be registered under the
Securities Act and the Exchange Act within the time periods specified in the
Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of a 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 1 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
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<PAGE> 62
combination, affect the finding that such securities are "freely transferable".
The Company believes that any restrictions imposed on the transfer of the Series
1 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 1 Preferred Shares to be "freely transferable".
A Plan should not acquire or hold the Series 1 Preferred Shares if the
Company's underlying assets will be treated as Plan Assets. However, the Company
believes that under the Plan Asset Regulation the Series 1 Preferred Shares
should be treated as "publicly-offered securities" and, accordingly, the
underlying assets of the Company should not be considered to be Plan Assets of
any Plan or IRA investing in the Series 1 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
Plan Assets. As discussed above, the assets of the Company under current law do
not appear likely to be considered Plan Assets of the Plans receiving Series 1
Preferred Shares as a result of the Offering. However, if the assets of the
Company were deemed to be Plan Assets of the Plans, 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 1 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 with a party in interest involving the
furnishing of goods, services or facilities; or (d) a transaction involving the
transfer of Plan assets to, or use of Plan assets by or for the benefit of, a
party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan Assets in its own interest or for its own account, from acting
in any capacity in any transaction involving the Plan on behalf of a party (or
representing a party) whose interests are adverse to the interests of the Plan
and from receiving any consideration for its own account from any party dealing
with the Plan in connection with a transaction involving Plan Assets. Similar
provisions in Section 4975 of the Code apply to transactions between
disqualified persons and Plans and IRAs and result in the imposition of excise
taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company's engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its taxexempt status. The other penalties for prohibited
transactions would not apply.
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<PAGE> 63
Thus, the acquisition of the Series 1 Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter (as defined below), the
Company, the Bank, BAC 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 1 Preferred
Shares were acquired pursuant to and in accordance with one or more "class
exemptions" issued by the DOL, 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 1 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% (by value) of the capital stock of the Company if the Company is
"predominantly held" by qualified trusts. See "Federal Income Tax
Considerations -- Taxation of United States Stockholders -- Treatment of
Tax-Exempt Stockholders".
EXPERTS
The financial statement of the Company as of October 14, 1996 included in
this Prospectus has been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon included herein. Such financial statement is
included herein in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
RATINGS
It is expected that the Series 1 Preferred Shares will be rated by
Moody's Investors Service, Inc. and by Standard and Poor's Ratings
Services. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. No person is obligated to maintain any rating on
the Series 1 Preferred Shares, and, accordingly, there can be no assurance that
the ratings assigned to the Series 1 Preferred Shares upon initial issuance will
not be lowered or withdrawn by the assigning rating organization at any time
thereafter.
CERTAIN LEGAL MATTERS
The validity of the Series 1 Preferred Shares offered hereby and certain
tax matters described under "Federal Income Tax Considerations" will be passed
upon for the Company by Orrick, Herrington & Sutcliffe LLP, San Francisco,
California. The validity of the Series 1 Preferred Shares will be passed upon
for the Underwriters by Sullivan & Cromwell, Los Angeles, California. Orrick,
Herrington & Sutcliffe LLP and Sullivan & Cromwell will rely upon the opinion of
Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, as to certain matters of
Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part) on Form S-11 (the "Registration Statement")
under the Securities Act with respect to the Series 1
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<PAGE> 64
Preferred Shares offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information regarding the Company and the Series 1
Preferred Shares offered hereby, reference is made to the Registration Statement
and the exhibits thereto.
The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the following regional offices of the Commission: 7
World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400, Chicago,
Illinois 60661 and at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005. Copies of such materials can be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
The Charter provides that the Company shall maintain its status as a
reporting company under the Exchange Act for so long as any of the Series 1
Preferred Shares are outstanding.
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<PAGE> 65
GLOSSARY
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the Company
pursuant to which the Bank will (i) administer the day-to-day operations of the
Company, (ii) monitor the credit quality of the Mortgage Assets held by the
Company, (iii) advise the Company with respect to the acquisition, management,
financing, servicing and disposition of the Mortgage Assets and (iv) maintain
custody of the documents related to the 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.
"BAC" means BankAmerica Corporation, a Delaware corporation and the parent
of the Bank.
"Bank" means Bank of America National Trust and Savings Association, a
national banking association and the parent of the Company.
"Board of Directors" means the board of directors of the Company.
"Bylaws" means the bylaws of the Company.
"Charter" means the Amended and Restated Articles of Incorporation of the
Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock, par value $1.00 per share, of the
Company.
"Company" means BankAmerica Preferred Capital Corporation, a Maryland
corporation.
"Comptroller" means the Office of the Comptroller of the Currency of the
United States.
"DOL" means the United States Department of Labor.
"Delinquent" with respect to a Mortgage Loan means that a payment of
principal or interest is more than 30 days past due.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a stockholder in excess of
the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"5 year FIRM" means a Mortgage Loan which bears interest at a rate that is
fixed for the first 60 monthly payments and adjusts annually thereafter as if
the Mortgage Loan were a One-Year ARM.
"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.
"Foreign Stockholders" means holders of Series 1 Preferred Shares that are
for United States federal income tax purposes non-resident alien individuals,
foreign corporations, foreign partnerships or foreign trusts and estates.
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"Gross Margin" means, with respect to a Mortgage Loan that is an ARM, the
applicable percentage which, when added to the applicable index, totals the
current interest rate payable by the borrower under such ARM (without taking
into account any interest rate caps or minimum interest rates).
"Independent Directors" means the members of the Board of Directors who are
not current officers or employees of the Company, BAC, the Bank or any affiliate
of the Bank, or any person or persons that, in the aggregate, own more than 50%
of the Company's outstanding shares of Common Stock, or is a director elected by
the holders of Preferred Stock of the Company.
"Initial Portfolio" means the initial portfolio of Mortgage Loans to be
purchased by the Company from the Bank.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
"IRS" means the United States Internal Revenue Service.
"Lifetime interest rate cap" means the maximum interest rate that may
accrue during any period over the term of a 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 of the mortgaged property
underlying such Mortgage Loan at origination and (ii) if the Mortgage Loan was
made to finance the acquisition of property, the purchase price of the mortgaged
property.
"MGCL" means the Maryland General Corporation Law, as amended.
"Mortgage Assets" means real estate mortgage assets.
"Mortgage-Backed Securities" means securities that represent interests in
or obligations backed by pools of Mortgage Loans.
"Mortgage Loans" means whole loans secured by first mortgages or deeds of
trust on single-family (one- to four-unit) residential properties.
"Mortgage Purchase Agreement" means the Mortgage Loan Purchase and
Warranties Agreement between the Company and the Bank.
"Net 5 ARM" means a Mortgage Loan with no principal amortization in the
first 60 months that bears interest at a rate that is fixed for the first 60
monthly payments, and thereafter bears interest at a rate which adjusts
semi-annually and is equal to the current Treasury Average Index plus the Gross
Margin.
"Offering" means the offering of Series 1 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, based on the Treasury Index.
"Ownership Limit" means the provision in the Charter limiting any person
from owning (including shares deemed to be owned by virtue of the attribution
provisions of the Code) more than 9.9% of the total number of the issued and
outstanding shares of any class or series of Preferred Stock.
"Plan" means an employee benefit plan subject to ERISA.
"Plan Asset Regulation" means the DOL regulations governing what
constitutes the assets of a Plan or IRA for purposes of ERISA and the related
prohibited transaction provisions of the Code.
"Plan Assets" means the assets of a Plan or IRA.
"Preferred Stock" means the preferred stock, $1.00 par value per share, of
the Company.
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"Prospectus" means this prospectus, as the same may be amended or
supplemented.
"Rate Adjustment Date" means, with respect to any Mortgage Loan, a date on
which the interest rate on such Mortgage Loan adjusts.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series 1 Preferred
Shares.
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" means Sections 856 through 860 of the Code and the
applicable Treasury Regulations.
"REIT Taxable Income" shall have the meaning set forth in "Federal Income
Tax Considerations -- Taxation of the Company -- Annual Distribution
Requirements".
"Securities Act" means the Securities Act of 1933, as amended.
"Series 1 Preferred Shares" means the Company's Noncumulative Preferred
Stock, Series 1, par value $1.00 per share, liquidation preference $25.00 per
share, offered hereby.
"Servicer" means the Bank in its role as servicer of the Mortgage Loans
under the Servicing Agreement.
"Servicing Agreement" means the Mortgage Loan Servicing Agreement between
the Company and the Bank.
"7 year FIRM" means a Mortgage Loan which bears interest at a rate that is
fixed for the first 84 monthly payments and adjusts annually thereafter as if
the Mortgage Loan were a One-Year ARM.
"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 1 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 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 year FIRM" means a Mortgage Loan that bears interest at a rate that is
fixed for the first 120 monthly payments and adjusts annually thereafter as if
the Mortgage Loan were a One-Year ARM.
"3 year FIRM" means a Mortgage Loan that bears interest at a rate that is
fixed for the first 36 monthly payments and adjusts annually thereafter as if
the Mortgage Loan were a One-Year ARM.
"TIN" means Taxpayer Identification Number.
"Treasury Average Index" means, with respect to a Net 5 ARM, the
twelve-month average of the monthly yield on actively traded U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve in Statistical Release G.13 (415) or any similar publication.
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"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) and G.13 (415) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank or
by any U.S. Government department or agency.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means those underwriters to which the Company will sell the
Series 1 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 Stockholder" means a holder of Series 1 Preferred Shares
that is for United States federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.
"USRPI" means United States real property interest.
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INDEX TO FINANCIAL STATEMENT
<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Balance Sheet of BankAmerica Preferred Capital Corporation as of October 14, 1996...... F-3
Note to Financial Statement............................................................ F-4
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
BankAmerica Preferred Capital Corporation
We have audited the accompanying balance sheet of BankAmerica Preferred
Capital Corporation as of October 14, 1996. This balance sheet is the
responsibility of BankAmerica Preferred Capital Corporation's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of BankAmerica Preferred Capital
Corporation at October 14, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Francisco, California
October 15, 1996
F-2
<PAGE> 71
BANKAMERICA PREFERRED CAPITAL CORPORATION
BALANCE SHEET
OCTOBER 14, 1996
<TABLE>
<S> <C>
ASSETS
Cash.............................................................................. $1,000
------
STOCKHOLDER'S EQUITY
Common Stock, par value $1.00 per share, 1000 shares authorized; 1000 shares
issued and outstanding......................................................... $1,000
------
</TABLE>
See Note to Balance Sheet.
F-3
<PAGE> 72
BANKAMERICA PREFERRED CAPITAL CORPORATION
NOTE TO BALANCE SHEET
1. ORGANIZATION
BankAmerica Preferred Capital Corporation (the "Company"), a wholly-owned
subsidiary of Bank of America National Trust and Savings Association (the
"Bank"), was incorporated on October 4, 1996 in the State of Maryland.
The Company intends to acquire, hold and manage real estate mortgage assets
financed by common and preferred stock offerings and expects to generate income
for distribution to its preferred and common stockholders primarily from the net
interest income derived from its investments in real estate mortgage assets. The
Company intends to purchase these assets from the Bank and its affiliates at
their estimated fair market values. The Company intends to operate in a manner
that permits it to elect, and it intends to elect, to be subject to tax as a
real estate investment trust for federal income tax purposes. The Company has
not had any operations as of October 14, 1996.
The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
proceeds from a sale of common stock to the Bank. If the public offering is not
consummated, the Bank will pay any offering costs of the Company.
F-4
<PAGE> 73
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
, 1996 (the "Underwriting Agreement") among the Company, the Bank
and the underwriters named below (the "Underwriters"), the Company has agreed
that the Company will sell to each of the Underwriters, and each of such
Underwriters for which Goldman, Sachs & Co. are acting as representatives has
severally agreed to purchase from the Company, the respective number of Series 1
Preferred Shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES 1
UNDERWRITER PREFERRED SHARES
-------------------------------------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co.................................................
Total..................................................... ,000,000
========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series 1 Preferred Shares
offered hereby, if any are taken.
The Company and the Underwriters have agreed that a total of
shares of the Series 1 Preferred Shares will initially be allocated for sale to
certain institutional investors, and that the underwriting discount with respect
to such shares will be $ per share. The actual total underwriting discount and
total proceeds of the Offering to the Company will depend on the number of
shares actually purchased by such institutional investors, which may be greater
or less than the initial allocation.
The Underwriters propose to offer the Series 1 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 1 Preferred Shares are released for sale
to the public, the offering price and other selling terms may from time to time
be varied by the representatives.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially similar to the
Series 1 Preferred Shares or which are convertible or exchangeable into
securities which are substantially similar to the Series 1 Preferred Shares
without the prior written consent of the representatives, except for the Series
1 Preferred Shares offered in connection with the Offering.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Series 1 Preferred Shares offered by them.
Prior to the Offering, there has been no public market for the Series 1
Preferred Shares.
The Series 1 Preferred Shares will be listed on the New York Stock
Exchange. In order to meet one of the requirements for listing the Series 1
Preferred Shares on the New York Stock Exchange, the Underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
holders.
The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to affiliates of the Company, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
U-1
<PAGE> 74
- ---------------------------------------------------------
- ---------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY 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 AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
SUMMARY OF TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Contents....................... 2
Prospectus Summary...................... 3
Risk Factors............................ 11
The Company............................. 17
Use of Proceeds......................... 18
Capitalization.......................... 19
Business and Strategy................... 20
Management.............................. 37
Benefits of the Offering to the Bank and
Its Affiliates........................ 41
Description of Series 1 Preferred
Shares................................ 42
Description of Capital Stock............ 47
Federal Income Tax Considerations....... 51
ERISA Considerations.................... 60
Experts................................. 62
Ratings................................. 62
Certain Legal Matters................... 62
Additional Information.................. 62
Glossary................................ 64
Index to Financial Statement............ F-1
Underwriting............................ U-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE COMMENCEMENT OF
THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED 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.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
,000,000 SHARES
BANKAMERICA PREFERRED
CAPITAL
CORPORATION
(A SUBSIDIARY OF BANK OF
AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION)
% NONCUMULATIVE
PREFERRED STOCK, SERIES 1
(LIQUIDATION PREFERENCE
$25.00 PER SHARE)
------------------
PROSPECTUS
------------------
GOLDMAN, SACHS & CO.
REPRESENTATIVES OF THE UNDERWRITERS
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee.................................................... $ 303.03
NASD Fee............................................................ $ *
Listing Fee.......................................................... $ *
Printing and Engraving Expenses..................................... $ *
Legal Fees and Expenses............................................. $ *
Accounting Fees and Expenses........................................ $ *
Blue Sky Fees and Expenses.......................................... $ *
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 issued 1,000
shares of Common Stock, par value $1.00 per share, to Bank of America National
Trust and Savings Association. Simultaneously with the consummation of the
Offering, the Company will issue an aggregate of ,000 shares of Common
Stock to Bank of America National Trust and Savings Association. The description
of these transactions in the Prospectus under the heading "Business and
Strategy -- Commencement of Operations" 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.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision, which eliminates such liability to the
maximum extent permitted by the Maryland law.
The Charter of the Company authorizes it, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present former director, officer or employee or (b) any individual who, while a
director, officer or employee of the Company and at the request of the Company,
serves or has served another corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise from and against any claim or liability to which such
person may become subject or which such person may incur by reason of his or her
status as a present or former director, officer or employee of the Company. The
Bylaws of the Company obligate it, to the maximum extent permitted by Maryland
law or other applicable law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director, officer or employee who is made a party to the proceeding by
reason of service in that capacity or (b) any individual who, while a director,
officer or employee of the Company and at the request of the Company, serves or
has
II-1
<PAGE> 76
served another corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of service in
that capacity. The Charter and Bylaws also permit the Company to indemnify and
advance expenses to any employee or agent of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which such person is made a party by reason of service in that capacity. The
MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of service in those or other
capacities, unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
(i) was committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of a good faith
belief that he or she has met the standard of conduct necessary for
indemnification by the Company as authorized by the Bylaws and (b) a written
agreement by or on his or her behalf to repay the amount paid or reimbursed by
the Company if it shall ultimately be determined that the standard of conduct
was not met.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See page F-1 of the Prospectus for the financial statement included as part
of the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------------------
<S> <C> <C>
1* -- Form of Underwriting Agreement among the Company, the Bank and the Underwriters
3(a)(i) -- Charter of the Company
3(a)(ii)* -- Amended and Restated Charter of the Company
3(b) -- Bylaws of the Company
4* -- Specimen of certificate representing Series 1 Preferred Shares
5* -- Opinion of Orrick, Herrington & Sutcliffe LLP, counsel to the Company, relating
to Series 1 Preferred Shares
8* -- Opinion of Orrick, Herrington & Sutcliffe LLP, counsel to the Company, relating
to certain tax matters
10(a)* -- Form of Mortgage Loan Purchase and Warranties Agreement between the Company and
the Bank
</TABLE>
II-2
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------------------
<S> <C> <C>
10(b)* -- Form of Mortgage Loan Servicing Agreement between the Company and the Bank
10(c)* -- Form of Advisory Agreement between the Company and the Bank
23(a) -- Consent of Ernst & Young LLP
23(b)* -- Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit 5)
24 -- Powers of Attorney
</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 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
posteffective 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-3
<PAGE> 78
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 San Francisco, California, on the 15th day of October, 1996.
BANKAMERICA PREFERRED CAPITAL
CORPORATION
By /s/ SHAUN M. MAGUIRE
--------------------------------------
Shaun M. Maguire
Chief Financial Officer
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
- ------------------------------------- ---------------------------------- -----------------
<C> <S> <C>
ARTHUR D. RINGWALD* Chairman of the Board and October 15, 1996
- ------------------------------------- Chief Executive Officer
Arthur D. Ringwald (Principal Executive Officer)
/s/ SHAUN M. MAGUIRE Chief Financial Officer October 15, 1996
- ------------------------------------- (Principal Financial Officer)
Shaun M. Maguire
/s/ GEORGE T. HANSEN Chief Accounting Officer October 15, 1996
- ------------------------------------- (Principal Accounting Officer)
George T. Hansen
Directors:
RICHARD A. LAIDERMAN*
- -------------------------------------
Richard A. Laiderman
NANCY M. ABREU*
- -------------------------------------
Nancy M. Abreu
JACQUELINE LEGORRETA ERDMAN*
- -------------------------------------
Jacqueline Legorreta Erdman
CLAUS LUND*
- -------------------------------------
Claus Lund
RAYMOND R. PETERS*
- -------------------------------------
Raymond R. Peters
A Majority of the Board of Directors
*By /s/ CAROLYN CHEW HAMILTON
- -------------------------------------
(Carolyn Chew Hamilton,
Attorney-in-Fact)
Dated: October 15, 1996
</TABLE>
II-4
<PAGE> 79
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------------- -------------------------------------------------------------------------------
<C> <S> <C> <C>
1 * -- Form of Underwriting Agreement among the Company, the Bank and the Underwriters
3 (a)(i) -- Charter of the Company
3 (a)(ii)* -- Amended and Restated Charter of the Company
3 (b) -- Bylaws of the Company
4 * -- Specimen of certificate representing Series 1 Preferred Shares
5 * -- Opinion of Orrick, Herrington & Sutcliffe LLP, counsel to the Company, relating
to Series 1 Preferred Shares
8 * -- Opinion of Orrick, Herrington & Sutcliffe LLP, counsel to the Company, relating
to certain tax matters
10 (a)* -- Form of Mortgage Loan Purchase and Warranties Agreement between the Company and
the Bank
10 (b)* -- Form of Mortgage Loan Servicing Agreement between the Company and the Bank
10 (c)* -- Form of Advisory Agreement between the Company and the Bank
23 (a) -- Consent of Ernst & Young LLP
23 (b)* -- Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit 5)
24 -- Powers of Attorney
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3(A)(I)
BANKAMERICA PREFERRED CAPITAL CORPORATION
ARTICLES OF INCORPORATION
THIS IS TO CERTIFY THAT:
First: The undersigned, James J. Hanks, Jr., whose address is c/o Ballard
Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202,
being at least eighteen (18) years of age, does hereby form a corporation under
the general laws of the State of Maryland.
Second: The name of the corporation (which is hereinafter called the
"Corporation") is:
BANKAMERICA PREFERRED CAPITAL CORPORATION
Third: The Corporation is formed for the purpose of carrying on any lawful
business.
Fourth: The address of the principal office of the Corporation in this
State is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202.
Fifth: The name and address of the resident agent of the Corporation are
The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202.
The resident agent is a Maryland corporation.
Sixth: The total number of shares of stock which the Corporation has
authority to issue is 1,000 shares, $1.00 par value per share, all of one class.
The aggregate par value of all authorized shares having a par value is
$1,000.00.
Seventh: The Corporation shall have a board of 7 directors unless the
number is increased or decreased in accordance with the Bylaws of the
Corporation. However, the number of directors shall never be less than the
minimum number required by the Maryland General Corporation Law. The initial
directors are:
Nancy M. Abreu
Jacqueline Legorreta Erdman
Richard A. Laiderman
Claus Lund
Raymond R. Peters
Arthur D. Ringwald
The one initial vacancy in the Board of Directors may be filled by the
initial directors or their successors at any time prior to the first annual
meeting of stockholders of the Corporation.
Eighth: (a) The Corporation reserves the right to make any amendment of
the charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in the charter, of any shares
of outstanding stock.
(b) The Board of Directors of the Corporation may 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,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable, subject to such restrictions or limitations, if
any, as may be set forth in the Bylaws of the Corporation.
(c) The Board of Directors of the Corporation may, by articles
supplementary, classify or reclassify any unissued stock from time to time by
setting or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of the stock.
Ninth: No holder of shares of stock of any class shall have any preemptive
right to subscribe to or purchase any additional shares of any class, or any
bonds or convertible securities of any nature;
<PAGE> 2
provided, however, that the Board of Directors may, in authorizing the issuance
of shares of stock of any class, confer any preemptive right that the Board of
Directors may deem advisable in connection with such issuance.
Tenth: To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers, no director or
officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this
Article, nor the adoption or amendment of any other provision of the charter or
Bylaws inconsistent with this Article, shall apply to or affect in any respect
the applicability of the preceding sentence with respect to any act or failure
to act which occurred prior to such amendment, repeal or adoption.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 4th day of October, 1996.
/s/ James J. Hanks, Jr.
--------------------------------------
2
<PAGE> 1
EXHIBIT 3(B)
BANKAMERICA PREFERRED CAPITAL CORPORATION
BYLAWS
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of the Corporation shall
be located at such place or places as the Board of Directors may designate.
Section 2. Additional Offices. The Corporation may have additional offices
at such places as the Board of Directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. Annual Meeting. An annual meeting of the stockholders for the
election of directors and the transaction of any business within the powers of
the Corporation shall be held on a date and at the time set by the Board of
Directors during the month of May in each year.
Section 3. Special Meetings. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting.
Such request shall state the purpose of such meeting and the matters proposed to
be acted on at such meeting. The secretary shall inform such stockholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting. Unless requested by the stockholders entitled to cast a majority of all
the votes entitled to be cast at such meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding twelve
months.
Section 4. Notice. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting is called, either
by mail or by presenting it to such stockholder personally or by leaving it at
his residence or usual place of business. If mailed, such notice shall be deemed
to be given when deposited in the United States mail addressed to the
stockholder at his post office address as it appears on the records of the
Corporation, with postage thereon prepaid.
Section 5. Scope of Notice. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.
Section 6. Organization. At every meeting of stockholders, the chairman of
the board, if there be one, shall conduct the meeting or, in the case of vacancy
in office or absence of the chairman of the board, one of the following officers
present shall conduct the meeting in the order stated: the vice chairman of the
board, if there be one, the president, the chief operating officer, the chief
financial officer, the treasurer, the vice presidents in their order of rank and
seniority, or a chairman chosen by the
3
<PAGE> 2
stockholders entitled to cast a majority of the votes which all stockholders
present in person or by proxy are entitled to cast, shall act as chairman, and
the secretary, or, in his absence, an assistant secretary, or in the absence of
both the secretary and assistant secretaries, a person appointed by the chairman
shall act as secretary.
Section 7. Quorum. At any meeting of stockholders, the presence in person
or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If, however,
such quorum shall not be present at any meeting of the stockholders, the
stockholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from time to time to a date not more
than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 8. Voting. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of stockholders duly called and
at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the charter of the Corporation. Unless
otherwise provided in the charter, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
Section 9. Proxies. A stockholder may cast the votes entitled to be cast
by the shares of the stock owned of record by him either in person or by proxy
executed in writing by the stockholder or by his duly authorized attorney in
fact. Such proxy shall be filed with the secretary of the Corporation before or
at the time of the meeting. No proxy shall be valid after eleven months from the
date of its execution, unless otherwise provided in the proxy.
Section 10. Voting of Stock by Certain Holders. Stock of the Corporation
registered in the name of a corporation, partnership, trust or other entity, if
entitled to be voted, may be voted by the president or a vice president, a
general partner or trustee thereof, as the case may be, or a proxy appointed by
any of the foregoing individuals, unless some other person who has been
appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such stock. Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it shall
not be voted at any meeting and shall not be counted in determining the total
number of outstanding shares entitled to be voted at any given time, unless they
are held by it in a fiduciary capacity, in which case they may be voted and
shall be counted in determining the total number of outstanding shares at any
given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
4
<PAGE> 3
Notwithstanding any other provision of the charter of the Corporation or
these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article
of the Annotated Code of Maryland (or any successor statute) shall not apply to
any acquisition by any person of shares of stock of the Corporation. This
section may be repealed, in whole or in part, at any time, whether before or
after an acquisition of control shares and, upon such repeal, may, to the extent
provided by any successor bylaw, apply to any prior or subsequent control share
acquisition.
Section 11. Inspectors. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting. Such
inspectors shall ascertain and report the number of shares represented at the
meeting based upon their determination of the validity and effect of proxies,
count all votes, report the results and perform such other acts as are proper to
conduct the election and voting with impartiality and fairness to all the
stockholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting. If
there is more than one inspector, the report of a majority shall be the report
of the inspectors. The report of the inspector or inspectors on the number of
shares represented at the meeting and the results of the voting shall be prima
facie evidence thereof.
Section 13. Voting by Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
Section 14. Action by Written Consent. Unless otherwise provided in the
charter, any action required or permitted to be taken at any annual or special
meeting of stockholders of the Corporation may be taken without a meeting,
without prior notice except as otherwise provided by applicable law, and without
a vote, if a consent in writing setting forth the action so taken shall be
signed by each stockholder entitled to vote on the matter. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who would be entitled to vote and
who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors.
Section 2. Number, Tenure and Qualifications. At any regular meeting or at
any special meeting called for that purpose, a majority of the entire Board of
Directors may establish, increase or decrease the number of directors, provided
that the number thereof shall never be less than the minimum number required by
the Maryland General Corporation Law, nor more than 15, and further provided
that the tenure of office of a director shall not be affected by any decrease in
the number of directors.
Section 3. Annual and Regular Meetings. An annual meeting of the Board of
Directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.
Section 4. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board, president or by
a majority of the directors then in office. The person or persons authorized to
call special meetings of the Board of Directors may fix any place, either within
or without the State of Maryland, as the place for holding any special meeting
of the Board of Directors called by them.
Section 5. Notice. Notice of any special meeting of the Board of Directors
shall be delivered personally or by telephone, facsimile transmission, United
States mail or courier to each director at his business or residence address.
Notice by personal delivery, by telephone or a facsimile transmission shall
5
<PAGE> 4
be given at least two days prior to the meeting. Notice by mail shall be given
at least five days prior to the meeting and shall be deemed to be given when
deposited in the United States mail properly addressed, with postage thereon
prepaid. Telephone notice shall be deemed to be given when the director is
personally given such notice in a telephone call to which he is a party.
Facsimile transmission notice shall be deemed to be given upon completion of the
transmission of the message to the number given to the Corporation by the
director and receipt of a completed answer-back indicating receipt. Neither the
business to be transacted at, nor the purpose of, any annual, regular or special
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 6. Quorum. A majority of the directors shall constitute a quorum
for transaction of business at any meeting of the Board of Directors, provided
that, if less than a majority of such directors are present at said meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice, and provided further that if, pursuant to the charter of
the Corporation or these Bylaws, the vote of a majority of a particular group of
directors is required for action, a quorum must also include a majority of such
group.
The directors present at a meeting which has been duly called and convened
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough directors to leave less than a quorum.
Section 7. Voting. The action of the majority of the directors present at
a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for such
action by applicable statute.
Section 8. Telephone Meetings. Directors may participate in a meeting by
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 9. Informal Action by Directors. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting, if a consent in writing to such action is signed by each director and
such written consent is filed with the minutes of proceedings of the Board of
Directors.
Section 10. Vacancies. If for any reason any or all the directors cease to
be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Any vacancy on the Board of Directors for any cause
other than an increase in the number of directors shall be filled by a majority
of the remaining directors, although such majority is less than a quorum. Any
vacancy in the number of directors created by an increase in the number of
directors may be filled by a majority vote of the entire Board of Directors. Any
individual so elected as director shall hold office until the next annual
meeting of stockholders and until his successor is elected and qualifies.
Section 11. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors and/or a
stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed compensation
as determined by the board for attending committee meetings.
Section 12. Loss of Deposits. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.
Section 13. Surety Bonds. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
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<PAGE> 5
Section 14. Reliance. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
Section 15. Certain Rights of Directors, Officers, Employees and
Agents. The directors shall have no responsibility to devote their full time to
the affairs of the Corporation. Any director or officer, employee or agent of
the Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.
ARTICLE IV
COMMITTEES
Section 1. Number, Tenure and Qualifications. The Board of Directors may
appoint from among its members an Executive Committee, an Audit Committee and
other committees, composed of one or more directors, to serve at the pleasure of
the Board of Directors.
Section 2. Powers. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 3. Meetings. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A majority
of the members of the committee shall constitute a quorum for the transaction of
business at any meeting of the committee. The act of a majority of the committee
members present at a meeting shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any
two members of any committee may fix the time and place of its meeting unless
the Board shall otherwise provide. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another director to act in the place of such
absent member. Each committee shall keep minutes of its proceedings.
Section 4. Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. Informal Action by Committees. Any action required or permitted
to be taken at any meeting of a committee of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
Section 6. Vacancies. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. General Provisions. The officers of the Corporation shall
include a chairman of the board, a chief executive officer, a president, a
secretary and a treasurer and may include a, a vice chairman of the board, one
or more vice presidents, a chief operating officer, a chief financial officer,
one or more assistant secretaries and one or more assistant treasurers. In
addition, the Board of Directors
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<PAGE> 6
may from time to time appoint such other officers with such powers and duties as
they shall deem necessary or desirable. The officers of the Corporation shall be
elected annually by the Board of Directors at the first meeting of the Board of
Directors held after each annual meeting of stockholders, except that the chief
executive officer may appoint one or more vice presidents, assistant secretaries
and assistant treasurers. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient.
Each officer shall hold office until his successor is elected and qualifies or
until his death, resignation or removal in the manner hereinafter provided. Any
two or more offices may be held by the same person. In its discretion, the Board
of Directors may leave unfilled any office except that of president, treasurer
and secretary. Election of an officer or agent shall not of itself create
contract rights between the Corporation and such officer or agent.
Section 2. Removal and Resignation. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board, the
president or the secretary. Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The acceptance
of a resignation shall not be necessary to make it effective unless otherwise
stated in the resignation. Such resignation shall be without prejudice to the
contract rights, if any, of the Corporation.
Section 3. Vacancies. A vacancy in any office may be filled by the Board
of Directors for the balance of the term.
Section 4. Chief Executive Officer. The Board of Directors may designate a
chief executive officer. In the absence of such designation, the president shall
be the chief executive officer of the Corporation. The chief executive officer
shall have general responsibility for implementation of the policies of the
Corporation, as determined by the Board of Directors, and for the management of
the business and affairs of the Corporation.
Section 5. Chief Operating Officer. The Board of Directors may designate a
chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. Chief Financial Officer. The Board of Directors may designate a
chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 7. Chairman of the Board. The Board of Directors shall designate a
chairman of the board. The chairman of the board shall preside over the meetings
of the Board of Directors and of the stockholders at which he shall be present.
The chairman of the board shall perform such other duties as may be assigned to
him by the Board of Directors.
Section 8. President. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief operating
officer by the Board of Directors, the president shall be the chief operating
officer. He may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or agent of the
Corporation or shall be required by law to be otherwise executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the Board of Directors from time to time.
Section 9. Vice Presidents. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time
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<PAGE> 7
to time may be assigned to him by the president or by the Board of Directors.
The Board of Directors may designate one or more vice presidents as executive or
senior vice president or as vice president for particular areas of
responsibility. The executive vice presidents shall be senior in rank to all
other vice presidents.
Section 10. Secretary. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder; (e)
have general charge of the share transfer books of the Corporation; and (f) in
general perform such other duties as from time to time may be assigned to him by
the chief executive officer, the president or by the Board of Directors.
Section 11. Treasurer. The treasurer shall have the custody of the funds
and securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. In the absence of a designation of a chief financial officer by the
Board of Directors, the treasurer shall be the chief financial officer of the
Corporation.
The treasurer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and Board of Directors, at the regular meetings of
the Board of Directors or whenever it may so require, an account of all his
transactions as treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, the treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 12. Assistant Secretaries and Assistant Treasurers. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or treasurer, respectively, or by the
president or the Board of Directors. The assistant treasurers shall, if required
by the Board of Directors, give bonds for the faithful performance of their
duties in such sums and with such surety or sureties as shall be satisfactory to
the Board of Directors.
Section 13. Salaries. The salaries and other compensation of the officers
shall be fixed from time to time by the Board of Directors or a committee
thereof and no officer shall be prevented from receiving such salary or other
compensation by reason of the fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any officer or
agent to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Corporation and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the Board of Directors and upon the Corporation
when authorized or ratified by action of the Board of Directors.
Section 2. Checks and Drafts. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or agent of the Corporation in
such manner as shall from time to time be determined by the Board of Directors.
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<PAGE> 8
Section 3. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
designate.
ARTICLE VII
STOCK
Section 1. Certificates. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chairman of the board, the chief executive officer, the
president or a vice president and countersigned by the secretary or an assistant
secretary or the treasurer or an assistant treasurer and may be sealed with the
seal, if any, of the Corporation. The signatures may be either manual or
facsimile. Certificates shall be consecutively numbered; and if the Corporation
shall, from time to time, issue several classes of stock, each class may have
its own number series. A certificate is valid and may be issued whether or not
an officer who signed it is still an officer when it is issued. Each certificate
representing shares which are restricted as to their transferability or voting
powers, which are preferred or limited as to their dividends or as to their
allocable portion of the assets upon liquidation or which are redeemable at the
option of the Corporation, shall have a statement of such restriction,
limitation, preference or redemption provision, or a summary thereof, plainly
stated on the certificate. If the Corporation has authority to issue stock of
more than one class, the certificate shall contain on the face or back a full
statement or summary of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of each
class of stock and, if the Corporation is authorized to issue any preferred or
special class in series, the differences in the relative rights and preferences
between the shares of each series to the extent they have been set and the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series. In lieu of such statement or summary, the certificate may
state that the Corporation will furnish a full statement of such information to
any stockholder upon request and without charge. If any class of stock is
restricted by the Corporation as to transferability, the certificate shall
contain a full statement of the restriction or state that the Corporation will
furnish information about the restrictions to the stockholder on request and
without charge.
Section 2. Transfers. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock
will be subject in all respects to the charter of the Corporation and all of the
terms and conditions contained therein.
Section 3. Replacement Certificate. Any officer designated by the Board of
Directors may direct a new certificate to be issued in place of any certificate
previously issued by the Corporation alleged to have been lost, stolen or
destroyed upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing the issuance
of a new certificate, an officer designated by the Board of Directors may, in
his discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or the owner's legal
representative to advertise the same in such manner as he shall require and/or
to give bond, with sufficient surety, to the Corporation to indemnify it against
any loss or claim which may arise as a result of the issuance of a new
certificate.
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<PAGE> 9
Section 4. Closing of Transfer Books or Fixing of Record Date. The Board
of Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of stockholders, not less
than ten days, before the date on which the meeting or particular action
requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide that
the stock transfer books shall be closed for a stated period but not longer than
20 days. If the stock transfer books are closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the stock transfer books are not closed for
the determination of stockholders, (a) the record date for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day on which the notice of meeting is mailed
or the 30th day before the meeting, whichever is the closer date to the meeting;
and (b) the record date for the determination of stockholders entitled to
receive payment of a dividend or an allotment of any other rights shall be the
close of business on the day on which the resolution of the directors, declaring
the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. Stock Ledger. The Corporation shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. Fractional Stock; Issuance of Units. The Board of Directors may
issue fractional stock or provide for the issuance of scrip, all on such terms
and under such conditions as they may determine. Notwithstanding any other
provision of the charter or these Bylaws, the Board of Directors may issue units
consisting of different securities of the Corporation. Any security issued in a
unit shall have the same characteristics as any identical securities issued by
the Corporation, except that the Board of Directors may provide that for a
specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The fiscal year of the Corporation shall end on December 31 of each year.
ARTICLE IX
DISTRIBUTIONS
Section 1. Authorization. Dividends and other distributions upon the stock
of the Corporation may be authorized and declared by the Board of Directors,
subject to the provisions of law and the charter of the Corporation. Dividends
and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter.
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<PAGE> 10
Section 2. Contingencies. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board of
Directors may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. Seal. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation and
the year of its incorporation and the words "Incorporated Maryland." The Board
of Directors may authorize one or more duplicate seals and provide for the
custody thereof.
Section 2. Affixing Seal. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland and other applicable law in
effect from time to time, the Corporation shall indemnify and, without requiring
a preliminary determination of the ultimate entitlement to indemnification,
shall pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any individual who is a present or former director or officer
or employee of the Corporation and who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director, officer or employee of the Corporation and at the request of the
Corporation, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Corporation may, with
the approval of its Board of Directors, provide such indemnification and advance
for expenses to a person who served a predecessor of the Corporation in any of
the capacities described in (a) or (b) above the Corporation or a predecessor of
the Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
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ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of the
Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Directors or the holders of the Common Stock shall have the
exclusive power to adopt, alter or repeal any provision of these Bylaws and to
make new Bylaws. The Board of Directors may not alter or repeal any provision of
these Bylaws specifically approved by the holders of Common Stock.
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<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' and to the
use of our report dated October 15, 1996, in the Registration Statement (Form
S-11) and related Prospectus of BankAmerica Preferred Capital Corporation for
the registration of 40,000 shares of its noncumulative preferred stock.
ERNST & YOUNG LLP
San Francisco, California
October 15, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as Chairman of the Board and Chief Executive
Officer of BankAmerica Preferred Capital Corporation and file with the
Securities and Exchange Commission pursuant to the Securities Act of 1933 a
registration statement and any amendments covering the public offering of
preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ ARTHUR D. RINGWALD
------------------------------------
Arthur D. Ringwald
[Chairman of the Board and Chief Executive Officer]
4144626
<PAGE> 2
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as Chief Financial Officer of BankAmerica Preferred
Capital Corporation and file with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 a registration statement and any
amendments covering the public offering of preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ SHAUN M. MAGUIRE
------------------------------------
Shaun M. Maguire
[Chief Financial Officer]
4144626
<PAGE> 3
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as Chief Accounting Officer of BankAmerica
Preferred Capital Corporation and file with the Securities and Exchange
Commission pursuant to the Securities Act of 1933 a registration statement and
any amendments covering the public offering of preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ GEORGE HANSEN
------------------------------------
George Hansen
[Chief Accounting Officer]
4144626
<PAGE> 4
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as a Director of BankAmerica Preferred Capital
Corporation and file with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 a registration statement and any amendments covering the
public offering of preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ NANCY M. ABREU
------------------------------------
Nancy M. Abreu
[Director]
4144626
<PAGE> 5
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as a Director of BankAmerica Preferred Capital
Corporation and file with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 a registration statement and any amendments covering the
public offering of preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ JACQUELINE LEGORRETA ERDMAN
------------------------------------
Jacqueline Legorreta Erdman
[Director]
4144626
<PAGE> 6
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as a Director of BankAmerica Preferred Capital
Corporation and file with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 a registration statement and any amendments covering the
public offering of preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ RICHARD A. LAIDERMAN
------------------------------------
Richard A. Laiderman
[Director]
4144626
<PAGE> 7
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as a Director of BankAmerica Preferred Capital
Corporation and file with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 a registration statement and any amendments covering the
public offering of preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ CLAUS LUND
------------------------------------
Claus Lund
[Director]
4144626
<PAGE> 8
POWER OF ATTORNEY
I hereby appoint CHERYL SOROKIN, JEFFREY R. LAPIC, and CAROLYN CHEW
HAMILTON, and each of them, my attorneys-in-fact, each with full power of
substitution, to sign for me as a Director of BankAmerica Preferred Capital
Corporation and file with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 a registration statement and any amendments covering the
public offering of preferred stock.
This power of attorney, unless earlier revoked or terminated, will
terminate on January 31, 1998.
Dated: October 15, 1996
/s/ RAYMOND R. PETERS
------------------------------------
Raymond R. Peters
[Director]
4144626
