<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
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
----------------
HARRIS PREFERRED CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
----------------
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
(312) 461-2121
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
----------------
THOMAS R. SIZER
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH COPIES TO:
STEVEN L. CLARK VINCENT J. PISANO
CHAPMAN AND CUTLER SKADDEN, ARPS, SLATE, MEAGHER
111 WEST MONROE STREET & FLOM LLP
CHICAGO, ILLINOIS 60603 919 THIRD AVENUE
(312) 845-3799 NEW YORK, NEW YORK 10022
(212) 735-3000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Noncumulative Exchangeable 10,000,000
Preferred Stock, Series A...... shares $25.00 $250,000,000 $75,758
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</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee.
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1997
PROSPECTUS
10,000,000 SHARES
HARRIS PREFERRED CAPITAL CORPORATION
% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED SHARES
LOGO OF
HARRIS TRUST AND SAVINGS BANK
-----------
Harris Preferred Capital Corporation (the "Company") is hereby offering (the
"Offering") 10,000,000 shares of its % Noncumulative Exchangeable Preferred
Stock, Series A, par value $.01 per share (the "Series A Preferred Shares").
Dividends on the Series A Preferred Shares are payable at the rate of %
per annum of the liquidation preference (an amount equal to $ per annum
per share) if, when and as declared by the Board of Directors of the Company.
Dividends are not cumulative and, if declared, are payable quarterly in arrears
on the thirtieth day of March, June, September and December in each year,
commencing December 30, 1997. If no dividend is declared on the Series A
Preferred Shares by the Company for a quarterly dividend period, holders of the
Series A Preferred Shares will have no right to receive a dividend for that
period, and the Company will have no obligation to pay a dividend for that
period, whether or not dividends are declared and paid for any future period.
Dividends in each dividend period shall accrue from the first day of such
period, whether or not declared or paid in the prior period. Each of the Series
A Preferred Shares will be exchanged automatically for one newly issued %
Noncumulative Preferred Share, Series A (a "Bank Preferred Share") of Harris
Trust and Savings Bank (the "Bank"), on the occurrence of an Exchange Event (as
defined).
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, INCLUDING THE FOLLOWING:
. A significant decline in interest rates could have an adverse effect on
the Company;
. Dividends are not cumulative;
. A substantial portion of the Company's assets will initially consist of
limited recourse obligations;
. Series A Preferred Shares may be exchanged for Bank Preferred Shares in
the event the Bank is experiencing financial difficulties; the Bank
Preferred Shares will not be listed on any exchange and therefore will be
an illiquid investment;
. Federal regulators of the Bank could impose restrictions on the operations
of the Company or the Company's ability to pay dividends;
. Geographic concentration in Illinois and Arizona of properties securing
the Company's initial portfolio;
. The Company may not qualify as a REIT for federal income tax purposes and
would therefore be subject to federal income tax on its taxable income at
regular corporate rates; and
. Lack of prior operating history of the Company.
(continued on next page)
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $ $ $
- --------------------------------------------------------------------------------
Total(4)................................. $ $ $
- --------------------------------------------------------------------------------
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</TABLE>
(1) Plus accrued dividends, if any, from 1997.
(2) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
(4) In addition, the Bank will make a capital contribution to the Company in an
amount equal to $250,000,000.
-----------
The Series A Preferred Shares are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Series A
Preferred Shares offered hereby will be made in New York, New York on or about
, 1997.
-----------
MERRILL LYNCH & CO. NESBITT BURNS SECURITIES INC.
-----------
The date of this Prospectus is , 1997.
<PAGE>
(continued from previous page)
The Series A Preferred Shares are not redeemable prior to , 2002
(except upon the occurrence of a Tax Event, as described herein). On and after
, 2002, the Series A Preferred Shares may be redeemed for cash at
the option of the Company, in whole or in part, at any time and from time to
time, at the principal amount thereof, plus the quarterly accrued and unpaid
dividend, if any, thereon. The Company may not redeem the Series A Preferred
Shares without prior approval from the Board of Governors of the Federal
Reserve System or appropriate successor federal regulatory agency (the "Board
of Governors"). The Series A Preferred Shares are not subject to any sinking
fund or mandatory redemption and are not convertible into any other securities
of the Company.
Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued Bank Preferred Share in the event
(i) the Bank becomes less than "adequately capitalized" under regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended, (ii) the Bank is placed into conservatorship or
receivership, (iii) the Board of Governors directs such exchange in writing
because, in its sole discretion and even if the Bank is not less than
"adequately capitalized," the Board of Governors anticipates that the Bank may
become less than "adequately capitalized" in the near term, or (iv) the Board
of Governors in its sole discretion directs in writing an exchange in the
event that the Bank has a Tier 1 risk-based capital ratio of less than 5% (the
"Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED
INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A
PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE
BANK SET FORTH ELSEWHERE IN THIS PROSPECTUS. The Bank believes, however, that
based on various factors, including the Bank's financial condition, the
potential effect of non-payment of dividends on the Bank's business and the
Bank's understanding of the Board of Governors' policies and procedures, the
likelihood of an Exchange Event occurring is extremely remote.
In the event of the Automatic Exchange, the Bank Preferred Shares would
constitute a new series of preferred shares of the Bank, would have the same
dividend rights, liquidation preference, redemption options and other
attributes as the Series A Preferred Shares, except that the Bank Preferred
Shares would not be listed on the New York Stock Exchange, Inc. (the "NYSE"),
and would rank pari passu in terms of cash dividend payments and liquidation
preference with any outstanding shares of preferred stock of the Bank. In
addition, the Bank's deposits and its secured, senior, general and
subordinated debt would rank senior to the Bank Preferred Shares. Holders of
Series A Preferred Shares cannot exchange their Series A Preferred Shares for
Bank Preferred Shares voluntarily, and, absent the occurrence of the Automatic
Exchange, holders of Series A Preferred Shares will have no dividend, voting,
liquidation preference or other rights with respect to the Bank or any
security of the Bank. See "Description of Series A Preferred Shares--Automatic
Exchange."
Prior to this Offering, there has been no market for the Series A Preferred
Shares. Application has been made to list the Series A Preferred Shares on the
NYSE. Listing is subject to the Company's fulfilling all the requirements of
the NYSE. If approved for listing, the trading of the Series A Preferred
Shares on the NYSE is expected to commence within 30 days after the initial
delivery of the Series A Preferred Shares. The Bank does not intend to apply
for listing of the Bank Preferred Shares on any national securities exchange
or for quotation of the Bank Preferred Shares through the Nasdaq Stock Market.
There can be no assurance as to the liquidity of the trading markets for the
Series A Preferred Shares or the Bank Preferred Shares, or that an active
public market for the Series A Preferred Shares or the Bank Preferred Shares
would develop or be maintained.
The Company has been formed for the purpose of providing investors with the
opportunity to invest in residential mortgages and other real estate assets.
The Company's principal business objective is to acquire, hold, finance and
manage assets consisting of obligations secured by real property, as well as
certain other qualifying REIT assets (the "Mortgage Assets"). All of the
shares of the Company's common stock, par value $1.00 per share (the "Common
Stock"), are owned by the Bank. The Company expects that all or substantially
all of its Mortgage Assets will be acquired from the Bank and affiliates of
the Bank. Initially, approximately $358 million of the Mortgage Assets (the
"Initial Mortgage Assets") will consist of obligations issued by the Bank (the
"Bank Secured Obligations") that are recourse only to the Securing Mortgage
Loans (as defined) that are secured by real property located primarily in
Illinois and Arizona. The principal amount of the Bank Secured Obligations
will constitute approximately 80% of the principal amount of the Securing
Mortgage Loans. See "Business and Strategy--Description of Initial Mortgage
Assets" and "--Description of Securing Mortgage Loans."
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, 1997. No individual is permitted to beneficially own more than 5%
of any series of preferred stock of the Company, including the Series A
Preferred Shares. Related transfer restrictions are described under
"Description of Capital Stock--Restrictions on Ownership and Transfer."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A
PREFERRED SHARES. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING,
THE PURCHASE OF SERIES A PREFERRED SHARES TO COVER SYNDICATE SHORT POSITIONS
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
THE SERIES A PREFERRED SHARES AND THE BANK PREFERRED SHARES DO NOT EVIDENCE
DEPOSITS WITH THE BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER INSURER.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 4
The Company.............................................................. 4
The Bank................................................................. 5
Risk Factors............................................................. 7
The Offering............................................................. 8
The Formation............................................................ 10
Benefits to the Bank..................................................... 10
Business and Strategy.................................................... 11
Tax Status of the Company................................................ 13
RISK FACTORS.............................................................. 14
Interest Rate Risk....................................................... 14
Dividends Not Cumulative................................................. 14
Limited Recourse Nature of Certain Mortgage Assets....................... 14
Certain Risks Associated with the Bank................................... 14
Bank Preferred Shares Will Not Be Listed on any Exchange................. 15
Dividend and Other Regulatory Restrictions on Operations of the Company.. 15
Geographic Concentration................................................. 15
Tax Risks................................................................ 16
Dependence upon the Advisor and Servicer................................. 17
Relationship with the Bank and Its Affiliates; Conflicts of Interest..... 17
No Operating History..................................................... 18
No Credit Enhancement or Special Hazard Insurance........................ 18
Real Estate Market Conditions............................................ 18
Delays in Liquidating Defaulted Mortgage Loans........................... 18
Legal Considerations..................................................... 18
Special Risks Relating to Commercial Mortgage Loans...................... 19
Environmental Considerations............................................. 19
Risk of Future Revisions in Policies and Strategies by Board of
Directors............................................................... 19
Risks Associated with Leverage........................................... 19
No Third Party Valuation of the Mortgage Assets; No Arm's-Length
Negotiations with Affiliates............................................ 20
No Prior Market for Series A Preferred Shares............................ 20
THE COMPANY............................................................... 20
USE OF PROCEEDS........................................................... 20
CAPITALIZATION............................................................ 21
BUSINESS AND STRATEGY..................................................... 22
General.................................................................. 22
Dividend Policy.......................................................... 22
Liquidity and Capital Resources.......................................... 23
General Description of Mortgage Assets................................... 23
Description of the Bank Secured Obligations.............................. 24
Management Policies and Programs......................................... 25
Description of Securing Mortgage Loans................................... 27
Description of Initial Mortgage-Backed Securities........................ 32
Servicing................................................................ 32
Employees................................................................ 33
Competition.............................................................. 34
Legal Proceedings........................................................ 34
MANAGEMENT................................................................ 34
Directors and Executive Officers......................................... 34
Independent Directors.................................................... 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audit Committee.......................................................... 35
Compensation of Directors and Officers................................... 35
Limitations on Liability of Directors and Officers....................... 36
The Advisor.............................................................. 36
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION........................... 37
The Formation............................................................ 37
Benefits to the Bank..................................................... 38
DESCRIPTION OF SERIES A PREFERRED SHARES.................................. 39
General.................................................................. 39
Dividends................................................................ 39
Automatic Exchange....................................................... 40
Voting Rights............................................................ 41
Redemption............................................................... 42
Rights Upon Liquidation.................................................. 43
Independent Director Approval............................................ 43
Restrictions on Ownership................................................ 44
DESCRIPTION OF CAPITAL STOCK.............................................. 44
Common Stock............................................................. 44
Preferred Stock.......................................................... 44
Restrictions on Ownership and Transfer................................... 45
Super-majority Director Approval......................................... 46
Business Combinations.................................................... 46
Control Share Acquisitions............................................... 47
U.S. FEDERAL INCOME TAX CONSIDERATIONS.................................... 47
General.................................................................. 47
Taxation of the Company.................................................. 48
Failure to Qualify....................................................... 52
Tax Treatment of Automatic Exchange...................................... 52
Taxation of United States Stockholders................................... 52
Certain United States Federal Income Tax Considerations Applicable to
Foreign Holders......................................................... 53
Information Reporting Requirements and Backup Withholding Tax............ 54
Other Tax Consequences................................................... 54
ERISA CONSIDERATIONS...................................................... 54
General.................................................................. 54
Plan Asset Regulation.................................................... 55
Effect of Plan Asset Status.............................................. 56
Prohibited Transactions.................................................. 56
Unrelated Business Taxable Income........................................ 57
THE BANK.................................................................. 57
Certain Information Regarding the Bank................................... 57
Selected Consolidated Financial and Other Data........................... 58
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 64
Description of Bank Preferred Shares..................................... 66
UNDERWRITING.............................................................. 66
EXPERTS................................................................... 68
RATINGS................................................................... 68
LEGAL MATTERS............................................................. 69
AVAILABLE INFORMATION..................................................... 69
GLOSSARY.................................................................. 69
INDEX TO COMPANY FINANCIAL STATEMENT...................................... CF-1
INDEX TO BANK FINANCIAL STATEMENTS........................................ BF-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. The offering by Harris
Preferred Capital Corporation (the "Company") of 10,000,000 shares of its %
Noncumulative Exchangeable Preferred Stock, Series A, par value $.01 per share
(the "Series A Preferred Shares"), is referred to herein as the "Offering."
Capitalized terms used herein and not otherwise defined are as defined in the
Glossary appearing elsewhere in this Prospectus.
THE COMPANY
Harris Preferred Capital Corporation is a newly formed Maryland corporation
incorporated on September 24, 1997, pursuant to the Maryland General
Corporation Law ("MGCL"). The Company's principal business objective is to
acquire, hold, finance and manage assets consisting of a limited recourse note
or notes issued by Harris Trust and Savings Bank (the "Bank") secured by real
estate mortgage assets and other obligations secured by real property, as well
as certain other qualifying REIT assets (the "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 shares of the Company's common stock, par value $1.00 per
share (the "Common Stock"), are owned by the Bank. The Bank has indicated to
the Company that, for as long as any Series A Preferred Shares are outstanding,
the Bank intends to maintain direct or indirect ownership of at least 80% of
the outstanding Common Stock of the Company. The Company has been formed by the
Bank to provide investors with the opportunity to invest in residential
mortgages and other real estate assets and to provide the Bank with a cost-
effective means of raising capital for federal regulatory purposes.
The Company and the Bank are undertaking the Offering for two principal
reasons: (i) the qualification of the Series A Preferred Shares as Tier 1
capital of the Bank for U.S. banking regulatory purposes under relevant
regulatory capital guidelines, as a result of the treatment of the Series A
Preferred Shares as a minority interest in a consolidated subsidiary of the
Bank, and (ii) the tax deductibility of the dividends payable on the Series A
Preferred Shares, as a result of the Company's qualification as a REIT.
Each Series A Preferred Share will be exchanged automatically (the "Automatic
Exchange") for one newly issued % Noncumulative Preferred Shares, Series A,
of the Bank (a "Bank Preferred Share") in the event (i) the Bank becomes less
than "adequately capitalized" under regulations established pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991, as amended
("FDICIA"), (ii) the Bank is placed into conservatorship or receivership, (iii)
the Board of Governors of the Federal Reserve System or appropriate successor
federal regulatory agency (the "Board of Governors") directs such exchange in
writing because, in its sole discretion and even if the Bank is not less than
"adequately capitalized," the Board of Governors anticipates that the Bank may
become less than "adequately capitalized" in the near term, or (iv) the Board
of Governors in its sole discretion directs in writing an exchange in the event
that the Bank has a Tier 1 risk-based capital ratio of less than 5.0% (the
"Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR THE BANK HAS BEEN PLACED INTO
CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A PREFERRED
SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET
FORTH UNDER "THE BANK." See also "Description of Series A Preferred Shares--
Automatic Exchange." The Bank will be considered to be less than "adequately
capitalized" under the regulations if it has (i) a Tier 1 leverage ratio of
less than 4.0%, (ii) a Tier 1 risk-based capital ratio of less than 4.0%, or
(iii) a total risk-based capital ratio of less than 8.0%. Tier 1 capital
consists of common shareholder's equity, noncumulative perpetual preferred
stock, and minority interests in consolidated subsidiaries, less certain
intangible assets and investments in certain subsidiaries. Total capital
consists of Tier 1 capital plus supplementary capital (which includes
cumulative perpetual preferred stock, qualifying subordinated debt, and a
limited amount of the allowance for
4
<PAGE>
loan and lease losses) to the extent such supplementary capital does not exceed
100% of Tier 1 capital, less certain equity investments. For purposes of the
regulations, the Bank's capital category is determined as of the most recent
date (i) certain quarterly financial reports are required to be filed with the
regulators; (ii) a final report of examination has been delivered to the Bank;
or (iii) the Bank is notified in writing by the Board of Governors of its
capital category or a change in such category. For its fiscal years ended
December 31, 1996, 1995 and 1994, the Bank's Tier 1 leverage ratio was 6.65%,
6.44% and 6.60%, its Tier 1 risk-based capital ratio was 7.44%, 7.37% and
7.82%, and its total risk-based capital ratio was 10.74%, 10.86% and 11.22%,
respectively. Based on unaudited results, at September 30, 1997, the Bank's
Tier 1 leverage ratio was 6.61%, its Tier 1 risk-based capital ratio was 7.38%,
and its total risk-based capital ratio was 10.63%. After giving effect to the
Offering, those ratios for September 30, 1997, would have been %, %
and % respectively.
Initially, a substantial portion of the Mortgage Assets of the Company (the
"Initial Mortgage Assets") will consist of obligations issued by the Bank (the
"Bank Secured Obligations") that are recourse only to the Securing Mortgage
Loans (as defined herein). The Bank Secured Obligations will mature October 1,
2027, and the proceeds thereof (net of obligations and expenses) are expected
to be reinvested in additional Mortgage Assets as described in "Business and
Strategy--General Description of Mortgage Assets" and "--Management Policies
and Programs."
The principal executive offices of the Company are located at 111 West Monroe
Street, Chicago, Illinois 60690, and its telephone number is (312) 461-2121.
THE BANK
The Bank is a wholly owned subsidiary of Harris Bankcorp, Inc., a multibank
holding company incorporated under the laws of the State of Delaware,
headquartered in Chicago and registered under the Bank Holding Company Act of
1956, as amended. At September 30, 1997, the Bank was conducting business from
60 domestic branch offices, an international banking facility, and 96 automated
teller machines ("ATMs") in the Chicago area. At September 30, 1997, the Bank
had total assets of $15.3 billion, total deposits of $10.3 billion, total loans
(net of unearned income) of $8.4 billion and total stockholder's equity of $1.3
billion. Harris Bankcorp, Inc., the Bank's parent, is a wholly owned subsidiary
of Bankmont Financial Corp., a wholly owned U.S. subsidiary of Bank of
Montreal.
The Bank Preferred Shares will be issued only upon the occurrence of the
Exchange Event. The Bank Preferred Shares will not be registered with the
Securities and Exchange Commission (the "Commission").
5
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
---------------------- ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net interest income (FTE
basis)................... $ 326,625 $ 299,418 $ 403,979 $ 360,697 $ 345,548 $ 331,616 $ 352,102
Provision for loan
losses................... 46,555 43,307 57,382 42,756 37,308 52,265 55,326
Noninterest income........ 229,705 192,387 265,500 276,384 257,108 263,126 266,979
Noninterest expense....... 385,879 329,319(1) 446,446(1) 420,072 468,814(2) 417,862 428,560
Provision for income
taxes/FTE adjustment..... 46,540 44,846 62,570 64,967 28,592 45,158 39,834
Cumulative effect of
change in accounting for
income taxes............. -- -- -- -- -- 1,782 --
Net income................ 77,356 74,333 103,081 109,286 67,942 77,675 97,361
FINANCIAL CONDITION DATA
(PERIOD END):
Total assets.............. 15,291,169 15,112,902 14,206,666 11,970,485 11,928,006 10,224,452 9,581,034
Loans receivable, net..... 8,382,298 7,859,330 8,147,180 7,459,857 6,356,771 5,924,320 5,300,023
Deposits.................. 10,321,268 10,000,953 9,726,205 7,030,551 7,015,586 6,552,316 6,070,590
Shareholder's equity...... 1,250,375 1,156,355 1,192,566 837,241 729,731 734,451 695,134
RATIOS:
Performance ratios:
Return on average
assets................. 0.69% 0.76% 0.77% 0.91% 0.62% 0.79% 0.98%
Return on average
equity................. 8.50% 10.47%(1) 10.20%(1) 14.07% 9.49%(2) 11.11% 14.73%
Net interest margin..... 3.44% 3.56% 3.53% 3.55% 3.94% 3.93% 4.14%
Noninterest expense to
average assets......... 2.59% 2.52% 3.34% 3.49% 4.30% 4.23% 4.27%
Asset quality ratios:
Nonperforming assets to
total loans............ 0.32% 0.30% 0.23% 0.50% 1.03% 1.06% 1.76%
Allowance for loan loss
to nonperforming
assets................. 404% 468% 586% 251% 139% 152% 100%
Allowance for loan loss
to total loans......... 1.28% 1.39% 1.33% 1.26% 1.42% 1.61% 1.77%
Allowance for loan loss
to total nonperforming
loans.................. 416% 471% 605% 256% 142% 170% 105%
Net charge-offs to
average loans.......... 0.78% 0.59% 0.62% 0.57% 0.70% 0.99% 1.03%
Bank regulatory capital
ratios:
Tier 1 leverage ratio... 6.61% 6.69% 6.65% 6.44% 6.60% 7.15% 7.36%
Tier 1 risk-based ratio. 7.38% 7.39% 7.44% 7.37% 7.82% 8.24% 8.47%
Total risk-based ratio.. 10.63% 10.75% 10.74% 10.86% 11.22% 12.05% 12.48%
</TABLE>
- --------
(1) In September 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund ("SAIF"). The one-time special assessment of
$16.7 million ($10.0 million after-tax) was recorded during third quarter
1996. Excluding the SAIF assessment, return on equity would have been
11.88% and 11.19% for the nine months ended September 30, 1996, and the
year ended December 31, 1996, respectively.
(2) In 1994, a one-time $55.3 million charge ($33.4 million after-tax) was
recorded resulting from management's decision to absorb the impact of
higher interest rates on mortgage-backed securities held in certain
customer accounts of HTSB's Securities Lending unit. Excluding the effect
of this charge, return on equity would have been 14.16%.
6
<PAGE>
RISK FACTORS
THE PURCHASE OF SERIES A PREFERRED SHARES OFFERED HEREBY IS SUBJECT TO
CERTAIN RISKS. SEE "RISK FACTORS" COMMENCING ON PAGE 14. Among such risks are
the following:
. Because the rate at which dividends are to be paid is fixed and many of the
Securing Mortgage Loans have interest rates that are adjustable, a significant
decline in interest rates might adversely affect the Company's cash flow and
its ability to pay dividends on the Series A Preferred Shares, especially
following the maturity of the Initial Mortgage Assets.
. Dividends on Series A Preferred Shares are not cumulative. Consequently, if
the Board of Directors of the Company (the "Board of Directors") does not
declare a dividend on the Series A Preferred Shares for any quarterly period,
the holders thereof would not be entitled to recover such dividend whether or
not funds are or subsequently become available. The Board of Directors may
determine, in its business judgment, that it would be in the best interests of
the Company to pay less than the full amount of the stated dividends on the
Series A Preferred Shares or no dividends for any quarter notwithstanding that
funds are available. To remain qualified as a REIT, however, the Company must
distribute annually at least 95% of its "REIT taxable income" to stockholders,
and the Company expects that the Board of Directors will declare dividends on
the Series A Preferred Shares quarterly.
. The Bank Secured Obligations will be recourse only to the Securing Mortgage
Loans. Accordingly, in the event of a default on the Securing Mortgage Loans,
the Company may not receive sufficient payments on the Bank Secured Obligations
to make distributions on the Series A Preferred Shares.
. A decline in the performance and capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could lead to the
exchange of the Series A Preferred Shares for Bank Preferred Shares, which
would represent an investment in the Bank and not in the Company. An investment
in the Bank is subject to certain risks that are distinct from the risks
associated with an investment in the Company. For example, an investment in the
Bank would involve risks relating to the capital levels of and other federal
regulatory requirements applicable to the Bank and the performance of the
Bank's loan portfolio. In the event of a liquidation of the Bank, the claims of
the Bank's depositors and of its secured, senior, general and subordinated
creditors will be entitled to a priority of payment over the claims of holders
of equity securities such as the Bank Preferred Shares. As a result, if the
Bank were to be placed into receivership, the holders of the Bank Preferred
Shares likely would receive, if anything, substantially less than they would
have received had the Series A Preferred Shares not been exchanged for Bank
Preferred Shares. Potential investors in the Series A Preferred Shares should
carefully consider the description of the Bank set forth under "The Bank."
. Although the Series A Preferred Shares will be listed on the New York Stock
Exchange, Inc. (the "NYSE"), the Bank does not intend to apply for listing of
the Bank Preferred Shares on any national securities exchange or for quotation
of the Bank Preferred Shares through the Nasdaq Stock Market. Consequently,
there can be no assurance as to the liquidity of the trading markets for the
Bank Preferred Shares, if issued, or that an active public market for the Bank
Preferred Shares would develop or be maintained.
. As a subsidiary of the Bank, the Company is subject to the risk that
federal regulators of the Bank will restrict the ability of the Company to
transfer assets, to make distributions to stockholders, including dividends to
the holders of Series A Preferred Shares, or to redeem shares of preferred
stock of the Company (the "Preferred Stock"). Under certain circumstances,
certain of these restrictions could result in the Company's failure to qualify
as a REIT.
. Risks associated with mortgage loans generally, and particularly the
geographic concentration of the Securing Mortgage Loans in Illinois and
Arizona, could adversely affect the value of the Series A Preferred Shares and
the Mortgage Assets held by the Company.
7
<PAGE>
. If the Company fails to maintain its status as a REIT for federal income
tax purposes, it will be subject to corporate income tax.
. The Company will be dependent in virtually every phase of its operations on
the diligence and skill of the officers and employees of the Bank and its
affiliates acting on behalf of the Company.
. Because of the relationship between the Company and the Bank and its
affiliates, conflicts of interests may arise between the Company and the Bank
and its affiliates.
. The Company is a newly organized corporation with no operating history.
THE OFFERING
For a more complete description of the terms of the Series A Preferred Shares
specified in the following summary, see "Description of Series A Preferred
Shares."
Issuer.................... Harris Preferred Capital Corporation, a newly
formed Maryland corporation.
Securities Offered........ 10,000,000 Series A Preferred Shares.
Ranking................... The Series A Preferred Shares rank senior to
the Company's Common Stock with respect to
dividend rights and rights upon liquidation.
Additional shares of Preferred Stock ranking
senior to the Series A Preferred Shares may not
be issued without the approval of holders of at
least 67% of the Series A Preferred Shares.
Additional shares of Preferred Stock ranking on
a parity with the Series A Preferred Shares may
not be issued without the approval of a
majority of the Board of Directors and a
majority of the Independent Directors (as
defined herein).
Dividends................. Dividends on the Series A Preferred Shares are
payable at the rate of % per annum of the
liquidation preference (an amount equal to
$ per annum per share), if, when and as
declared by the Board of Directors of the
Company. If declared, dividends are payable
quarterly in arrears on the 30th day of March,
June, September and December in each year,
commencing December 30, 1997. Dividends accrue
in each quarterly period from the first day of
such period, whether or not dividends are paid
with respect to the preceding period. Dividends
on the Series A Preferred Shares are not
cumulative and, accordingly, if no dividend is
declared on the Series A Preferred Shares by
the Company for a quarterly dividend period,
holders of the Series A Preferred Shares will
have no right to receive a dividend for that
period, and the Company will have no obligation
to pay a dividend for that period, whether or
not dividends are declared and paid for any
future period with respect to either the Series
A Preferred Shares or the Common Stock. If no
dividend is paid on the Series A Preferred
Shares for a quarterly dividend period, the
payment of dividends on the Common Stock will
be prohibited for that period and at least the
following three quarterly dividend periods. See
"Description of Series A Preferred Shares--
Dividends."
8
<PAGE>
Liquidation Preference.... The liquidation preference for each Series A
Preferred Share is $25.00. Upon liquidation,
holders of Series A Preferred Shares will
additionally be entitled to receive an amount
equal to the quarterly accrued and unpaid
dividend, if any, thereon. See "Description of
Series A Preferred Shares--Rights Upon
Liquidation."
Redemption................ The Series A Preferred Shares are not
redeemable prior to , 2002 (except
upon the occurrence of a Tax Event, as defined
in "Description of Series A Preferred Shares--
Redemption"). On and after , 2002,
the Series A Preferred Shares may be redeemed
for cash at the option of the Company, in whole
or in part, at any time and from time to time,
at the liquidation amount thereof, plus the
quarterly accrued and unpaid dividend, if any,
thereon. Any redemption is subject to the prior
written approval of the Board of Governors.
Upon the occurrence of a Tax Event, the Company
will have the right to redeem the Series A
Preferred Shares in whole (but not in part) at
a redemption price of $25.00 per share, plus
the quarterly accrued and unpaid dividend, if
any, thereon. See "Description of Series A
Preferred Shares--Redemption." The Series A
Preferred Shares are not subject to any sinking
fund or mandatory redemption and are not
convertible into any other securities of the
Company.
Automatic Exchange........ Each Series A Preferred Share will be exchanged
automatically for one Bank Preferred Share upon
the occurrence of the Exchange Event. See
"Description of Series A Preferred Shares--
Automatic Exchange" and "The Bank--Description
of Bank Preferred Shares."
Voting Rights............. Holders of Series A Preferred Shares will not
have any voting rights, except as expressly
provided herein. On any matter on which holders
of the Series A Preferred Shares may vote, each
Series A Preferred Share will be entitled to
one vote. See "Description of Series A
Preferred Shares--Voting Rights."
Ownership Limits.......... Beneficial ownership by any individual of more
than 5% of any outstanding series of Preferred
Stock, including the Series A Preferred Shares
offered hereby, is restricted in order to
preserve the Company's status as a REIT for
federal income tax purposes. See "Description
of Capital Stock--Restrictions on Ownership and
Transfer."
Listing................... Application has been made for the listing of
the Series A Preferred Shares on the NYSE.
Ratings................... Upon issuance, the Series A Preferred Shares
will be rated " " by Moody's Investors
Service, Inc. and " " by Standard & 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.
See "Ratings."
Use of Proceeds........... The net proceeds to the Company from the
Offering, together with proceeds received as
capital contributions from the Bank, will be
used to acquire the Initial Mortgage Assets and
to pay the expenses of the Offering and the
formation of the Company. See "Use of
Proceeds."
9
<PAGE>
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company
and the Bank will engage in the transactions described under "Certain
Transactions Constituting the Formation--The Formation." These transactions are
designed (i) to facilitate the Offering, (ii) to provide for the acquisition by
the Company of the Initial Mortgage Assets from the Bank, and (iii) to enable
the Company to qualify as a REIT for federal income tax purposes commencing
with its taxable year ending December 31, 1997.
The following diagram outlines the relationship between the Company and the
Bank relevant to the Offering following consummation of the Offering:
LOGO
BENEFITS TO THE BANK
The Bank expects to realize the following benefits (which are described in
more detail under "Certain Transactions Constituting the Formation--Benefits to
the Bank") in connection with the Offering and the other transactions
constituting the formation of the Company:
. The Bank expects that the Series A Preferred Shares will qualify as
Tier 1 capital of the Bank for U.S. banking regulatory purposes under
relevant regulatory capital guidelines.
. The dividends payable on the Series A Preferred Shares will be
deductible for income tax purposes as a result of the Company's
qualification as a REIT.
. The Bank has advised the Company that the treatment of the Series A
Preferred Shares as Tier 1 capital of the Bank and the Company's ability to
deduct, for income tax purposes, the dividends payable on the Series A
Preferred Shares as a result of the Company's qualification as a REIT will
provide the Bank with a more cost-effective means of obtaining regulatory
capital than if the Bank were to issue preferred stock itself.
. The Bank will receive approximately $ million upon consummation of
the Offering in connection with the acquisition of the Initial Mortgage
Assets by the Company (approximately $ million of which represents new
funds after giving effect to the Bank's expense of purchasing the Company's
Common Stock and additional capital contributions).
. The Bank will be entitled to receive annual advisory and servicing fees
and annual dividends in respect of the Common Stock. For the first 12
months following completion of the Offering, these annual fees and
dividends are anticipated to be approximately $ million.
10
<PAGE>
. The Bank, as Servicer, also will be entitled to retain any ancillary
fees, including, but not limited to, late payment charges, prepayment fees,
penalties and assumption fees collected in connection with the mortgage
loans serviced by it. In addition, the Bank, as Servicer, will receive any
benefit derived from interest earned on collected principal and interest
payments between the date of collection and the date of remittance to the
Company and from interest earned on tax and insurance impound funds with
respect to mortgage loans serviced by the Servicer.
BUSINESS AND STRATEGY
General. The Company's principal business objective is to acquire, hold,
finance and manage Mortgage Assets that will generate net income for
distribution to stockholders. Initially, a substantial portion of the assets of
the Company will consist of obligations issued by the Bank that are recourse
only to the Securing Mortgage Loans. The Company intends to acquire
substantially all of its Mortgage Assets from the Bank and/or affiliates of the
Bank on terms that are comparable to those that could be obtained by the
Company if such Mortgage Assets were purchased from unrelated third parties.
The Company may also from time to time acquire Mortgage Assets from unrelated
third parties. As of the date of this Prospectus, the Company has not entered
into any agreements with third parties with respect to the purchase of Mortgage
Assets. Other than with respect to the temporary investment of payments of
interest and principal on its Mortgage Assets, the Company anticipates that it
will purchase Mortgage Assets from unrelated third parties only if neither the
Bank nor any affiliate of the Bank has an amount or type of Mortgage Assets
sufficient to meet the requirements of the Company.
The Company currently intends to maintain at least 90% of its portfolio in
Mortgage Assets consisting of the Initial Mortgage Assets and obligations which
are comparable to the Initial Mortgage Assets. The Company may, however, invest
in other assets eligible to be held by a REIT. The Company's current policy and
the Servicing Agreement prohibit the acquisition of any Mortgage Asset
constituting an interest in a Mortgage Loan (other than an interest resulting
from the acquisition of Mortgage-Backed Securities), which Mortgage Loan (i) is
delinquent (more than 30 days past due) in the payment of principal or interest
at the time of proposed acquisition; (ii) is or was at any time during the
preceding 12 months (a) in nonaccrual status or (b) 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. Loans that are in a "nonaccrual status" are generally
loans that are past due 90 days or more in principal or interest.
Initial Mortgage Assets. Simultaneously with the consummation of the
Offering, the Bank, as owner of the Company's Common Stock, will make a capital
contribution to the Company equal to $250 million. The Company will use the
aggregate net proceeds (after underwriting discounts and expenses of the
Offering and the formation) of approximately $ million received in
connection with both the Offering and such capital contribution by the Bank to
purchase (i) obligations issued by the Bank that are recourse only to the
Securing Mortgage Loans (as defined herein) and (ii) Mortgage-Backed
Securities. See "Business and Strategy--General Description of Mortgage Assets"
and "Use of Proceeds."
The principal amount of the Bank Secured Obligations will equal approximately
80% of the aggregate outstanding principal amount of the Securing Mortgage
Loans. See "Business and Strategy--General Description of Mortgage Assets."
The Company and the Bank believe that the fair value of the Initial Mortgage
Assets will approximately equal the amount that the Company will pay for the
Initial Mortgage Assets. However, no third party valuations of the Initial
Mortgage Assets have been or will be obtained for purposes of the Offering. See
"Risk Factors--No Third Party Valuation of the Mortgage Assets; No Arm's-Length
Negotiations with Affiliates."
Servicing Agreement. The Bank will service the Securing Mortgage Loans and
the other Mortgage Loans purchased by the Company on behalf of, and as agent
for, the Company and will be entitled to receive fees in
11
<PAGE>
connection with the servicing thereof pursuant to the servicing agreement (the
"Servicing Agreement"). The Bank in its role as servicer under the Servicing
Agreement is hereinafter referred to as the "Servicer." See "Business and
Strategy--Servicing."
Advisory Agreement. The Company will enter into an advisory agreement with
the Bank (the "Advisory Agreement") pursuant to which the Bank will administer
the day-to-day operations of the Company. The Bank in its role as advisor under
the terms of the Advisory Agreement is hereinafter referred to as the
"Advisor." The Advisor will be responsible for (i) monitoring the credit
quality of Mortgage Assets held by the Company, (ii) advising the Company with
respect to the reinvestment of income from and payments on, and with respect to
the acquisition, management, financing and disposition of the Mortgage Assets
held by the Company, and (iii) monitoring the Company's compliance with the
requirements necessary to qualify as a REIT. The Advisor may from time to time
subcontract all or a portion of its obligations under the Advisory Agreement to
one or more of its affiliates. The Advisor may, with the approval of a majority
of the Board of Directors, as well as a majority of the Independent Directors,
subcontract all or a portion of its obligations under the Advisory Agreement to
unrelated third parties. An "Independent Director" is a director who is not a
current officer or employee of the Company or a current director, officer or
employee of the Bank or any affiliate of the Bank. 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 Assets.
The Advisory Agreement has an initial term of one year, and may be renewed
for additional one-year periods. The Advisory Agreement may be terminated by
the Company at any time upon 60 days' prior written notice. As long as any
Series A Preferred Shares remain outstanding, any decision by the Company
either to renew the Advisory Agreement or to terminate the Advisory Agreement
must be approved by a majority of the Board of Directors, as well as by a
majority of the Independent Directors. The Advisor will be entitled to receive
an advisory fee equal to $50,000 per year, payable in equal quarterly
installments. See "Management--The Advisor."
Additional Investments. The Company may from time to time purchase additional
Mortgage Assets out of proceeds received in connection with the repayment or
disposition of Mortgage Assets, the issuance of additional shares of Preferred
Stock or additional capital contributions with respect to the Common Stock.
Additional shares of Preferred Stock ranking on a parity with the Series A
Preferred Shares may not be issued by the Company without the approval of a
majority of the Board of Directors and a majority of the Independent Directors.
See "Description of Series A Preferred Shares--Independent Director Approval."
The Company does not currently intend to issue any additional shares of
Preferred Stock unless it simultaneously receives additional capital
contributions from the Bank sufficient to support the issuance of such
additional shares of Preferred Stock.
Management. The Board of Directors will be composed of six members, two of
whom will be Independent Directors. Pursuant to the terms of the Series A
Preferred Shares, the Independent Directors are required to take into account
the interests of the holders of both the Series A Preferred Shares and the
Common Stock in assessing the benefit to the Company of any proposed action
requiring their approval. The Company currently has six officers. The Company
has no other employees and does not anticipate that it will require additional
employees. See "Management."
Newly Formed Entity. As a newly formed entity, the Company has no prior
operating history. As of the date hereof, it has $1,000 of assets and
stockholder's equity and no indebtedness. Immediately after the issuance by the
Company of the Series A Preferred Shares to the public, the contribution of
capital by the Bank to the Company and the purchase by the Company of the
Initial Mortgage Assets, the Company will have approximately $ million
represented by Initial Mortgage Assets, $ million of stated capital
attributable to the Series A Preferred Shares, $ of stated capital
attributable to the Common Stock and approximately $ million of additional
paid-in capital. See "Capitalization." The par value of the Series A Preferred
Shares is
12
<PAGE>
$.01 per share. Net proceeds received by the Company from the Offering in
excess of the aggregate par value of the Series A Preferred Shares is
considered additional paid-in capital and may be used by the Company for
various corporate purposes, including the payment of dividends. The par value
of the Series A Preferred Shares is unrelated to the liquidation preference or
the redemption price of such shares.
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ending December 31, 1997. As a
REIT, the Company generally will not be subject to federal income tax on net
income and capital gains to the extent that it makes sufficient distributions
of its income to the holders of its Common Stock and Preferred Stock, including
the Series A Preferred Shares, and maintains its qualification as a REIT.
A REIT is subject to a number of organizational and operational requirements,
including a requirement that it currently distribute to stockholders at least
95% of its "REIT taxable income" (not including capital gains). Notwithstanding
qualification for taxation as a REIT, the Company may be subject to federal,
state and/or local tax. See "Risk Factors--Tax Risks" and "U.S. Federal Income
Tax Considerations."
13
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Series A Preferred Shares in the Offering. This Prospectus contains
forward-looking statements that involve risks and uncertainties. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE
THOSE DISCUSSED BELOW. IN ADDITION, PROSPECTIVE INVESTORS SHOULD ALSO
CAREFULLY CONSIDER THE INFORMATION CONCERNING THE BANK SET FORTH UNDER "THE
BANK."
INTEREST RATE RISK
The Company's income will consist primarily of interest payments on the
Mortgage Assets held by it. If there is a significant decline in interest
rates at a time when the Company must reinvest payments of interest and
principal in respect of its Mortgage Assets, the Company may find it difficult
to purchase additional Mortgage Assets that generate sufficient income to
support payment of dividends on the Series A Preferred Shares. Because the
rate at which dividends, if, when and as authorized and declared, are payable
on the Series A Preferred Shares is fixed, there can be no assurance that an
interest rate environment in which there is a significant decline in interest
rates would not adversely affect the Company's ability to pay dividends on the
Series A Preferred Shares.
DIVIDENDS NOT CUMULATIVE
Dividends on the Series A Preferred Shares are not cumulative. Consequently,
if the Board of Directors does not declare a dividend on the Series A
Preferred Shares for any quarterly period, the holders of the Series A
Preferred Shares would not be entitled to recover such dividend whether or not
funds are or subsequently become available. The Board of Directors may
determine, in its business judgment, that it would be in the best interests of
the Company to pay less than the full amount of the stated dividend on the
Series A Preferred Shares or no dividend for any quarter notwithstanding that
funds are available. Factors that may be considered by the Board of Directors
in making this determination are the Company's financial condition and capital
needs, the impact of legislation and regulations as then in effect or as may
be proposed, economic conditions, and such other factors as the Board of
Directors may deem relevant. Notwithstanding the foregoing, to remain
qualified as a REIT, the Company must distribute annually at least 95% of its
"REIT taxable income" (not including capital gains) to stockholders. See "--
Tax Risks" and "U.S. Federal Income Tax Considerations--Taxation of the
Company--Organizational Requirements."
LIMITED RECOURSE NATURE OF CERTAIN MORTGAGE ASSETS
A substantial portion of the Initial Mortgage Assets will consist of Bank
Secured Obligations. The Bank Secured Obligations will be recourse only to the
Securing Mortgage Loans, which will be assigned to the Company by the Bank and
will be secured by real property. In the event of nonpayment of interest or
default on the Bank Secured Obligations, the Company's only recourse will be
to exercise its rights under the Securing Mortgage Loans, either directly or
through the Bank as Servicer. It is anticipated that additional Mortgage
Assets acquired by the Company will consist of similar limited recourse
obligations.
CERTAIN RISKS ASSOCIATED WITH THE BANK
The purchase of Series A Preferred Shares involves risk with respect to the
performance and capital levels of the Bank. A decline in the performance and
capital levels of the Bank or the placement of the Bank into conservatorship
or receivership could result in the exchange of the Series A Preferred Shares
for Bank Preferred Shares, which would be an investment in the Bank and not in
the Company. As a result, holders of Series A Preferred Shares would become
preferred stockholders of the Bank at a time when the Bank's financial
condition was deteriorating or when the Bank had been placed into
conservatorship or receivership. If an Exchange Event occurs, the Bank would
likely be prohibited from paying dividends on the Bank Preferred Shares. An
investment in the Bank is also subject to certain risks that are distinct from
the risks associated with an investment in the
14
<PAGE>
Company. For example, an investment in the Bank would involve risks relating
to the capital levels of, and other federal regulatory requirements applicable
to, the Bank, and the performance of the Bank's loan portfolio. An investment
in the Bank is also subject to the general risks inherent in equity
investments in depository institutions. In the event of a liquidation of the
Bank, the claims of depositors and secured, senior, general and subordinated
creditors of the Bank would be entitled to a priority of payment over the
claims of holders of equity interests such as the Bank Preferred Shares. As a
result, if the Bank were to be placed into receivership, the holders of the
Bank Preferred Shares likely would receive, if anything, substantially less
than they would have received had the Series A Preferred Shares not been
exchanged for Bank Preferred Shares. Potential investors in the Series A
Preferred Shares should carefully consider the description of the Bank set
forth under "The Bank." See also "Description of Series A Preferred Shares--
Automatic Exchange."
BANK PREFERRED SHARES WILL NOT BE LISTED ON ANY EXCHANGE
Although the Series A Preferred Shares will be listed on the NYSE, the Bank
does not intend to apply for listing of the Bank Preferred Shares on any
national securities exchange or for quotation of the Bank Preferred Shares
through the Nasdaq Stock Market. Consequently, there can be no assurance as to
the liquidity of the trading markets for the Bank Preferred Shares, if issued,
or that an active public market for the Bank Preferred Shares would develop or
be maintained.
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of the Bank, banking regulatory
authorities will have the right to examine the Company and its activities.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
such regulatory authorities will have the authority to restrict the ability of
the Company to transfer assets, to make distributions to its stockholders
(including dividends to the holders of Series A Preferred Shares, as described
below), or to redeem shares of Preferred Stock, or even to require the Bank to
sever its relationship with or divest its ownership of the Company. Such
actions could potentially result in the Company's failure to qualify as a
REIT.
Payment of dividends on the Series A Preferred Shares could also be subject
to regulatory limitations if the Bank became less than "adequately
capitalized" for purposes of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). Less than "adequately capitalized" is
currently defined as having (i) a total risk-based capital ratio of less than
8.0%, (ii) a Tier 1 risk-based capital ratio of less than 4.0%, or (iii) a
Tier 1 leverage ratio of less than 4.0% (or 3.0% under certain circumstances
not currently applicable to the Bank). Based on unaudited results, at
September 30, 1997, the Bank's total risk-based capital ratio was 10.63%, its
Tier 1 risk-based capital ratio was 7.38% and its Tier 1 leverage ratio was
6.61%. Such ratios, adjusted to give effect to the sale of Series A Preferred
Shares in the Offering, would be %, % and %, respectively.
If the Automatic Exchange occurs, the Bank would likely be prohibited from
paying dividends on the Bank Preferred Shares. In all circumstances following
the Automatic Exchange, the Bank's ability to pay dividends would be subject
to various restrictions under applicable regulations. Furthermore, in the
event the Bank is placed into conservatorship or receivership (whether before
or after the Automatic Exchange), the Bank would be unable to pay dividends on
the Bank Preferred Shares. In addition, in the event of a liquidation of the
Bank, the claims of the Bank's depositors and of its secured, senior, general
and subordinated creditors would be entitled to a priority of payment over the
dividend and other claims of holders of equity interests such as the Bank
Preferred Shares.
GEOGRAPHIC CONCENTRATION
Certain geographic regions of the United States may from time to time
experience natural disasters or weaker regional economic conditions and
housing markets, and, consequently, may experience higher rates of loss and
delinquency on Mortgage Loans generally. Any concentration of the Mortgage
Loans in such a region
15
<PAGE>
may present risks in addition to those generally present with respect to
mortgage loans. The Company currently anticipates that a substantial portion
of the residential properties underlying the Securing Mortgage Loans and the
other Mortgage Loans purchased by the Company will be located in Illinois and
Arizona. These Mortgage Loans may be subject to a greater risk of default than
other comparable Mortgage Loans in the event of adverse economic, political or
business developments or natural hazards that may affect such region and the
ability of property owners in such region to make payments of principal and
interest on the underlying mortgages.
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 Chapman and Cutler will render certain opinions, described under
"U.S. Federal Income Tax Considerations," regarding the Company's
qualification as a REIT, no assurance can be given that the Company will be
able to operate in such a manner so as to qualify as a REIT or to remain so
qualified. Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only limited
judicial or administrative interpretations. The determination of various
factual matters and circumstances, not entirely within the Company's control
and not addressed by the opinion of Chapman and Cutler, 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 Chapman and Cutler, counsel to the
Company, regarding various issues affecting the Company's ability to qualify,
and retain qualification, as a REIT. Such legal opinion is not binding on the
Internal Revenue Service (the "IRS") or the courts and no assurance can be
given that such opinion will not be challenged by the 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 including the holders of the Series A Preferred
Shares, would be reduced for the year or years involved. In addition, unless
entitled to relief under certain statutory provisions, the Company would 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 necessarily give the Company the right to redeem the
Series A Preferred Shares, nor would it give the holders of the Series A
Preferred Shares the right to have their shares redeemed. See "Description of
Series A Preferred Shares--Redemption."
Notwithstanding that the Company currently intends to operate in a manner
designed to enable it to qualify as a REIT, future economic, market, legal,
tax or other considerations may cause the Company to determine that it is in
the best interest of the Company and the holders of its Common Stock and
Preferred Stock to revoke the REIT election. As long as any Series A Preferred
Shares are outstanding, any such determination by the Company may not be made
without the approval of a majority of the Independent Directors. The tax law
prohibits the Company from electing treatment as a REIT for the four taxable
years following the year of such revocation. See "U.S. Federal Income Tax
Considerations."
REIT Requirements with Respect to Stockholder Distributions. To qualify as a
REIT 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
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<PAGE>
respect to any calendar year are less than the sum of 85% of its ordinary
income for the calendar year, 95% of its capital gains net income for the
calendar year and any undistributed taxable income from prior periods. Under
certain circumstances, banking regulatory authorities may restrict the ability
of the Company, as a subsidiary of the Bank, to make distributions to its
stockholders. Such a restriction could result in the Company's failure to meet
REIT requirements with respect to stockholder distributions. See "--Dividend
and Other Regulatory Restrictions on Operations of the Company."
Redemption upon Occurrence of a Tax Event. At any time following the
occurrence of a Tax Event (as defined under "Description of Series A Preferred
Shares--Redemption"), even if such Tax Event occurs prior to ,
2002, the Company will have the right to redeem the Series A Preferred Shares
in whole but not in part. The occurrence of a Tax Event will not, however,
give the holders of the Series A Preferred Shares any right to have such
shares redeemed. See "Description of Series A Preferred Shares--Redemption."
Automatic Exchange upon Occurrence of the Exchange Event. Upon the
occurrence of the Exchange Event, the outstanding Series A Preferred Shares
will be automatically exchanged on a one-for-one basis into Bank Preferred
Shares. See "Description of Series A Preferred Shares--Automatic Exchange."
Assuming, as is anticipated to be the case, that the Bank Preferred Shares are
nonvoting, the Automatic Exchange will be taxable, and each holder of Series A
Preferred Shares will have a gain or loss, as the case may be, measured by the
difference between the basis of such holder in the Series A Preferred Shares
and the fair market value of the Bank Preferred Shares received in the
Automatic Exchange. Assuming that such holder's Series A Preferred Shares were
held as capital assets prior to the Automatic Exchange, any gain or loss will
be capital gain or loss. See "U.S. Federal Income Tax Considerations--Tax
Treatment of Automatic Exchange."
DEPENDENCE UPON THE ADVISOR AND SERVICER
The Company will be dependent for the selection, structuring and monitoring
of its Mortgage Assets on the diligence and skill of the officers and
employees of the Advisor. See "Management." In addition, the Company will be
dependent upon the expertise of the Servicer for the servicing of the 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 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 services. See "Management--The Advisor" and
"Business and Strategy--Servicing."
RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock of the
Company and will administer the day-to-day activities of the Company in its
role as Advisor under the Advisory Agreement. The Bank will also act as
Servicer of the Mortgage Loans on behalf of the Company under the Servicing
Agreement. In addition, other than the Independent Directors, all of the
officers and directors of the Company are also officers and/or directors of
the Bank and/or affiliates of the Bank. As the holder of all of the
outstanding voting stock of the Company, the Bank will have the right to elect
all directors of the Company, including the Independent Directors.
The 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 acquisition of the
Initial Mortgage Assets; future acquisitions of Mortgage Assets from the Bank
and/or affiliates of the Bank; servicing of Mortgage Loans; future
dispositions of Mortgage Assets to the Bank; and the renewal, termination or
modification of the Advisory Agreement or the Servicing Agreement. It is the
intention of the Company and the Bank that any agreements and transactions
between the Company, on the one hand, and the Bank and/or its affiliates, on
the other hand, are fair to all parties and consistent with market terms,
including prices paid and received for the Initial Mortgage Assets, on the
acquisition or disposition of Mortgage Assets by the Company or in connection
with the servicing of Mortgage Loans. The requirement in the terms of the
Series
17
<PAGE>
A Preferred Shares that certain actions of the Company be approved by a
majority of the Independent Directors is also intended to ensure fair dealings
between the Company and the Bank and its affiliates. However, there can be no
assurance that such agreements or transactions will be on terms as favorable
to the Company as those that could have been obtained from unaffiliated third
parties. See "Business and Strategy--Management Policies and Programs--
Conflict of Interest Policies."
NO OPERATING HISTORY
The Company is a newly organized corporation with no operating history and
no revenues to date.
NO CREDIT ENHANCEMENT OR SPECIAL HAZARD INSURANCE
The Bank generally does not intend to obtain credit enhancements such as
mortgagor bankruptcy insurance or to obtain special hazard insurance for the
Mortgage Assets, other than standard hazard insurance, which will in each case
only relate to individual Mortgage Loans. Accordingly, during the time it
holds the Mortgage Assets 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, 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 the borrower or an insurer (or
guarantor in the case of Commercial Mortgage Loans) 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: (i) local and
other economic conditions affecting real estate value, particularly in
Illinois and Arizona, (ii) the level of interest income generated by the
Mortgage Assets, (iii) the market value of such Mortgage Assets and (iv) the
supply of and demand for such Mortgage Assets. Further, there can be no
assurance that the value of the Initial Mortgage Assets or the values of
properties securing such Mortgage Assets, have remained or will remain at the
levels existing on the dates of origination of such Mortgage Assets.
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS
Even assuming that the mortgaged properties underlying the Mortgage Assets
held by the Company provide adequate security for such Mortgage Assets,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property
securing a Mortgage Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
In Illinois, nonjudicial sales of mortgaged properties are not allowed,
requiring a judicial action to foreclose. Furthermore, in some states (not
including Illinois), an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a mortgaged property. In the event
of a default by a mortgagor, these restrictions, among other things, may
impede the ability of the Bank to foreclose on or sell the mortgaged property
or to obtain proceeds sufficient to repay all amounts due on the related
Mortgage Loan. In addition, the Servicer will be entitled to deduct from
collections received all expenses reasonably incurred in attempting to recover
amounts due and not yet repaid on liquidated Mortgage Loans, including legal
fees and costs of legal action, real estate taxes, insurance and maintenance
and preservation expenses, thereby reducing amounts available with respect to
the Mortgage Loans.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the servicing and
18
<PAGE>
collection of the Mortgage Loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations
of these laws, policies and principles may limit the ability of the Bank to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the Bank to damages and administrative sanctions.
SPECIAL RISKS RELATING TO COMMERCIAL MORTGAGE LOANS
The Initial Mortgage Assets will not contain or be secured by any Commercial
Mortgage Loans. In the future, however, the Company may acquire interests in
Commercial Mortgage Loans. Commercial Mortgage Loans have certain distinct
risks. The Company's current policy is not to acquire any interest in a
Commercial Mortgage Loan if Commercial Mortgage Loans would constitute more
than 5% of the total book value of the Mortgage Assets of the Company at the
time of its acquisition. Commercial Mortgage Loans generally lack standardized
terms, which may complicate their structure. Commercial real estate properties
themselves tend to be unique and are more difficult to value than residential
real estate properties. Commercial Mortgage Loans also tend to have shorter
maturities than Residential Mortgage Loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon"
payment due on maturity. In addition, commercial real estate properties,
particularly industrial and warehouse properties, are generally subject to
relatively greater environmental risks than non-commercial properties and to
the corresponding burdens and costs of compliance with environmental laws and
regulations. See "--Environmental Considerations." Also, there may be costs
and delays involved in enforcing rights of a property owner against tenants in
default under the terms of leases with respect to commercial properties. For
example, tenants may seek the protection of the bankruptcy laws, which could
result in termination of lease contracts.
ENVIRONMENTAL CONSIDERATIONS
In the event that the Company is forced to foreclose on a defaulted Mortgage
Loan to recover its investment in such Mortgage Loan, the Company may be
subject to environmental liabilities in connection with the underlying real
property which could exceed the value of the real property. Although the
Company intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof
(as defined by state and federal laws and regulations) may be discovered on
properties during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the
Company has acquired through foreclosure or otherwise, the Company may be
required to remove those substances and clean up the property. There can be no
assurance that in such a case the Company would not incur full recourse
liability for the entire costs of any removal and clean-up, that the cost of
such removal and clean-up would not exceed the value of the property or that
the Company could recoup any of such costs from any third party. The Company
may also be liable to tenants and other users of neighboring properties. In
addition, the Company may find it difficult or impossible to sell the property
prior to or following any such clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and operating
policies and strategies of the Company, certain of which are described in this
Prospectus. These policies may be amended or revised from time to time at the
discretion of the Board of Directors (in certain circumstances subject to the
approval of a majority of the Independent Directors) without a vote of the
Company's stockholders, including holders of the Series A Preferred Shares.
The ultimate effect of any change in the policies and strategies of the
Company on a holder of Series A 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 indebtedness in
connection with the acquisition and holding of Mortgage Assets, the Company
may do so at any time (although indebtedness in excess of 25% of the Company's
total stockholders' equity may not be incurred without the approval of a
majority of the Independent Directors of the Company). To the extent the
Company were to change its policy
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<PAGE>
with respect to the incurrence of indebtedness, the Company would be subject
to risks associated with leverage, including, without limitation, changes in
interest rates and prepayment risk.
NO THIRD PARTY VALUATION OF THE MORTGAGE ASSETS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and the Bank intend that the fair value of the Initial Mortgage
Assets will approximately equal the amount (approximately $ million) that
the Company will pay for the Initial Mortgage Assets. However, no third party
valuations were obtained for purposes of the Offering, and there can be no
assurance that the fair value of the Initial Mortgage Assets will not differ
from the amount payable by the Company.
In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Assets even in circumstances where an affiliate of the Company is selling the
Mortgage Assets to, or purchasing the Mortgage Assets from, the Company.
Accordingly, although the Company and the Bank intend that future acquisitions
or dispositions of Mortgage Assets be on a fair value basis, there can be no
assurance that the consideration to be paid (or received) by the Company to
(or from) the Bank or any of its affiliates in connection with future
acquisitions or dispositions of Mortgage Assets will not differ from the fair
value of such Mortgage Assets.
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES
Prior to the Offering, there has been no public market for the Series A
Preferred Shares, and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be
resold at or above the initial public offering price.
THE COMPANY
The Company is a newly formed Maryland corporation created for the purpose
of providing investors with the opportunity to invest in residential mortgages
and other real estate assets. The Company's principal business objective is to
acquire, hold, finance and manage Mortgage Assets that will generate net
income for distribution to stockholders. The Company anticipates that a
substantial portion of its Mortgage Assets will consist of obligations of the
Bank that are recourse only to the Securing Mortgage Loans.
Generally, the Company expects that it will acquire its Mortgage Assets from
the Bank and 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.
All of the Common Stock of the Company is owned by the Bank. The Company will
elect to be subject to tax as a REIT under the Code, and will generally not be
subject to federal income tax to the extent that it distributes its earnings
to its stockholders and maintains its qualification as a REIT. For a further
description of the operations of the Company, see "Business and Strategy,"
"Management," "Risk Factors" and "U.S. Federal Income Tax Considerations."
The Series A Preferred Shares will be exchanged automatically on a one-for-
one basis for Bank Preferred Shares upon the occurrence of the Exchange Event.
CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES COULD BE REPLACED BY
AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE BANK'S FINANCIAL
CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED INTO
CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A PREFERRED
SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET
FORTH UNDER "THE BANK." See also "Description of Series A Preferred Shares--
Automatic Exchange."
USE OF PROCEEDS
The gross proceeds to the Company from the sale of the Series A Preferred
Shares offered hereby will be $250 million. Simultaneously with the
consummation of the Offering, the Bank will make capital contributions to the
Company with respect to its Common Stock equal to $250 million. The Company
will use the aggregate net proceeds of approximately $ million (after
expenses of the Offering and the formation) received in connection with both
the Offering and such capital contributions by the Bank to acquire the Initial
Mortgage Assets from the Bank upon the consummation of the Offering. See
"Business and Strategy."
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<PAGE>
The following table illustrates the use of proceeds by the Company from the
sale of the Series A Preferred Shares offered hereby and the capital
contributions by the Bank described above.
<TABLE>
<S> <C>
Gross proceeds from the Offering of Series A Preferred
Shares..................................................... $250,000,000
Gross proceeds from the capital contributions by the Bank... 250,000,000
Underwriting discount and expenses..........................
------------
Net proceeds to be applied to the acquisition of the Initial
Mortgage Assets from the Bank.............................. $
============
</TABLE>
The Bank will not receive any transaction fees upon consummation of the
Offering, including any advance payment in respect of advisory or servicing
fees.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
, 1997 (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 "Certain Transactions
Constituting the Formation--The Formation" and the use of the proceeds
therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
, 1997
-------------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
DEBT
Total long-term debt.................................. -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value per share; none
authorized, issued and outstanding, actual; and
20,000,000 shares authorized, 10,000,000 shares
issued and outstanding, as adjusted.................. -- $250,000
Common Stock, $1.00 par value; 1,000 shares
authorized, 1,000 shares issued and outstanding,
actual and as adjusted............................... $ 1(1) 1
Capital contributed in excess of par.................. -- (1)
------- --------
Total stockholders' equity.......................... 1
------- --------
TOTAL CAPITALIZATION.................................... $ 1 $
======= ========
</TABLE>
- --------
(1) The Company was formed with an initial capitalization of $1,000.
Immediately prior to the consummation of the Offering, the Bank will make
capital contributions to the Company equal to $250 million. Upon
consummation of the Offering, the Common Stock capital amount will equal
$1,000. The additional paid-in capital of $ million represents (i) the
total capital contributions made by the Bank to the Company minus the
aggregate underwriting discount and Offering and organization expenses and
(ii) the full $250 million raised in the Offering minus the aggregate $
million par value of the Series A Preferred Shares.
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<PAGE>
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold, finance and
manage Mortgage Assets that will generate net income for distribution to
stockholders. The Company will acquire the Initial Mortgage Assets from the
Bank for an aggregate purchase price of approximately $ million. See
"Certain Transactions Constituting the Formation--The Formation."
In order to preserve its status as a REIT under the Code, substantially all
of the assets of the Company will consist of the Initial Mortgage Assets and
other qualified REIT real estate assets of the type set forth in Section
856(c)(6)(B) of the Code. See "U.S. Federal Income Tax Considerations."
DIVIDEND POLICY
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to not less than 95%
of the Company's "REIT taxable income" (excluding capital gains). In order to
remain qualified as a REIT, the Company must distribute annually at least 95%
of its "REIT taxable income" (excluding capital gains) to stockholders. The
Company anticipates that none of the dividends on the Series A Preferred
Shares and none or no material portion of the dividends on the Common Stock
will constitute non-taxable returns of capital.
Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors.
There are several limitations on the Company's ability to pay dividends on
the Common Stock (none of which should adversely affect the legal right of the
Company to pay dividends in respect of the Series A Preferred Shares). First,
under the Company's current dividend policy, the Company may not make any
distribution in respect of the Common Stock with respect to any year to the
extent that, after taking into account such proposed distribution, total cash
or property distributions on the Company's outstanding shares of Preferred
Stock and Common Stock with respect to that year would exceed 105% of the
Company's "REIT taxable income" (excluding capital gains) for that year plus
net capital gains of the Company for that year. This policy regarding the
limitations on payment of dividends in respect of Common Stock may not be
modified without the approval of a majority of the Independent Directors.
Second, if the Company fails to declare and pay full dividends on the Series A
Preferred Shares in any dividend period, the Company may not make any
dividends or other distributions with respect to the Common Stock, until such
time as dividends on all outstanding Series A Preferred Shares have been (i)
declared and paid for three consecutive dividend periods and (ii) declared and
paid or declared and a sum sufficient for the payment thereof has been set
apart for payment for the fourth consecutive dividend period. See "Description
of Series A Preferred Shares--Dividends." Third, Maryland law provides that
dividends may not be paid on the capital stock of the Company if, after giving
effect to the dividends: (i) the Company would not be able to pay indebtedness
of the Company as the indebtedness becomes due in the usual course of
business; or (ii) the Company's total assets would be less than the sum of the
Company's total liabilities plus, unless the Charter permits otherwise, the
amount that would be needed, if the Company 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. It is, however, possible that these limitations on
the Company's ability to pay dividends on the Common Stock could affect the
ability of the Company to qualify as a REIT for federal income tax purposes.
See "U.S. Federal Income Tax Considerations--Taxation of the Company--
Organizational Requirements."
In the event that the Bank were to pay dividends on the Bank Preferred
Shares, such dividends would be paid out of the Bank's capital surplus.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
banking regulatory authorities will have additional authority to restrict the
ability of the Company to make dividend payments to its stockholders.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Assets as Mortgage Assets held by the Company are repaid.
The acquisition of such additional Mortgage Assets will be funded with the
proceeds of principal repayments on its current portfolio of Mortgage Assets.
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 the Securing Mortgage Loans will enable full
payments to be made on the Bank Secured Obligations and that such payments
along with payments with respect to the other Mortgage Assets held by the
Company will provide the Company with sufficient funds to meet its operating
requirements and to pay dividends in accordance with the requirements to be
taxed as a REIT for the foreseeable future.
GENERAL DESCRIPTION OF MORTGAGE ASSETS
Initial Mortgage Assets. It is anticipated that approximately $358 million
of the Company's initial assets will consist of obligations issued by the Bank
that are recourse only to the underlying Mortgage Loans (the "Securing
Mortgage Loans") and will also include approximately $133 million of Mortgage-
Backed Securities (the "Initial Mortgage-Backed Securities"). The principal
amount of the Bank Secured Obligations will equal approximately 80% of the
principal amount of the Securing Mortgage Loans.
Residential Mortgage Loans. The Bank may from time to time directly acquire
or originate both conforming and nonconforming Residential Mortgage Loans.
Conventional conforming Residential Mortgage Loans comply with the
requirements for inclusion in a loan guarantee program sponsored by either the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("Fannie Mae"). Under current regulations, the maximum
principal balance allowed on conforming Residential Mortgage Loans ranges from
$214,600 ($310,500 for Residential Mortgage Loans secured by mortgaged
properties located in either Alaska or Hawaii) for one-unit residential loans
to $397,800 ($596,700 for Residential Mortgage Loans secured by mortgaged
properties located in either Alaska or Hawaii) for four-unit residential
loans. Nonconforming Residential Mortgage Loans are Residential Mortgage Loans
that do not qualify in one or more respects for purchase by Fannie Mae or
FHLMC under their standard programs. The nonconforming Residential Mortgage
Loans that the Company purchases will be nonconforming generally because they
have original principal balances which exceed the limits for FHLMC or Fannie
Mae programs. The Company's nonconforming Residential Mortgage Loans are
expected to meet the requirements for sale to national private mortgage
conduit programs or other investors in the secondary mortgage market.
Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties, including stock allocated to a dwelling unit in a residential
cooperative housing corporation. Residential real estate properties underlying
Residential Mortgage Loans consist of individual dwelling units, individual
cooperative apartment units, individual condominium units, two- to four-family
dwelling units, planned unit developments and townhouses. The Company
currently expects that most of the Residential Mortgage Loans to be acquired
by it will be adjustable rate Mortgage Loans; however, the Company may also
purchase fixed rate Residential Mortgage Loans.
Mortgage-Backed Securities. The Company may from time to time acquire fixed-
rate or variable-rate Mortgage-Backed Securities representing interests in
pools of Mortgage Loans. A portion of any such Mortgage-Backed Securities may
have been originated by the Bank by exchanging pools of Mortgage Loans for the
Mortgage-Backed Securities. The Mortgage Loans underlying the Mortgage-Backed
Securities will be secured by single-family residential properties located
throughout the United States.
The Company intends to acquire only investment grade Mortgage-Backed
Securities issued by agencies of the federal government or government
sponsored agencies, such as FHLMC, Fannie Mae and the Government
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<PAGE>
National Mortgage Association ("GNMA"). The Company does not intend to acquire
any interest-only, principal-only or similar speculative Mortgage-Backed
Securities.
Commercial Mortgage Loans. While no Commercial Mortgage Loans will be
included in the Initial Mortgage Assets, the Company may from time to time in
the future acquire Commercial Mortgage Loans secured by industrial and
warehouse properties, recreational facilities, office buildings, retail space
and shopping malls, hotels and motels, hospitals, nursing homes or senior
living centers. The Company's current policy is not to acquire any interest in
a Commercial Mortgage Loan if Commercial Mortgage Loans would constitute more
than 5% of the Company's Mortgage Assets immediately following such
acquisition. Unlike Residential Mortgage Loans, Commercial Mortgage Loans
generally lack standardized terms. Commercial Mortgage Loans may also not be
fully amortizing, meaning that they may have a significant principal balance
or "balloon" payment due on maturity. Moreover, commercial properties,
particularly industrial and warehouse properties, are generally subject to
relatively greater environmental risks than non-commercial properties,
generally giving rise to increased costs of compliance with environmental laws
and regulations. See "Risk Factors--Special Risks Relating to Commercial
Mortgage Loans" and "--Environmental Considerations." There is no requirement
regarding the percentage of any commercial real estate property that must be
leased at the time the Bank acquires a Commercial Mortgage Loan secured by
such commercial real restate property, and there is no requirement that
Commercial Mortgage Loans have third party guarantees.
The credit quality of a Commercial Mortgage Loan may depend on, among other
factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been
deferred), the creditworthiness of tenants, the historical and anticipated
level of vacancies and rents on the property and on other comparable
properties located in the same region, potential or existing environmental
risks, the availability of credit to refinance the Commercial Mortgage Loan at
or prior to maturity and the local and regional economic climate in general.
Foreclosures of defaulted Commercial Mortgage Loans are generally subject to a
number of complicating factors, including environmental considerations, which
are generally not present in foreclosures of Residential Mortgage Loans. See
"Risk Factors--Special Risks Relating to Commercial Mortgage Loans" and "--
Environmental Considerations."
Other Real Estate Assets. The Company may invest up to 5% of the total value
of its portfolio in assets eligible to be held by REITs other than those
described above. In addition to Commercial Mortgage Loans and Mortgage Loans
secured by multi-family properties, such assets could include cash, cash
equivalents and securities, including shares or interests in other REITs and
partnership interests.
DESCRIPTION OF THE BANK SECURED OBLIGATIONS
Simultaneously with the consummation of the Offering, the Company will
acquire the Bank Secured Obligations pursuant to the terms of a loan agreement
with the Bank (the "Bank Loan Agreement"). The Bank Secured Obligations will
be recourse only to the Securing Mortgage Loans that are secured by real
property. The Bank Secured Obligations will mature on October 1, 2027. The
principal amount of the Bank Secured Obligations will equal approximately 80%
of the aggregate of the outstanding principal amount of the Securing Mortgage
Loans. The Bank Secured Obligations will initially pay interest at % per
annum. Payments of interest will be made monthly out of payments on the
Securing Mortgage Loans. Pursuant to an agreement between the Company and the
Bank (the "Mortgage Loan Assignment Agreement"), the Company through the Bank
as agent will receive all scheduled payments made on the Securing Mortgage
Loans, will retain a portion of any such payments equal to the amount due on
the Bank Secured Obligations and will remit the balance, if any, to the Bank.
The Company will also retain approximately 80% of any prepayments of principal
in respect of the Securing Mortgage Loans and will apply such amounts as a
prepayment on the Bank Secured Obligations. Repayment of the Bank Secured
Obligations will be secured by an assignment of the Securing Mortgage Loans to
the Company pursuant to the Mortgage Loan Assignment Agreement. The assignment
of the Securing Mortgage Loans by the Bank to the Company will be without
recourse. The Company will have a security interest in the real property
securing the Securing Mortgage Loans and, subject to fulfilling certain
procedural requirements under state law, will be entitled to enforce payment
on the Securing Mortgage Loans in its own
24
<PAGE>
name if a mortgagor should default. In the event of such a default, the
Company would have the same rights as the original mortgagee to foreclose the
mortgaged property and satisfy the obligations of the Bank out of the
proceeds. The Securing Mortgage Loans will be administered by the Servicer, as
agent of the Company, and the Company will have the right to perfect its
security interest in the Securing Mortgage Loans. Following repayment of the
Bank Secured Obligations, the Company will reassign its interest in any
outstanding Securing Mortgage Loans (without recourse or warranty) and deliver
them to, or as directed by, the Bank.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect
to the acquisition and disposition of assets, use of capital and leverage,
credit risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of
a majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also "--
Dividend Policy."
Asset Acquisition and Disposition Policies. Subsequent to the acquisition of
the Initial Mortgage Assets, the Company anticipates that it will from time to
time purchase additional Mortgage Assets out of proceeds received in
connection with the repayment or disposition of Mortgage Assets, or the
issuance of additional shares of Preferred Stock or the contribution of
additional capital by the Bank. The Company intends to acquire all or
substantially all of such Mortgage Assets from the Bank and/or affiliates of
the Bank, on terms that are comparable to those that could be obtained by the
Company if such Mortgage Assets were purchased from unrelated third parties.
The Company currently anticipates that the Mortgage Assets that it purchases
will include those secured by Residential Mortgage Loans, as described in "--
General Description of Mortgage Assets," and those secured by Mortgage-Backed
Securities, although if the Bank and/or any of its affiliates develop
additional Mortgage Asset products, the Company may purchase such additional
types of Mortgage Assets. In addition, the Company may also from time to time
acquire limited amounts of other assets eligible to be held by REITs. The
Company currently anticipates that it will not acquire the right to service
any Mortgage Asset it may acquire in the future. The Company anticipates that
any servicing arrangement that it enters into in the future will contain fees
and other terms consistent with secondary market standards.
The Company currently intends to maintain at least 90% of its portfolio in
the Initial Mortgage Assets and obligations which are comparable to the
Initial Mortgage Assets. As indicated above, the Company may invest in other
assets eligible to be held by REITs. The Company's current policy prohibits
the acquisition of an interest in any Mortgage Loans which (i) are delinquent
(more than 30 days past due) in the payment of principal or interest at the
time of proposed acquisition; (ii) are or were at any time during the
preceding 12 months (a) in nonaccrual status or (b) renegotiated due to
financial deterioration of the borrower; or (iii) have been, more than once
during the preceding 12 months, more than 30 days past due in the payment of
principal or interest. Loans that are in a "nonaccrual status" are generally
loans that are past due 90 days or more in principal or interest.
The Company currently intends to maintain a policy of disposing of any
Mortgage Loan which (i) falls into nonaccrual status, (ii) has to be
renegotiated due to the financial deterioration of the borrower, or (iii) is
more than 30 days past due in the payment of principal or interest more than
once in any 12 month period. The Company may choose, at any time subsequent to
its acquisition of any Mortgage Asset, to require the Servicer of any Mortgage
Loan to dispose of the Mortgage Loan for any of these reasons or for any other
reason.
The Company will develop forms of assignment and a policy regarding
recording of mortgage assignments for Residential Mortgage Loans.
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 a certain
25
<PAGE>
percentage of taxable income and taking into account taxes that would be
imposed on undistributed taxable income), or a combination of these methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the
Company might incur. Notwithstanding the foregoing, the Company may not,
without the approval of a majority of the Independent Directors, incur debt
for borrowed money other than debt not in excess of 25% of the Company's total
stockholders' equity. Any such debt incurred may include intercompany advances
made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares either in the payment of dividends or in the
distribution of assets on liquidation without the consent of holders of at
least 67% of the outstanding shares of Preferred Stock at that time, including
the Series A Preferred Shares, and the Company may not issue additional shares
of Preferred Stock on a parity with the Series A Preferred Shares either in
the payment of dividends or in the distribution of assets in liquidation
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 receives additional capital contributions from
the Bank equal to the sum of the aggregate offering price of such additional
Preferred Stock and the Company's expenses in connection with the issuance of
such additional shares of Preferred Stock. Prior to its issuance of additional
shares of Preferred Stock, the Company will take into consideration the Bank's
regulatory capital requirements and the cost of raising and maintaining that
capital at the time. See "Certain Transactions Constituting the Formation--
Benefits to the Bank."
Credit Risk Management Policies. The Company intends that each Mortgage Loan
assigned to the Company by the Bank or an affiliate of the Bank will represent
a first lien position and will be originated in the ordinary course of the
originator's real estate lending activities based on the underwriting
standards generally applied (at the time of origination) for the originator's
own account. See "--Description of Securing Mortgage Loans--Underwriting
Standards." The Company also intends that all Mortgage Assets held by the
Company will be serviced pursuant to the Servicing Agreement, which requires
servicing in conformity with accepted secondary market standards, with any
servicing guidelines promulgated by the Company and, in the case of the
Residential Mortgage Loans, with Fannie Mae and FHLMC guidelines and
procedures. The Company may also choose, at any time subsequent to its
acquisition of Mortgage Assets, to dispose of any Mortgage Loan for any
reason, including as a result of a Mortgage Loan securing such Mortgage Asset
being placed in a "nonaccrual status" or renegotiated due to the financial
deterioration of the borrower or having been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal or
interest, as described above.
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 Assets from, or disposition
of Mortgage Assets to, the Bank or its affiliates and the modification of the
Bank Loan Agreement, the Advisory Agreement or the Servicing Agreement. It is
the Company's policy that the terms of any financial dealings with the Bank
and its affiliates will be consistent with those available from third parties
in the mortgage lending industry. In addition, neither the Bank Loan
Agreement, the Advisory Agreement nor the Servicing Agreement may be modified
or terminated without the approval of a majority of the Independent Directors.
Conflicts of interest between the Company and the Bank and its affiliates
may also arise in connection with making decisions that bear upon the credit
arrangements that the Bank or one of its affiliates may have with a borrower.
Conflicts could also arise in connection with actions taken by the Bank as a
controlling person in the Company. It is the intention of the Company and the
Bank that any agreements and transactions between the Company, on the one
hand, and the Bank or its affiliates, on the other hand, including, without
limitation, the Servicing Agreement, the Bank Loan Agreement and the Mortgage
Loan Assignment Agreement, are fair to all
26
<PAGE>
parties and are 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 toward maximizing the recovery
by the Company as owner of the Mortgage Assets, and the Servicer shall service
the Mortgage Loans solely with a view toward the interests of the Company, and
without regard to the interests of the Bank or any of its affiliates. The
requirement in the terms of the Series A Preferred Shares that certain actions
of the Company be approved by a majority of the Independent Directors is also
intended to ensure fair dealings between the Company and the Bank and its
affiliates. However, there can be no assurance that any such agreement or
transaction will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
There are no provisions in the Company's Charter limiting any officer,
director, security holder or affiliate of the Company from having any direct
or indirect pecuniary interest in any Mortgage Assets to be acquired or
disposed of by the Company or in any transaction in which the Company has an
interest or from engaging in acquiring, holding or managing such 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 issuance 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, as amended.
The Company does not intend to (i) invest in the securities of other issuers
for the purpose of exercising control over such issuers, (ii) underwrite
securities of other issuers, (iii) actively trade in loans or other
investments, (iv) offer securities in exchange for property, or (v) make loans
to third parties, including without limitation, officers, directors or other
affiliates of the Company. The Company may, under certain circumstances,
purchase the Series A Preferred Shares in the open market or otherwise. The
Company has no present intention of causing the Company to repurchase any
shares of its capital stock, and any such action would be taken only in
conformity with applicable federal and state laws and the requirements for
qualifying as a REIT.
The Company intends to publish and distribute to stockholders, in accordance
with the rules of the NYSE, annual reports containing financial statements
prepared in accordance with generally accepted accounting principles and
certified by the Company's independent public accountants. The terms of the
Series A Preferred Shares provide that the Company shall maintain its status
as a reporting company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), for as long as any of the Series A Preferred Shares are
outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or
other considerations may cause the Board of Directors, subject to approval by
a majority of the Independent Directors, to determine that it is in the best
interests of the Company and its stockholders to revoke its REIT status.
DESCRIPTION OF SECURING MORTGAGE LOANS
Information with respect to the Securing Mortgage Loans is presented as of
September 15, 1997. Factual data with respect to the Securing Mortgage Loans
relates to those Mortgage Loans which are expected to comprise the Securing
Mortgage Loans. The actual Securing Mortgage Loans may differ in certain
respects from the Securing Mortgage Loans as described in this Prospectus;
provided, however, that (i) at least 95% of the Securing Mortgage Loans
(measured by aggregate outstanding principal balance) shall include mortgages
described herein, and (ii) the Bank must first determine that any differences
between the Securing Mortgage Loans as described herein and actual Securing
Mortgage Loans are not material.
The aggregate principal amount of the Securing Mortgage Loans will equal
approximately $ million.
27
<PAGE>
Payments on the Securing Mortgage Loans will be received by the Company
monthly in arrears on the 15th day of each month or such earlier date on which
payment in full of the Securing Mortgage Loans is made (the "Final Payment
Date") or, if the 15th day of a month is not a business day, on the first
business day following the 15th day of such month (a "Monthly Payment Date").
The Securing Mortgage Loans will mature beginning in July 2000 and bear
interest at rates ranging from approximately 4.375% to 10.000% with an average
interest rate of 7.44% per annum. The Final Payment Date may occur at an
earlier date if final payment on the Securing Mortgage Loans occurs earlier
than such date, because of unscheduled prepayments. In general, the Securing
Mortgage Loans will provide for monthly escrow payments for taxes and
insurance.
General. Substantially all of the Residential Mortgage Loans among the
Securing Mortgage Loans were originated in the ordinary course of the real
estate lending activities of either the Bank or one of the Bank's affiliates.
Certain of the Residential Mortgage Loans may have been originated by
mortgagees approved by the Secretary of Housing and Urban Development or
institutions (such as banks, credit unions and insurance companies) subject to
supervision and examination by federal and state authorities and then sold to
the Bank or one of the Bank's affiliates. All of such Residential Mortgage
Loans were originated generally in accordance with the underwriting standards
customarily employed by the originator during the period in which such
Mortgage Loans were originated.
All of the Residential Mortgage Loans among the Securing Mortgage Loans were
originated between 1988 and 1997, and have original terms to stated maturity
of five to 30 years. The weighted average number of months since origination
of such Residential Mortgage Loans (calculated as of September 15, 1997) was
approximately 30 months. The weighted average "Loan-to-Value Ratio" of such
Residential Mortgage Loans was 68.00%. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the original principal amount of a mortgage
loan to the lesser of (i) the appraised value at origination of the underlying
mortgage property, and (ii) if the mortgage loan was made to finance the
acquisition of property, the purchase price of the mortgaged property.
Except as described below, upon transfer of the residential mortgaged
property underlying a Residential Mortgage Loan among the Securing Mortgage
Loans that is an adjustable rate Mortgage Loan, the mortgage note generally
will not preclude assumption of the related Residential Mortgage Loan by the
proposed transferee if the proposed transferee satisfies certain criteria with
respect to its ability to repay the Residential Mortgage Loan. The mortgage
notes with respect to certain of the Residential Mortgage Loans contain "due-
on-sale" provisions, which prevent the assumption of the Residential Mortgage
Loan by a proposed transferee and accelerate the payment of the outstanding
principal balance of the Residential Mortgage Loan. "Due-on-sale" provisions
in mortgage notes with respect to adjustable rate Residential Mortgage Loans
may be applicable in the period prior to the first Rate Adjustment Date (as
defined herein) or following the exercise of a conversion option fixing the
interest rate.
None of the Residential Mortgage Loans among the Securing Mortgage Loans (i)
is currently delinquent in the payment of principal or interest; (ii) is or
was at any time during the preceding 12 months (a) in nonaccrual status or (b)
renegotiated due to the 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
Securing Mortgage Loans, any Residential Mortgage Loan included in the
description of the Securing Mortgage Loans herein falls within any of the
foregoing categories, the Company will not acquire such Mortgage Loan but will
instead acquire a Mortgage Loan similar in aggregate outstanding principal
balance and product type which does not fall into any of these categories.
Residential Mortgage Loans. The following types of Residential Mortgage Loan
products, each of which is more fully described below, will be included in the
Securing Mortgage Loans: seven-year extendable, 5/1 year ARM, ten-year
balloon, 3/1 year ARM, five-year extendable, one-year ARM, ten-year fixed,
six-month LIBOR, balloon, biweekly, 30-year fixed, 15-year fixed and three-
year ARM.
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<PAGE>
The following table sets forth certain information with respect to each type
of Residential Mortgage Loans eligible to be included in the Securing Mortgage
Loans as of , 1997:
TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AGGREGATE PERCENTAGE EXPECTED
PRINCIPAL BY MONTHS
BALANCE AGGREGATE REMAINING
(IN PRINCIPAL TO
TYPE THOUSANDS) BALANCE MATURITY
- ---- ---------- ---------- ---------
<S> <C> <C> <C>
Ten-year fixed.................................. $ %
15-year fixed................................... %
30-year fixed................................... %
Biweekly........................................ %
Balloon......................................... %
Ten-year balloon................................ %
Six-month LIBOR................................. %
One-year ARM.................................... %
Three-year ARM.................................. %
3/1 year ARM.................................... %
5/1 year ARM.................................... %
Five-year extendable............................ %
Seven-year extendable...........................
---------- --------- ---
Total......................................... $ %
========== ========= ===
</TABLE>
The majority of the Residential Mortgage Loans included in the Securing
Mortgage Loans are extendable mortgage loans, balloons, adjustable rate
mortgages and automatically convertible mortgages.
% of the Securing Mortgage Loans are extendable mortgage loans (such as
the five-year extendable and the seven-year extendable), which are Mortgage
Loans with a 30-year maturity with a fixed interest rate for the initial
period (five to seven years in the case of the loans referenced above) and a
one-time interest rate adjustment to another fixed rate for the remainder of
the term.
% of the Residential Mortgage Loans included in the Securing Mortgage
Loans are balloon loans (such as the balloon and ten-year balloon), which are
Mortgage Loans originated with a term to stated maturity that is shorter than
the period on which the corresponding amortization schedule is based. As a
result, upon the maturity of a balloon loan, the mortgagor will be required to
make a "balloon payment" which will be significantly larger than previous
monthly payments due on such balloon loans.
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<PAGE>
% of the Residential Mortgage Loans included in the Securing Mortgage
Loans bear interest at adjustable rates. The interest rate on an "adjustable
rate mortgage" or an "ARM" is typically tied to an index (such as the interest
rate on United States Treasury Bills), and is adjustable periodically. ARMs
are typically subject to lifetime interest rate caps and periodic interest
rate caps. As of September 15, 1997, the interest rates of the Residential
Mortgage Loans included in the Securing Mortgage Loans ranged from % per
annum to % per annum and the weighted average interest rate was
approximately % per annum. The following table contains certain additional
data with respect to the interest rates of the Residential Mortgage Loans
included in the Securing Mortgage Loans as of September 15, 1997:
CURRENT INTEREST RATE OF ADJUSTABLE RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
CURRENT AGGREGATE PERCENTAGE
INTEREST NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
RATE MORTGAGE LOANS (IN THOUSANDS) PRINCIPAL BALANCE
- -------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.000%-5.249%............... $
5.250%-5.499%...............
5.500%-5.749%...............
5.750%-5.999%...............
6.000%-6.249%...............
6.250%-6.499%...............
6.500%-6.749%...............
6.750%-6.999%...............
7.000%-7.249%...............
7.250%-7.499%...............
7.500%-7.749%...............
7.750%-7.999%...............
8.000%-8.249%...............
8.250%-8.499%...............
8.500%-8.749%...............
8.750%-8.999%...............
9.000%-9.249%...............
9.250%-9.499%...............
9.500%-9.749%
------ -------- -------
Total.....................
====== ======== =======
</TABLE>
"Gross Margin," with respect to a Residential Mortgage Loan that is an ARM,
means the applicable fixed percentage which is added to the applicable index
to calculate the current interest rate paid by the borrower of such
Residential Mortgage Loan (without taking into account any interest rate caps
or minimum interest rates). Gross Margin is inapplicable to fixed rate
Residential Mortgage Loans. As of , 1997, the weighted average
Gross Margin of the adjustable rate Residential Mortgage Loans included in the
Securing Mortgage Loans was approximately %.
The following table sets forth certain additional data with respect to the
Gross Margin of the adjustable rate Residential Mortgage Loans included in the
Securing Mortgage Loans as of , 1997:
GROSS MARGIN
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE
NUMBER PRINCIPAL BY
OF BALANCE AGGREGATE
MORTGAGE (IN PRINCIPAL
GROSS MARGIN LOANS THOUSANDS) BALANCE
- ------------ -------- ---------- ----------
<S> <C> <C> <C>
1.625%-2.124%....................................
2.625%-3.124%....................................
Greater than 3.124%..............................
------- ------- ------
Total............................................
======= ======= ======
</TABLE>
30
<PAGE>
The interest rate of each type of ARM product included in the Securing
Mortgage Loans (such as the One-year ARMs and the Three-year ARMs)
periodically adjusts (the time of each adjustment, a "Rate Adjustment Date")
subject to lifetime interest rate caps, to minimum interest rates and, in the
case of most ARMs in the Securing Mortgage Loans, to maximum periodic
adjustment increases or decreases, each as specified in the mortgage note
relating to the ARM. Information set forth below regarding interest rate caps
and minimum interest rates applies to the Securing Mortgage Loans only.
Mortgage Loans purchased by the Company after consummation of the Offering may
be subject to different interest rate caps and minimum interest rates.
Each ARM bears interest at its initial interest rate until its first Rate
Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on an adjustable rate Mortgage Loan will be
adjusted to an amount that will fully amortize the then-outstanding principal
balance of such Residential Mortgage Loan over its remaining term to stated
maturity and that will be sufficient to pay interest at the adjusted interest
rate. Certain of the types of Residential Mortgage Loan products that are ARMs
contain an option, which may be exercised by the mortgagor, to convert the ARM
into a fixed rate loan for the remainder of the mortgage term. If an ARM is
converted into a fixed rate loan, the interest rate will be determined at the
time of conversion as specified in the mortgage note relating to such Mortgage
Loan and will remain fixed at such rate until the stated maturity of such
Residential Mortgage Loan. All the Securing Mortgage Loans allow the mortgagor
to prepay at any time some or all of the outstanding principal balance of the
Securing Mortgage Loan without a fee or penalty.
% of the Residential Mortgage Loans included in the Securing Mortgage
Loans are automatically convertible Mortgage Loans (such as the 3/1 year ARM
and 5/1 year ARM). The interest rate for these automatically convertible
Mortgage Loans is fixed at an initial rate for a certain amount of years
(three to five years in the case of the loans referenced above), after which
time the loan automatically converts to a one-year ARM and the interest rate
adjusts annually thereafter as if the Residential Mortgaged Loan were a one-
year ARM with a lifetime interest rate cap. There is no ability to continue at
a fixed rate after the first Rate Adjustment Date.
Underwriting Standards. The Bank has represented to the Company that all of
the Securing Mortgage Loans were originated generally in accordance with the
underwriting policies customarily employed by the originator during the period
in which the Securing Mortgage Loans were originated.
In the Mortgage Loan approval process, the Bank assesses both the borrower's
ability to repay the Mortgage Loan and, in appropriate cases, the adequacy of
the proposed security. Credit policies and procedures are established by the
board of directors of the Bank, which delegates credit approval to certain
senior officers in accordance therewith.
The approval process for all types of Mortgage Loans includes on-site
appraisals of the properties securing such loans and a review of the
applicant's financial statements and credit, payment and banking history,
financial statements of any guarantors, and tax returns of guarantors of
multi-family Residential Mortgage Loans and Commercial Loans. The Bank
generally lends up to 95% of the appraised value of single-family residential
dwellings to be owner-occupied. The Loan-to-Value Ratio generally applied by
the Bank to multi-family Residential Mortgage Loans and Commercial Loans has
been 80% of the appraised value of the property.
The Bank requires title insurance policies protecting the priority of the
Bank's liens for all Mortgage Loans and also requires fire and casualty
insurance for Mortgage Loans. The borrower selects the insurance carrier,
subject to the Bank's approval. Generally, for any Residential Mortgage Loan
in an amount exceeding 80% of the appraised value of the security property,
the Bank currently requires mortgage insurance from an independent mortgage
insurance company.
Substantially all fixed-rate Mortgage Loans originated by the Bank contain a
"due-on-sale" clause providing that the Bank may declare a Mortgage Loan
immediately due and payable in the event, among other things, that the
borrower sells the property securing the loan without the consent of the Bank.
The Bank's ARMs generally are assumable.
31
<PAGE>
Geographic Distribution. Approximately % of the residential real estate
properties underlying the Bank's Residential Mortgage Loans included in the
Securing Mortgage Loans are located in Illinois, and approximately % are
located in Arizona. Consequently, these Residential Mortgage Loans may be
subject to a greater risk of default than other comparable Residential
Mortgage Loans in the event of adverse economic, political or business
developments in Illinois and Arizona that may affect the ability of
residential property owners in any of these areas to make payments of
principal and interest on the underlying mortgages.
Loan-to-Value Ratios; Insurance. Approximately % of the Residential
Mortgage Loans included in the Securing Mortgage Loans having Loan-to-Value
Ratios of greater than %, are insured under primary mortgage guaranty
insurance policies. Approximately % of such insured Residential Mortgage
Loans are insured by one primary mortgage insurance policy issuer. At the time
of origination of the Residential Mortgage Loans, each of the primary mortgage
insurance policy insurers was approved by Fannie Mae or FHLMC. A standard
hazard insurance policy is required to be maintained by the mortgagor with
respect to each Residential Mortgage Loan in an amount equal to the maximum
insurable value of the improvements securing such Residential Mortgage Loan or
the principal balance of such Residential Mortgage Loan, whichever is less. If
the residential real estate property underlying a Residential Mortgage Loan is
located in a flood zone, such Residential Mortgage Loan may also be covered by
a flood insurance policy as required by law. No special hazard insurance
policy or mortgagor bankruptcy insurance will be maintained by the Company
with respect to the Residential Mortgage Loans among the Securing Mortgage
Loans, nor will any Residential Mortgage Loan be insured by the Federal
Housing Administration or guaranteed by the Veterans Administration.
DESCRIPTION OF INITIAL MORTGAGE-BACKED SECURITIES
The Initial Mortgage-Backed Securities will consist of either % GNMA
Platinum Securities or % Fannie Mae Seven-year Balloon Securities purchased
from the Bank.
The Fannie Mae Seven-year Balloon Mortgage-Backed Security is backed by a
pool of balloon Mortgage Loans that are amortized on a 30-year schedule but
carry a maximum term of seven years. Fannie Mae guarantees full payment of
principal by the end of seven years.
The GNMA Platinum Certificates represent an interest in a pool of GNMA I
Certificates or GNMA II Certificates with the same pool type, coupon rate and
original term to maturity. The GNMA Platinum Certificates will have the same
fixed coupon rates as the underlying GNMA Certificates and are guaranteed as
to the timely payment of principal and interest by GNMA. The Mortgage Loans
underlying GNMA Certificates consist of government loans secured by mortgaged
loans on residential properties, including level payment mortgage loans and
"buy down" mortgage loans. All Mortgage Loans underlying a particular GNMA
Certificate must be of the same type (for example, all level payment single
family mortgages) and have a fixed annual interest rate.
SERVICING
The Mortgage Loans will be serviced by the Bank pursuant to the terms of the
Servicing Agreement. The Bank in its role as servicer under the terms of the
Servicing Agreement is herein referred to as the "Servicer." The Servicer will
receive a fee equal to 0.25% per annum on the principal balances of the loans
serviced. Payment of such fees will be subordinate to payments of dividends on
the Series A Preferred Shares.
The Servicing Agreement requires the Servicer to service the Mortgage Loans
in a manner generally consistent with accepted secondary market practices,
with any servicing guidelines promulgated by the Company and, in the case of
Residential Mortgage Loans, with Fannie Mae and FHLMC guidelines and
procedures. The Servicing Agreement requires the Servicer to service the
Mortgage Loans solely with a view toward the interests of the Company and
without regard to the interests of the Bank or any of its affiliates. The
Servicer will collect and remit principal and interest payments, administer
mortgage escrow accounts, submit and pursue insurance claims and initiate and
supervise foreclosure proceedings on the Mortgage Loans it services. The
Servicer will also provide accounting and reporting services required by the
Company for such Mortgage Loans. The Servicing
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Agreement requires the Servicer to follow such collection procedures as are
customary in the industry, including contacting delinquent borrowers and
supervising foreclosures and property disposition in the event of unremedied
defaults in accordance with servicing guidelines promulgated by the Company.
The Servicer may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreement, subject to the reasonable
consent of the Company and approval of a majority of the Independent
Directors. 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 Servicer will be required to pay all expenses related to the performance
of its duties under the Servicing Agreement. The Servicer will be required to
make advances of taxes and required insurance premiums that are not collected
from borrowers with respect to any Mortgage Loan serviced by it, unless it
determines that such advances are nonrecoverable from the mortgagor, insurance
proceeds or other sources with respect to such Mortgage Loan. If such advances
are made, the Servicer generally will be reimbursed prior to the Company's
receipt of the proceeds of such Mortgage Loan. The Servicer also will be
entitled to reimbursement 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. The Servicer will be responsible to the
Company for any loss suffered as a result of the Servicer's failure to make
and pursue timely claims or as a result of actions taken or omissions made by
the Servicer which cause the policies to be canceled by the insurer. The
Servicer may institute foreclosure proceedings, exercise any power of sale
contained in any mortgage or deed of trust, obtain a deed in lieu of
foreclosure or otherwise and hold mortgage proceeds for the benefit of the
Company acquire title to a mortgaged property underlying a Mortgage Loan by
operation of law or otherwise in accordance with the terms of the Servicing
Agreement. The Servicer shall not, however, have the authority to enter into
contracts in the name of the Company.
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 also
terminate the Servicing Agreement without cause upon 60 days' notice and
payment of a termination fee that is competitive with that which is generally
payable in the industry. The termination fee will be based on the aggregate
outstanding principal amount of the Mortgage Loans then serviced under the
Servicing Agreement. As long as any Series A Preferred Shares remain
outstanding, the Company may not terminate, or elect 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. 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.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law
and governmental regulations. The terms of a particular Mortgage Loan or
applicable law, however, may provide that the Servicer is prohibited from
exercising the "due-on-sale" clause under certain circumstances related to the
security underlying the Mortgage Loan and the buyer's ability to fulfill the
obligations thereunder. Upon any assumption of a Mortgage Loan by a
transferee, a fee equal to a specified percentage of the outstanding principal
balance of the Mortgage Loan is typically required, which sum will be retained
by the Servicer as additional servicing compensation.
EMPLOYEES
The Company has six officers. The executive officers of the Company are
described further below under "Management." The Company does not anticipate
that it will require any additional employees because it has retained the
Advisor to perform certain functions pursuant to the Advisory Agreement
described below under
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"Management--The Advisor." Each officer of the Company currently is also an
officer and/or director of the Bank and/or affiliates of the Bank. The Company
will maintain corporate records and audited financial statements that are
separate from those of the Bank or any of the Bank's affiliates. None of the
officers, directors or employees of the Company will have any direct or
indirect pecuniary interest in any Mortgage Asset to be acquired or disposed
of by the Company or in any transaction in which the Company has an interest
or will engage in acquiring, holding and managing Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. While the Company will acquire additional Mortgage
Assets, it anticipates that such Mortgage Assets will be acquired from the
Bank and affiliates of the Bank. Accordingly, 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 Assets.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, the Bank or any affiliate of the Bank is currently involved in nor,
to the Company's knowledge, currently threatened with any material litigation
with respect to the Initial Mortgage Assets, other than routine litigation
arising in the ordinary course of business, most of which is expected to be
covered by liability insurance.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of four members. Two
additional persons will be appointed to the Board of Directors, each of whom
will be an Independent Director. Pursuant to the terms of the Series A
Preferred Shares, the Independent Directors are required to take into account
the interests of the holders of both the Series A Preferred Shares and the
Common Stock in assessing the benefit to the Company of any proposed action
requiring their consent. In considering the interests of the holders of the
Series A Preferred Shares, the Independent Directors shall owe the same duties
which the Independent Directors owe to holders of Common Stock. The Company
currently has six officers. The Company has no other employees and does not
anticipate that it will require additional employees. See "Business and
Strategy--Employees."
The persons who are current and proposed directors and executive officers of
the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Michael D. Williams............... 42 Chairman of the Board of Directors
Paul R. Skubic.................... 49 President, Director
Pierre O. Greffe.................. 45 Chief Financial Officer
Thomas R. Sizer................... 59 Secretary, Director
Frank M. Novosel.................. 51 Treasurer, Director
John F. Faulhaber................. 51 Vice President of Operations
Margaret M. Sulkin................ 39 Assistant Treasurer
</TABLE>
The following is a summary of the experience of the executive officers and
current and proposed directors of the Company:
Mr. Williams has been Senior Vice President, Community Bank Management, of
the Bank since June 1996. Prior to that he was Senior Vice President, Retail
Banking, of Household Bank, f.s.b., a company he joined in April of 1978.
Household Bank's 54 Illinois branches were acquired by the Bank in June 1996.
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Mr. Skubic has been Vice-President and Controller of the Bank and Chief
Accounting Officer for Harris Bankcorp, Inc., since 1990. Prior to joining
Harris Bankcorp, Inc., Mr. Skubic was employed by Arthur Andersen & Co. He is
a certified public accountant.
Mr. Greffe has been Senior Vice President and Chief Financial Officer of the
Bank since June 1994. Prior to that he was Vice President of Finance,
Corporate and Institutional Financial Services, of Bank of Montreal in
Toronto. Mr. Greffe has been with the Bank of Montreal family of companies
since November 1974. Mr. Greffe is a member of the Certified Management
Accountant Institute of Canada.
Mr. Sizer has been Vice President and Secretary of the Bank since 1983.
Prior to that time he was a Vice President of the Bank. He holds a Juris
Doctor degree from Fordham University, New York.
Mr. Novosel has been a Vice-President in the Treasury Group of the Bank
since 1995. Previously, he served as Treasurer of Harris Bankcorp, Inc.,
managing financial planning. Mr. Novosel is a Chartered Financial Analyst and
a member of the Investment Analysts' Society of Chicago.
Mr. Faulhaber has been Vice-President and Division Administrator,
Residential Mortgages, at the Bank since 1994. Prior to this position, he was
Manager, Secondary Mortgage Market, since 1991. He currently serves on the
Bank's Asset/Liability Committee.
Ms. Sulkin has been a Vice President in the Taxation Department of the Bank
since 1992. Ms. Sulkin has been employed by the Bank since 1984. Prior to
joining the Bank, she was employed by KPMG Peat Marwick LLP. She is a
certified public accountant.
INDEPENDENT DIRECTORS
The terms of the Series A Preferred Shares require that, as long as any
Series A Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors of the Company. See
"Description of Series A Preferred Shares--Independent Director Approval."
and will be the Company's initial
Independent Directors. As long as there are only two Independent Directors,
any action that requires the approval of a majority of Independent Directors
must be approved by both Independent Directors.
If at any time the Company fails to declare and pay a quarterly dividend
payment on the Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two at
the Company's next annual meeting and the holders of Series A Preferred
Shares, voting together with the holders of any other outstanding series of
Preferred Stock as a single class, will be entitled to elect two additional
directors to serve on the Company's Board of Directors. Any member of the
Board of Directors elected by holders of the Company's Preferred Stock will be
deemed to be an Independent Director for purposes of the actions requiring the
approval of a majority of the Independent Directors. See "Description of
Series A Preferred Shares--Voting Rights."
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement of independent accountants and
review their independence. The audit committee will also review the adequacy
of the Company's internal accounting controls. The audit committee will be
comprised of and .
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company fees for
their services as directors. The Independent Directors will receive annual
compensation of $10,000 plus a fee of $750 for attendance (in person or by
telephone) at each meeting of the Board of Directors.
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The Company will not pay any compensation to its officers or employees or to
directors who are not Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Charter (as such term is defined in the MGCL) eliminates, to
the fullest extent permitted by the MGCL, the personal liability of a director
to the Company or its stockholders for monetary damages for breach of such
director's fiduciary duty. The Company's Charter and bylaws (the "Bylaws")
empower the Company to indemnify, to the fullest extent permitted by the MGCL,
any director or officer of the Company. The Bylaws also empower the Company to
purchase and maintain insurance to protect any director or officer against any
liability asserted against him or her, or incurred by him or her, arising out
of his or her status as such.
The Bylaws require indemnification of the Company's directors and officers
and specify that the right to indemnification is a contract right, setting
forth certain procedural and evidentiary standards applicable to the
enforcement of a claim under the Bylaws. The Bylaws also entitle any director
or officer to be reimbursed for the expenses of prosecuting any claim against
him or her arising out of his or her status as such.
THE ADVISOR
In connection with the consummation of the Offering, and the formation of
the Company as described herein, the Company will enter into the Advisory
Agreement with the Bank to administer the day-to-day operations of the
Company. The Bank in its role as advisor under the terms of the Advisory
Agreement is herein referred to as the "Advisor." The Advisor will be
responsible for (i) monitoring the credit quality of the Mortgage Assets held
by the Company, (ii) advising the Company with respect to the reinvestment of
income from, and principal payments on, the Initial Mortgage Assets, and with
respect to the acquisition, management, financing and disposition of the
Company's Mortgage Assets, and (iii) monitoring the Company's compliance with
the requirements necessary to qualify as a REIT. 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
mortgage finance and the administration of Mortgage Assets. The Advisor may,
with the approval of a majority of the Board of Directors, as well as a
majority of the Independent Directors, subcontract all or a portion of its
obligations under the Advisory Agreement to unrelated third parties. The
Advisor will not, in connection with the subcontracting of any of its
obligations under the Advisory Agreement, be discharged or relieved in any
respect from its obligations under the Advisory Agreement.
The Advisor and its affiliates have substantial experience in the mortgage
lending industry, both in the origination and in the servicing of mortgage
loans. At September 30, 1997, the Advisor and its domestic affiliates owned
approximately $1.8 billion of residential mortgage loans. In their residential
mortgage loan business, the Advisor and its affiliates originate and purchase
residential mortgage loans and then sell such loans to investors, primarily in
the secondary market, while generally retaining the rights to service such
loans. The Advisor and its affiliates also purchase servicing rights on
residential mortgage loans. At September 30, 1997, in addition to loans
serviced for its own portfolio, the Advisor serviced residential mortgage
loans having an aggregate principal balance of approximately $1.2 billion.
The Advisory Agreement has an initial term of one year, and may be renewed
for additional one-year periods. The Advisory Agreement may be terminated by
the Company at any time upon 60 days' prior written notice. As long as any
Series A Preferred Shares remain outstanding, any decision by the Company
either to renew the Advisory Agreement or to terminate the Advisory Agreement
must be approved by a majority of the Board of Directors, as well as by a
majority of the Independent Directors. The Advisor will be entitled to receive
an advisory fee equal to $50,000 payable in equal quarterly installments with
respect to the advisory and management services provided by it to the Company.
Payment of such fees will be subordinated to payments of dividends on the
Series A Preferred Shares.
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As a result of the relationship between the Bank and the Company, certain
conflicts of interest may arise. See "Risk Factors--Relationship with the Bank
and its Affiliates; Conflicts of Interest."
The principal executive offices of the Advisor are located at 111 West
Monroe Street, Chicago, Illinois 60690, and its telephone number at such
address is (312) 461-2121.
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
THE FORMATION
Prior to or simultaneously with the consummation of the Offering, the
Company and the Bank will engage in the transactions described below, which
are designed to (i) facilitate the Offering, (ii) provide for the acquisition
of the Initial Mortgage Assets by the Company, and (iii) enable the Company to
qualify as a REIT for federal income tax purposes commencing with its taxable
year ending December 31, 1997.
Transactions constituting the formation of the Company will include the
following:
. The Bank has acquired 1,000 shares of Common Stock and will make
additional capital contributions with respect thereto equal to $250
million, from which will be paid underwriting discounts and expenses of the
Offering and the formation of the Company and to capitalize the Company.
. The Charter of the Company will be amended and restated by filing
Articles of Amendment and Restatement with the State Department of
Assessments and Transaction of Maryland in order to provide for 1,000
authorized shares of Common Stock and 20,000,000 authorized shares of
Preferred Stock, and to establish the terms of the Series A Preferred
Shares.
. The Company will sell to the public 10,000,000 Series A Preferred
Shares in the Offering.
. The Company will acquire the Initial Mortgage Assets from the Bank for
approximately $ million. In addition, the Bank will assign the
Securing Mortgage Loans to the Company and the Company will acquire a
security interest in the real property securing the Securing Mortgage
Loans.
. The Company will enter into the Advisory Agreement with the Advisor
pursuant to which the Advisor will manage the Mortgage Assets and
administer the day-to-day operations of the Company. See "Management--The
Advisor."
. The Company will enter into the Servicing Agreement with the Servicer
pursuant to which the Servicer will service the Securing Mortgage Loans and
other Mortgage Loans held by the Company. See "Business and Strategy--
Servicing."
The Bank currently owns, and following the consummation of the Offering will
continue to own, all of the issued and outstanding shares of Common Stock of
the Company. In addition to its ownership of 100% of the Common Stock of the
Company, the Bank will also have responsibility for the day-to-day management
and custody of the Company's assets, in its capacity as Advisor under the
Advisory Agreement, and Servicer under the Servicing Agreement. The Bank has
indicated to the Company that, for as long as any Series A Preferred Shares
are outstanding, the Bank intends to maintain direct or indirect ownership of
at least 80% of the outstanding Common Stock of the Company. See "Management--
The Advisor" and "Risk Factors--Relationship with the Bank and its Affiliates;
Conflicts of Interest."
The Company and the Bank intend that the fair value of the Initial Mortgage
Assets will equal the amount (approximately $ million) that the Company
will pay for the Initial Mortgage Assets. However, no third party valuations
of the Initial Mortgage Assets have been or will be obtained for purposes of
the Offering, and there can be no assurance that the fair value of the Initial
Mortgage Assets will not differ from the amount to be paid by the Company. See
"Risk Factors--No Third Party Valuation of the Mortgage Assets; No Arm's-
Length Negotiations with Affiliates" and "--Relationship with the Bank and its
Affiliates; Conflicts of Interest."
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<PAGE>
BENEFITS TO THE BANK
The Bank expects to realize the following benefits in connection with the
Offering and other transactions constituting the formation of the Company:
. The Bank expects that the Series A Preferred Shares will qualify as
Tier 1 capital for U.S. banking regulatory purposes.
. The dividends payable on the Series A Preferred Shares will be
deductible for income tax purposes as a result of the Company's
qualification as a REIT.
. The Bank has advised the Company that the treatment of the Series A
Preferred Shares as Tier 1 capital of the Bank and the Company's ability to
deduct, for income tax purposes, the dividends payable on the Series A
Preferred Shares as a result of the Company's qualification as a REIT will
provide the Bank with a more cost-effective means of obtaining regulatory
capital than if the Bank were to issue preferred stock itself. Further, if
the Bank issued a class of preferred stock with dividend rights, the
dividends payable on such Bank preferred stock would not be deductible by
the Bank for income tax purposes.
. The Bank will receive approximately $ million upon consummation of
the Offering in connection with the acquisition of the Initial Mortgage
Assets by the Company (approximately $ million of which represents new
funds after giving effect to the Bank's expense of purchasing the Company's
Common Stock and additional capital contributions).
. The Bank will be entitled to receive annual advisory and servicing fees
and annual dividends in respect of the Common Stock. For the first 12
months following completion of the Offering, these annual fees and
dividends are anticipated to be as follows:
<TABLE>
<S> <C>
Advisory Fee............................................... $ 50,000
Servicing Fees............................................. (1)
Common Stock Dividends..................................... (2)
-----------
$
===========
</TABLE>
--------
(1) Assumes that for the first 12 months following completion of the
Offering, the Company holds Residential Mortgage Loans or Bank Secured
Obligations secured by Residential Mortgage Loans with the same
outstanding principal balances as those Residential Mortgage Loans
included in the Initial Mortgage Assets. See "Business and Strategy--
Servicing" for a description of the basis upon which the servicing fees
will be calculated.
(2) The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's "REIT taxable
income" (excluding capital gains) over the amount of dividends paid in
respect of Preferred Stock. The aggregate annual dividend amount of the
Series A Preferred Shares is approximately $ million. Assuming that
(i) the Initial Mortgage Assets are held for the 12-month period
following consummation of the Offering, (ii) principal repayments are
reinvested in additional Mortgage Assets with characteristics similar
to those of the Initial Mortgage Assets, and (iii) interest rates
remain constant during such 12-month period, the Company anticipates
that the Initial Mortgage Assets will generate "REIT taxable income"
(excluding capital gains) of approximately $ million, after payment
of servicing and advisory fees, during such 12-month period.
. The Bank also will be entitled to retain any ancillary fees, including,
but not limited to, late payment charges, prepayment fees, penalties and
assumption fees collected in connection with the Mortgage Loans serviced by
it. In addition, the Bank, as Servicer, will receive any benefit derived
from interest earned on collected principal and interest payments between
the date of collection and the date of remittance to the Company and from
interest earned on tax and insurance impound funds with respect to Mortgage
Loans serviced by the Servicer.
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<PAGE>
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to
the terms and provisions of the Articles of Amendment and Restatement
establishing the Series A Preferred Shares and the Company's Charter, the
forms of which have been filed with the Commission as exhibits to the
Registration Statement of which this Prospectus forms a part. See "Description
of Capital Stock."
GENERAL
The Series A Preferred Shares form a series of the Preferred Stock of the
Company, which Preferred Stock may be issued from time to time in one or more
series with such rights, preferences and limitations as are determined by the
Company's Board of Directors. The Board of Directors has authorized the
Company to issue the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the capital stock of the
Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
will not be subject to any sinking fund or other obligation of the Company for
their repurchase or retirement. The Series A Preferred Shares will be
exchanged automatically on a one-for-one basis for Bank Preferred Shares upon
the occurrence of the Exchange Event.
The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be the Bank. The registrar for shares of Preferred Stock
will send notices to stockholders of any meetings at which holders of the
Preferred Stock have the right to elect directors of the Company or to vote on
any other matter.
DIVIDENDS
Holders of Series A Preferred Shares shall be entitled to receive, if, when
and as declared by the Board of Directors of the Company out of assets of the
Company legally available therefor, noncumulative cash dividends at the rate
of % per annum of the liquidation preference (equivalent to $ per
share per annum). If declared, dividends on the Series A Preferred Shares
shall be payable quarterly in arrears on March 30, June 30, September 30 and
December 30 (or, if any such day is not a Business Day, on the next Business
Day) of each year, at such annual rate, commencing on December 30, 1997.
Dividends in each quarterly period will accrue from the first day of such
period, whether or not declared or paid for the prior quarterly period. Each
declared dividend shall be payable to holders of record as they appear at the
close of business on the stock register of the Company on such record dates,
not exceeding 45 days preceding the payment dates thereof, as shall be fixed
by the Board of Directors of the Company. Dividends payable on the Series A
Preferred Shares for any dividend period shall be computed on the basis of a
360 day year consisting of twelve 30-day months.
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period,
then holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for
any future period with respect to either the Series A Preferred Shares or the
Common Stock. If the Company fails to pay or declare and set aside for payment
a quarterly dividend on the Series A Preferred Shares, holders of the
Preferred Stock of the Company, including the Series A Preferred Shares, will
be entitled to elect two directors. See "--Voting Rights."
If full dividends on the Series A Preferred Shares for any dividend period
shall not have been declared and paid, or declared and a sum sufficient for
the payment thereof shall not have been set apart for such payments, no
dividends shall be declared or paid or set aside for payment and no other
distribution shall be declared or
39
<PAGE>
made or set aside for payment upon the Common Stock or any other capital stock
of the Company ranking junior to or on a parity with the Series A Preferred
Shares as to dividends or amounts upon liquidation, nor shall any Common Stock
or any other capital stock of the Company ranking junior to or on a parity
with the Series A Preferred Shares as to dividends or amounts upon liquidation
be redeemed, purchased or otherwise acquired for any consideration (or any
monies to be paid to or made available for a sinking fund for the redemption
of any such capital stock) by the Company (except by conversion into or
exchange for other capital stock of the Company ranking junior to the Series A
Preferred Shares as to dividends and amounts upon liquidation), until such
time as dividends on all outstanding Series A Preferred Shares have been (i)
declared and paid for three consecutive dividend periods and (ii) declared and
paid, or declared and a sum sufficient for the payment thereof has been set
apart for payment, for the fourth consecutive dividend period.
When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Series A Preferred Shares and the shares of
any other series of capital stock ranking on a parity as to dividends with the
Series A Preferred Shares, all dividends declared upon the Series A Preferred
Shares and any other series of capital stock ranking on a parity as to
dividends with the Series A Preferred Shares shall be declared pro rata so
that the amount of dividends declared per share on the Series A Preferred
Shares and such other series of capital stock shall in all cases bear to each
other the same ratio that full dividends, for the then-current dividend
period, per share of the Series A Preferred Shares (which shall not include
any accumulation in respect of unpaid dividends for prior dividend periods)
and full dividends, including required or permitted accumulations, if any, on
each other series of capital stock bear to each other.
For a discussion of the tax treatment of distributions to stockholders, see
"U.S. Federal Income Tax Considerations--Taxation of United States
Stockholders" and "--Taxation of Foreign Stockholders," and for a discussion
of certain potential regulatory limitations on the Company's ability to pay
dividends, see "Risk Factors--Dividend and Other Regulatory Restrictions on
Operations of the Company."
AUTOMATIC EXCHANGE
Each Series A Preferred Share will be exchanged automatically for one newly
issued Bank Preferred Share in the event (i) the Bank becomes less than
"adequately capitalized"under regulations established pursuant to FDICIA, (ii)
the Bank is placed into conservatorship or receivership, (iii) the Board of
Governors directs such exchange in writing because, in its sole discretion and
even if the Bank is not less than "adequately capitalized," the Board of
Governors anticipates that the Bank may become less than "adequately
capitalized" in the near term, or (iv) the Board of Governors in its sole
discretion directs in writing an exchange in the event that the Bank has a
Tier 1 risk-based capital ratio of less than 5.0% (i.e., the Exchange Event).
The Bank will be considered to be less than "adequately capitalized" under the
regulations if it has (i) a Tier 1 leverage ratio of less than 4.0%, (ii) a
Tier 1 risk-based capital ratio of less than 4.0%, or (iii) a total risk-based
capital ratio of less than 8.0%. Upon the Exchange Event, each holder of
Series A Preferred Shares shall be unconditionally obligated to surrender to
the Bank the certificates representing each Series A Preferred Share of such
holder, and the Bank shall be unconditionally obligated to issue to such
holder in exchange for each such Series A Preferred Share a certificate
representing one Bank Preferred Share. Any Series A Preferred Shares purchased
or redeemed by the Company prior to the Time of Exchange (as defined below)
shall not be deemed outstanding and shall not be subject to the Automatic
Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
earliest possible Business Day such exchange could occur following the
Exchange Event (the "Time of Exchange"), as evidenced by the issuance by the
Bank of a press release prior to such time. As of the Time of Exchange, all of
the Series A Preferred Shares will be deemed canceled without any further
action by the Company, all rights of the holders of Series A Preferred Shares
as stockholders of the Company will cease, and such persons shall thereupon
and thereafter be deemed to be and shall be for all purposes the holders of
Bank Preferred Shares. The Company will mail notice of the occurrence of the
Exchange Event to each holder of Series A Preferred Shares within 30 days of
such event, and the Bank will deliver to each such holder certificates for
Bank Preferred Shares upon surrender
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of certificates for Series A Preferred Shares. Until such replacement stock
certificates are delivered (or in the event such replacement certificates are
not delivered), certificates previously representing Series A Preferred Shares
shall be deemed for all purposes to represent Bank Preferred Shares. All
corporate action necessary for the Bank to issue the Bank Preferred Shares
will be completed upon completion of the Offering. Accordingly, once the
Exchange Event occurs, no action will be required to be taken by holders of
Series A Preferred Shares, by the Bank or by the Company in order to effect
the Automatic Exchange as of the Time of Exchange.
Holders of Series A Preferred Shares, by purchasing such Series A Preferred
Shares, will be deemed to have agreed to be bound by the unconditional
obligation to exchange such Series A Preferred Shares for Bank Preferred
Shares upon the occurrence of the Exchange Event. The obligation of the
holders of Series A Preferred Shares to surrender such shares and the
obligation of the Bank to issue Bank Preferred Shares in exchange for Series A
Preferred Shares shall be enforceable by the Bank and such holders,
respectively, against the other.
Absent the occurrence of the Exchange Event, no shares of Bank Preferred
Shares will be issued. Upon the occurrence of the Exchange Event, the Bank
Preferred Shares to be issued as part of the Automatic Exchange would
constitute a newly issued series of preferred stock of the Bank and would
constitute 100% of the issued and outstanding shares of Bank Preferred Shares.
Holders of Bank Preferred Shares would have the same dividend rights,
liquidation preference, redemption options and other attributes as to the Bank
as holders of Series A Preferred Shares have as to the Company, except that
the Bank Preferred Shares would not be listed on the NYSE and there would be
no redemption for a Tax Event. Any accrued and unpaid dividends on the Series
A Preferred Shares as of the Time of Exchange would be deemed to be accrued
and unpaid dividends on the Bank Preferred Shares. The Bank Preferred Shares
would rank pari passu in terms of dividend payment and liquidation preference
with any outstanding shares of preferred stock of the Bank. The Bank Preferred
Shares will not be registered with the Commission and will be offered pursuant
to an exemption from registration under Section 3(a)(2) of the Securities Act
of 1933, as amended (the "Securities Act"). The Bank does not intend to apply
for listing of the Bank Preferred Shares on any national securities exchange
or for quotation of the Bank Preferred Shares through the Nasdaq Stock Market.
Absent the occurrence of the Exchange Event, however, the Bank will not issue
any Bank Preferred Shares, although the Bank will be able to issue preferred
stock in series other than that of the Bank Preferred Shares. There can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred
Shares would develop or be maintained.
Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of Series A Preferred Shares
will have no dividend, voting, liquidation preference or other rights with
respect to any security of the Bank; such rights as are conferred by the
Series A Preferred Shares exist solely as to the Company. See "The Bank--
Description of Bank Preferred Shares."
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to
vote as indicated below, each Series A Preferred Share will be entitled to one
vote on matters on which holders of the Series A Preferred Shares are entitled
to vote.
If, at the time of any annual meeting of the Company's stockholders for the
election of directors, the Company has failed to pay or declare and set aside
for payment a quarterly dividend during any of the four preceding quarterly
dividend periods on any series of Preferred Stock of the Company, including
the Series A Preferred Shares, the number of directors then constituting the
Board of Directors of the Company will be increased by two (if not already
increased by two due to a default in preferred dividends), and the holders of
the Series A Preferred Shares, voting together with the holders of all other
series of Preferred Stock as a single class, will be entitled to elect such
two additional directors to serve on the Company's Board of Directors at each
such annual meeting. Each director elected by the holders of shares of the
Preferred Stock shall continue to serve as such director until the later of
(i) the full term for which he or she shall have been elected or (ii) the
payment of four quarterly dividends on the Preferred Stock, including the
Series A Preferred Shares.
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The affirmative vote or consent of the holders of at least 67% of the
outstanding shares of each series of Preferred Stock of the Company, including
the Series A Preferred Shares, will be required (a) to create any class or
series of stock which shall, as to dividends or distribution of assets, rank
prior to or on a parity with any outstanding series of Preferred Stock of the
Company other than a series which shall not have any right to object to such
creation or (b) alter or change the provisions of the Company's Charter
(including the terms of the Series A Preferred Shares) so as to adversely
affect the voting powers, preferences or special rights of the holders of a
series of Preferred Stock of the Company; provided that if such amendment
shall not adversely affect all series of Preferred Stock of the Company, such
amendment need only be approved by at least 67% of the holders of shares of
all series of Preferred Stock adversely affected thereby.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to ,
2002 (except upon the occurrence of a Tax Event). On or after such date, the
Series A Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on not less than 30 nor
more than 60 days' notice by mail, at the principal amount thereof, plus the
quarterly accrued and unpaid dividend to the date of redemption, if any,
thereon.
In the event that fewer than all the outstanding Series A Preferred Shares
are to be redeemed, the number of Series A Preferred Shares to be redeemed
shall be determined by the Board of Directors, and the shares to be redeemed
shall be determined by lot or pro rata as may be determined by the Board of
Directors or by any other method as may be determined by the Board of
Directors in its sole discretion to be equitable, provided that such method
satisfies any applicable requirements of any securities exchange on which the
Series A Preferred Shares are then listed.
Unless full dividends on the Series A Preferred Shares have been or are
contemporaneously declared and paid, or declared and a sum sufficient for the
payment thereof has been set apart for payment for the then-current dividend
period, no Series A Preferred Shares shall be redeemed unless all outstanding
Series A Preferred Shares are redeemed and the Company shall not purchase or
otherwise acquire any Series A Preferred Shares; provided, however, that the
Company may purchase or acquire Series A Preferred Shares pursuant to a
purchase or exchange offer made on the same terms to holders of all
outstanding Series A Preferred Shares.
The Company will also have the right at any time, upon the occurrence of a
Tax Event, to redeem the Series A Preferred Shares, in whole (but not in part)
at a redemption price of $25.00 per share, plus the quarterly accrued and
unpaid dividend to the date of redemption, if any, thereon. "Tax Event" means
the receipt by the Company of an opinion of a nationally recognized law firm
experienced in such matters to the effect that, as a result of (i) any
amendment to, clarification of, or change (including any announced prospective
change) in, the laws or treaties (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein
affecting taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the interpretation
of such Administrative Action or any interpretation or pronouncement that
provides for a position with respect to such Administrative Action that
differs from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or change is
made known, which amendment, clarification or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Series A Preferred Shares, there is a material risk that (a) dividends paid or
to be paid by the Company with respect to the capital stock of the Company are
not, or will not be, fully deductible by the Company for United States federal
income tax purposes or (b) the Company is, or will be, subject to more than a
de minimis amount of other taxes, duties or other governmental charges.
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RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
legally available for distribution to stockholders under applicable law,
before any distribution of assets is made to holders of Common Stock or any
other class of stock ranking junior to the Series A Preferred Shares upon
liquidation, subject to rights of the Company's general creditors, liquidating
distributions in the amount of $25.00 per share, plus the quarterly accrued
and unpaid dividend thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Series A Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Company, then the holders of the Series A
Preferred Shares and such other classes or series of capital stock shall share
ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
liquidation, dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The terms of the Series A Preferred Shares require that, as long as any
Series A Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors.
and will be the Company's initial Independent
Directors. See "Management--Independent Directors." As 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. In
order to be considered "independent," a director must not be a current officer
or employee of the Company or a current director, officer or employee of the
Bank or any other affiliate of the Bank. In addition, any members of the Board
of Directors of the Company elected by holders of Preferred Stock, including
the Series A Preferred Shares, will be deemed to be Independent Directors for
purposes of approving actions requiring the approval of a majority of the
Independent Directors. The actions which require approval of a majority of the
Independent Directors include (i) the issuance of additional Preferred Stock
ranking senior to, or on a parity with, the Series A Preferred Shares, (ii)
the modification of the general distribution policy or the declaration of any
distribution in respect of Common Stock for any year if, after taking into
account any such proposed distribution, total distributions on the Series A
Preferred Shares and the Common Stock would exceed an amount equal to the sum
of 105% of the Company's "REIT taxable income" (excluding capital gains) for
such year plus net capital gains of the Company for that year, (iii) the
acquisition of real estate assets other than Mortgage Assets, (iv) the
redemption of any shares of Common Stock, (v) the termination or modification
of, or the election not to renew, the Advisory Agreement or the Servicing
Agreement or the subcontracting of any duties under the Servicing Agreement or
the Advisory Agreement to third parties unaffiliated with the Bank, (vi) any
dissolution, liquidation or termination of the Company prior to ,
2002, and (vii) the determination to revoke the Company's REIT status. The
terms of the Charter require that, in assessing the benefits to the Company of
any proposed action requiring their consent, the Independent Directors take
into account the interests of holders of both the Common Stock and the
Preferred Stock, including, without limitation, holders of the Series A
Preferred Shares. In considering the interests of the holders of the Preferred
Stock, including, without limitation, holders of the Series A Preferred
Shares, the Independent Directors shall owe the same duties that the
Independent Directors owe to holders of Common Stock.
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RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer."
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the capital stock of the Company does
not purport to be complete and is subject in all respects to the applicable
provisions of the MGCL and the Charter and Bylaws of the Company.
COMMON STOCK
General. The Company is authorized by the Charter to issue up to 1,000
shares of Common Stock. Upon consummation of the Offering and the transactions
described in "Transactions Constituting the Formation," the Company will have
outstanding 1,000 shares of Common Stock, all of which will be held by the
Bank. In addition, the Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect
ownership of at least 80% of the outstanding shares of Common Stock.
Dividends. Holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor, provided that, if the Company fails to declare and pay or declare
and set apart full dividends on the Series A Preferred Shares in any dividend
period, the Company may not pay any dividends or other distributions with
respect to the Common Stock until such time as dividends on all outstanding
Series A Preferred Shares have been (i) declared and paid for three
consecutive dividend periods and (ii) declared and paid, or declared and a sum
sufficient for the payment thereof has been set apart for payment, for the
fourth consecutive dividend period. 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. See "U.S. Federal
Income Tax Considerations--Organizational Requirements."
Voting Rights. Subject to the rights, if any, of the holders of any class or
series of Preferred Stock, all voting rights are vested in the Common Stock.
The holders of Common Stock are entitled to one vote per share. All of the
issued and outstanding shares of Common Stock are currently held by the Bank.
As the holder of all of the outstanding shares of Common Stock, the Bank
will be able, subject to the terms of the Series A Preferred Shares and any
other class or series of stock subsequently issued by the Company, to elect
and remove directors, amend the Charter, and take such other actions requiring
stockholder approval under the MCGL or otherwise.
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 the Charter to issue up to 20 million shares of
Preferred Stock. Subject to limitations prescribed by Maryland law and the
Company's Charter, the Board of Directors or, if then constituted, a duly
authorized committee thereof, is authorized to issue, from the authorized but
unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish,
from time to time, the number of shares of Preferred Stock to be included in
any such class or series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the shares
of any such class or series, and such other subjects or matters as may be
fixed by resolution of the Board of Directors.
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Upon issuance against full payment of the purchase price therefor, shares of
Preferred Stock will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in an
amendment to the Charter of the Company relating to that class or series.
An amendment to the Charter of the Company relating to each class or series
of Preferred Stock will set forth the preferences and other terms of such
class or series, including without limitation the following: (1) the title and
stated value of such class or series; (2) the number of shares of such class
or series offered and the liquidation preference per share of such class or
series; (3) the dividend rate(s), period(s), and/or payment date(s) or
method(s) of calculation thereof applicable to such class or series; (4)
whether 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 a sinking fund, if any, for such class
or series; (6) the provisions for redemption, if applicable, of such class or
series; (7) 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; (8) 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; (9) any other
specific terms, preferences, rights, limitations or restrictions of such class
or series; and (10) any voting rights of such class or series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Charter contains certain restrictions on the number of shares
of Preferred Stock that individual stockholders may directly or beneficially
own. For the Company to qualify as a REIT under the Code, no more than 50% of
the value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities and using certain constructive ownership principles) during
the last half of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year (the "Five or Fewer Test"). The
capital stock of the Company must also be beneficially owned by 100 or more
persons during at least 335 days of a taxable year (other than the first year)
or during a proportionate part of a shorter taxable year (the "One Hundred
Persons Test"). Absent any restrictions on the number of shares of Preferred
Stock that a stockholder may acquire and own (directly or indirectly), there
would be a possibility that the Company might fail the Five or Fewer Test or
the One Hundred Persons Test. In order to avoid the possibility that the
Company may fail the Five or Fewer Test or the One Hundred Persons Test, the
Company has adopted certain share ownership limitations in its Charter.
Subject to certain exceptions specified in the Company's Charter, no natural
person or entity which is considered to be an individual under Section
542(a)(2) of the Code is permitted to own (including shares deemed to be owned
by virtue of the relevant attribution provisions of the Code), more than 5%
(the "Ownership Limit") of any issued and outstanding class or series of
Preferred Stock. The Board of Directors may (but in no event will be required
to), upon receipt of a ruling from the IRS or an opinion of counsel
satisfactory to it, raise or 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. Further, the Charter of the Company contains
restrictions on the acquisition and ownership of Preferred Stock intended to
ensure compliance with the One Hundred Persons Test. Such provisions include a
restriction that if any transfer of shares of capital stock of the Company
would cause the Company to be owned by fewer than 100 persons, such transfer
shall be null and void and the intended transferee will acquire no rights to
the stock.
The Charter of the Company 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, or which would otherwise cause
the Company to fail to qualify as a REIT (the "Excess Shares"), will
automatically be transferred, by operation of law, to a trustee as a trustee
of a trust for the exclusive benefit of a charity to be named by the Company.
Any distributions paid on the Excess Shares prior to the discovery of the
prohibited transfer or ownership are to be repaid by the transferee to the
Company and by the Company to the trustee; any vote of the Excess Shares while
the shares were held by the transferee prior to the Company's discovery of the
prohibited
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transfer or ownership thereof shall be void ab initio and the transferee shall
be deemed to have given its proxy to the trustee. Any unpaid distributions
with respect to the transferee will be rescinded as void ab initio. In
liquidation, the transferee stockholder's ratable share of the Company's
assets would be limited to the price paid by the 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 Excess Shares to any person whose ownership is not
prohibited, whereupon the interest of the trust shall terminate. Proceeds of
the sale shall be paid to the transferee up to its purchase price (or, if the
transferee did not purchase the shares, the value on its date of acquisition)
and any remaining proceeds shall be paid to a charity to be named by the
Company.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition or ownership of less than
5% of a class or series of issued and outstanding Preferred Stock (or the
acquisition or ownership of an interest in an entity that owns shares of such
series of Preferred Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively
in excess of 5% of such class or series of Preferred Stock, and thus subject
such stock to the applicable Ownership Limit. Direct or constructive ownership
in excess of the Ownership Limit would cause ownership of the shares in excess
of the limit to be transferred to the trustee.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if the
REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration
limitation is increased. The foregoing restrictions on transferability and
ownership will not apply, however, if the Board of Directors determines that
it is no longer in the best interests of the Company to attempt to qualify, or
continue to qualify, as a REIT.
The Charter of the Company requires that any person who beneficially owns
0.5% (or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred
Stock of the Company must provide certain information to the Company within 30
days of June 30 and December 31 of each year. In addition, each stockholder
shall upon demand be required to disclose to the Company in writing such
information as the Company may request in order to determine the effect, if
any, of such stockholder's actual and constructive ownership on the Company's
status as a REIT and to ensure compliance with the Ownership Limit.
SUPER-MAJORITY DIRECTOR APPROVAL
The Charter of the Company requires approval by two-thirds of the Company's
Board of Directors in order for the Company to file a voluntary petition of
bankruptcy.
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, directly or indirectly, 10%
or more of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation (an "Interested Stockholder")
or an 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
(i) approved by the board of directors of such corporation and (ii) approved
by the affirmative vote of at least (a) 80% of the votes entitled to be cast
by holders of outstanding voting shares of the corporation and (b) two-thirds
of the votes entitled to be cast by holders of
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voting shares other than voting 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 statute) 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, be subject to the business combination provision 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 interest of its stockholders without compliance by the Company
with the super-majority vote requirements and the other provisions of the
statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares owned by the acquiror and officers who are
employees of the corporation. "Control shares" are shares which, if aggregated
with all other shares previously acquired which the person is entitled to
vote, would entitle the acquiror to vote (i) 20% or more but less than one-
third; (ii) one-third or more but less than a majority; or (iii) a majority of
the outstanding shares. Control shares do not include shares that the
acquiring person is entitled to vote on the basis of prior stockholder
approval. A "control share acquisition" means the acquisition of control
shares subject to certain exemptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or excepted by the charter or bylaws
of the corporation prior to a control share acquisition.
The Bylaws of the Company contain a provision exempting from the control
share statute any shares of stock owned by the Bank or any affiliate of the
Bank.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of U.S. material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the
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extent that it constitutes summaries of legal matters or legal conclusions,
has been reviewed by Chapman and Cutler, and it is such firm's opinion that
such information is accurate in all material respects. The discussion below is
based on existing U.S. 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 U.S. federal income tax laws.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND SALE
OF THE SERIES A PREFERRED SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS
A REAL ESTATE INVESTMENT TRUST, INCLUDING THE U.S. FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company will elect to be taxed as a REIT under Sections 856
through 860 of the Code and the applicable Treasury Regulations (the "REIT
Requirements" or the "REIT Provisions"), commencing with its taxable year
ending December 31, 1997. The Company believes that, commencing with its
taxable year ending, December 31, 1997, 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 as a REIT.
The REIT Requirements are technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Chapman and Cutler, commencing with the Company's taxable
year ending December 31, 1997, the Company will be organized in conformity
with the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that this opinion is
based on certain factual assumptions relating to the organization and
operation of the Company and is conditioned upon certain representations made
by the Company as to factual matters, such as the organization and expected
manner of operation of the Company. In addition, this opinion is based upon
the factual representations of the Company concerning its business and
Mortgage Assets set forth in this Prospectus. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet, through actual
annual operating results, distribution levels and diversity of stock
ownership, the various qualification tests imposed under the Code discussed
below, the results of which will not be reviewed by Chapman and Cutler on a
continuing basis. No assurance can be given that the actual results of the
Company's operation for any one taxable year will satisfy such requirements.
See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is annually 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.
Notwithstanding the Company's qualification as a REIT, 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.
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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 Requirements;
(iv) that is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is
held by 100 or more persons; (vi) not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) at any time
during the last half of each taxable year; and (vii) meets certain other
tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (i) through (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made to be taxed
as a REIT. For purposes of condition (vi), certain tax-exempt entities are
generally treated as individuals, and the beneficiaries of a pension trust
that qualifies under Section 401(a) of the Code and that holds shares of a
REIT will be treated as holding shares of the REIT in proportion to their
actuarial interests in the pension trust. See "--Taxation of United States
Stockholders--Treatment of Tax-Exempt Stockholders." In the opinion of Chapman
and Cutler, the Company does not constitute a financial institution within the
meaning of condition (iv).
In the opinion of Chapman and Cutler, preferred stock is taken into account
for purposes of determining whether a REIT satisfies conditions (v) and (vi)
above. The Company believes that it will issue sufficient shares pursuant to
the Offering to allow it to satisfy conditions (v) and (vi) above. 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." Also,
while certain options to acquire stock would be taken into account for the
purpose of determining whether conditions (v) and (vi) are satisfied, in the
opinion of Chapman and Cutler, because of the
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contingent nature of the Automatic Exchange, the Automatic Exchange does not
constitute an option by the Bank to acquire the Series A Preferred Shares for
this purpose and the possibility that the Automatic Exchange might occur will
not affect the status of the Company as a REIT prior to an actual occurrence
of the Automatic Exchange.
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 two gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (as interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of income
qualifying for the 75% gross income test listed above, dividends, interest,
and gain from the sale or other disposition of stock or securities and certain
other types of gross income (or from any combination of the foregoing).
For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation must be
secured by real property having a fair market value at the time of acquisition
at least equal to the principal amount of the loan. The term "interest"
includes only an amount that constitutes compensation for the use or
forbearance of money. For example, a fee received or accrued by a lender which
is in fact a charge for services performed for a borrower rather than a charge
for the use of borrowed money is not includable as interest; amounts earned as
consideration for entering into agreements to make loans secured by real
property, although not interest, are otherwise treated as within the 75% and
95% classes of gross income so long as the determination of those amounts does
not depend on the income or profits of any person. By statute, the term
interest does not include any amount based on income or profits except that
the Code provides that (i) interest "based on a fixed percentage or
percentages of receipts or sales" is not excluded and (ii) when the REIT makes
a loan that provides for interest based on the borrower's receipts or sales
and a portion of such receipts or sales under one or more leases is based on
income or profits, only a proportionate amount of the contingent interest paid
by the borrower will be disqualified as interest.
The Company anticipates that all the interest on the Mortgage Assets will
satisfy the 75% and 95% gross income tests.
Relief Provisions. If the Company fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even
if these relief provisions apply, a tax would be imposed with respect to the
excess net income.
Asset Tests. At the close of each quarter of its taxable year, the Company
must satisfy three tests relating the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering, or long-term
(at least five years) debt offering of the Company), cash, cash items, and
government securities. The Company anticipates that substantially all of its
assets will fall in this category. Second, not more than 25% of the value of
the Company's total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities.
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After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests and to take such
action within 30 days after the close of any quarter as may be required to
cure any noncompliance, but no assurance can be given that such asset tests
will be met.
Annual Distribution Requirements. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount at least equal to (A) the sum of
(i) 95% of the Company's "REIT taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income, if any, from foreclosure property in excess of the special tax
on income from foreclosure property, minus (B) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the
Company does not distribute (or is not treated as having distributed) all of
its net capital gain or distributes (or is treated as having distributed) at
least 95%, but less than 100% of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gains corporate
tax rates.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirement. However, under some circumstances, the
payment of dividends on the Series A Preferred Shares could be subject to
regulatory limitations. See "Risk Factors--Dividend and Other Regulatory
Restrictions on Operations of the Company." If the Company fails to declare
and pay full dividends on the Series A Preferred Shares in any dividend
period, the Company may not make any dividends or other distributions
(including redemptions and purchases) with respect to the Common Stock until
such time as dividends on all outstanding Series A Preferred Shares have been
(i) declared and paid for three consecutive dividend periods and (ii) declared
and paid or declared and a sum sufficient for the payment thereof has been set
apart for payment for the fourth consecutive dividend period. If the Company
becomes subject to this prohibition, it could have REIT taxable income during
a taxable year in excess of the distributions with respect to the Series A
Preferred Shares. It is anticipated that if this should occur, the Company
would be eligible to make and would in fact make so-called consent dividends,
where no actual distributions are made but the Company and the holders of the
Common Stock would be treated solely for tax purposes as if distributions in
the amount of the consent dividends were made.
"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.
It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement the Company may find it necessary to arrange
for borrowings or to pay dividends in the form of taxable stock dividends if
it is practicable to do so.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
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FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions described above do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in
any year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific
statutory provisions, the Company will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost, and will not be permitted to requalify unless it distributes any
earnings and profits attributable to the period when it failed to qualify.
TAX TREATMENT OF AUTOMATIC EXCHANGE
Upon the occurrence of the Exchange Event, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis for
Bank Preferred Shares. See "Description of Series A Preferred Shares--
Automatic Exchange." The Automatic Exchange will be a taxable exchange with
respect to which each holder of the Series A Preferred Shares will have a gain
or loss, as the case may be, measured by the difference between the basis of
such holder in the Series A Preferred Shares and the fair market value of the
Bank Preferred Shares received in the Automatic Exchange. Assuming that such
holder's Series A Preferred Shares were held as capital assets for the
applicable time period prior to the Automatic Exchange, any gain or loss will
be capital gain or loss. The basis of the holder in the Bank Preferred Shares
will be their fair market value at the time of the Automatic Exchange.
TAXATION OF UNITED STATES STOCKHOLDERS
As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax
purposes (i) a citizen or resident or the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source (except, with respect to the tax year of any trust
that begins after December 31, 1996, a United States Stockholder shall mean a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States fiduciaries who have
authority to control all substantial decisions of the trust). A "Non-United
States Stockholder" is any holder of Series A Preferred Shares that is not a
United States Stockholder.
Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital
gains dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gains dividends will be treated
as long-term capital gain (to the extent they do not exceed the Company's
actual net capital gain) for the taxable year without regard to the period for
which the stockholder has held its stock. However, corporate stockholders may
be required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. A distribution in excess of
current or accumulated earnings and profits will first be treated as a tax-
free return of capital, reducing the tax basis in the United States
Stockholder's Series A Preferred Shares, and a distribution in excess of the
United States Stockholder's tax basis in its Series A Preferred Shares will be
taxable gain realized from the sale of such shares. Dividends declared by the
Company in October, November or December of any year payable to a stockholder
of record on a specified date in any such month shall be treated as both paid
by the Company and received by the stockholder on December 31 of such year;
provided that the dividend is actually paid by the Company during January of
the following calendar year. Stockholders may not claim the benefit of any tax
losses of the Company on their own income tax returns.
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Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock.
Treatment of Tax-Exempt Stockholders. Distributions from the Company to a
tax-exempt employee's pension trust or other domestic tax-exempt stockholder
will not constitute "unrelated business taxable income" unless the stockholder
has borrowed to acquire or carry its shares of the Company. A tax-exempt
employee's pension trust that holds more than 10% of the shares of the capital
stock of the Company may under certain circumstances be required to treat a
certain percentage of dividends as unrelated business taxable income if the
Company is "predominantly held" by qualified trusts. For these purposes, a
qualified trust is any trust defined under Section 401(a) of the Code and
exempt from tax under Section 501(a) of the Code. As a consequence of the
look-through provisions of Code Section 856(h)(3), which generally affects
ownership by pension trusts of shares of REITs, any qualified pension trust
that owns more than 10% of the shares of the capital stock of the Company
might be required to treat a certain portion of the dividends paid as
unrelated business taxable income, if the conditions set forth in Code Section
856(h)(3) are satisfied. Assuming compliance with the ownership limit
described in "Description of Capital Stock--Restrictions on Ownership," the
Company does not anticipate that such conditions will be satisfied.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
HOLDERS
The following discussion summarizes certain United States federal income tax
consequences of the acquisition, ownership and disposition of the Series A
Preferred Shares by an initial purchaser of the Series A Preferred Shares
that, for United States federal income tax purposes, is not a "United States
person" (a "Non-United States Holder"). For purposes of this discussion, a
"United States person" means: a citizen or individual resident of the United
States; a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof;
an estate the income of which is includable in gross income for United States
federal income tax purposes regardless of its source; or a trust if both: (i)
a United States court is able to exercise primary supervision over the
administration of the trust, and (ii) one or more United States trustees or
fiduciaries have the authority to control all substantial decisions of the
trust. This discussion is necessarily of a general nature and does not
consider any specific facts or circumstances that may apply to a particular
Non-United States Holder. Prospective investors are urged to consult their tax
advisors regarding the United States federal tax consequences of acquiring,
holding and disposing of the Series A Preferred Shares as well as any tax
consequences that may arise under the laws of any foreign, state, local or
other taxing jurisdiction.
Dividends. Dividends paid by the Company out of current and accumulated
earnings and profits, as determined for United States federal income tax
purposes, to a Non-United States Holder will generally be subject to
withholding of United States federal income tax at the rate of 30%, unless
reduced or eliminated by an applicable tax treaty or unless such dividends are
treated as effectively connected with a United States trade or business of the
Non-United States Holder. Distributions paid by the Company in excess of its
current and accumulated earnings and profits will be treated first as a
nontaxable return of capital to the extent of the holder's adjusted basis in
his Series A Preferred Shares and, thereafter, as gain from the sale or
exchange of a capital asset as described "--Gain on Disposition." If it cannot
be determined at the time a distribution is made whether such distribution
will exceed the current and accumulated earnings and profits of the Company,
the distribution will be subject to withholding at the same rate as dividends.
Amounts so withheld, however, will be refundable or creditable against the
Non-United States Holder's United States federal income tax liability if it is
subsequently determined that such distribution was, in fact, in excess of the
current and accumulated earnings and profits of the Company. If the receipt of
a dividend is treated as being effectively connected with the conduct of a
United States trade or business by a Non-United States Holder, the dividend
received by such holder will be subject to United States federal income tax in
the same manner as United States persons generally (and, in the case of a
corporate holder, possibly the branch profits tax).
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Gain on Disposition. A Non-United States Holder will generally not be
subject to United States federal income tax on gain recognized on a sale or
other disposition of the Series A Preferred Shares unless (i) the gain is
effectively connected with the conduct of a United States trade or business by
the Non-United States Holder, (ii) in the case of a Non-United States Holder
who is a nonresident alien individual and holds the Series A Preferred Shares
as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other requirements are met, or (iii)
the Series A Preferred Shares constitute "United States real property
interests" ("USRPIs"). The Company does not believe that the Series A
Preferred Shares are, or are likely to become, USRPIs. Gain that is
effectively connected with the conduct of a United States trade or business by
a Non-United States Holder will be subject to United States federal income tax
in the same manner as United States persons generally (and, in the case of a
corporate holder, possibly the branch profits tax) but will not be subject to
withholding. Non-United States Holders should consult applicable treaties,
which may provide for different rules.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
United States Stockholders. Under certain circumstances, a United States
Stockholder of Series A Preferred Shares may be subject to backup withholding
at a rate of 31% on payments made with respect to, or cash proceeds of a sale
or exchange of, Series A Preferred Shares. Backup withholding will apply only
if the holder (i) fails to furnish the person required to withhold with its
Taxpayer Identification Number ("TIN") which, for an individual, would be his
or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of interest
and dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. A United States Stockholder should consult with
a tax advisor regarding qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. Backup withholding is not
an additional tax. Rather, the amount of any backup withholding with respect
to a payment to a United States Stockholder will be allowed as a credit
against such United States Stockholder's United States federal income tax
liability and may entitle such United States Stockholder to a refund, provided
that the required information is furnished to the IRS.
Foreign Stockholders. Additional issues may arise pertaining to information
reporting and backup withholding with respect to Foreign Stockholders, and a
Foreign Stockholder should consult with a tax advisor with respect to any such
information reporting and backup withholding requirements. Backup withholding
with respect to a Foreign Stockholder is not an additional tax. Rather, the
amount of any backup withholding with respect to a payment to a Foreign
Stockholder will be allowed as a credit against any United States federal
income tax liability of such Foreign Stockholder. If withholding, results in
an overpayment of taxes, a refund may be obtained, provided that the required
information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), a
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collective investment fund or separate account in which such plans invest and
any other investor using assets that are treated as the assets of an employee
benefit plan subject to ERISA (each, a "Plan" and collectively, "Plans")
should consider (a) whether the ownership of Series A Preferred Shares is in
accordance with the documents and instruments governing such Plan; (b) whether
the ownership of Series A Preferred Shares is solely in the interest of Plan
participants and beneficiaries and otherwise consistent with the fiduciary's
responsibilities and in compliance with the requirements of Part 4 of Title I
of ERISA, including, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA and the prohibited transaction
provisions of Section 406 of ERISA and Section 4975 of the Code; (c) whether
the Company's assets are treated as assets of the Plan; and (d) the need to
value the assets of the Plan annually. In addition, the fiduciary of an
individual retirement arrangement under Section 408 of the Code (an "IRA")
considering the purchase of Series A Preferred Shares should consider whether
the ownership of Series A Preferred Shares would result in a non-exempt
prohibited transaction under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Code and regulations and
rulings thereunder, and may be changed (perhaps adversely and with retroactive
effect) by future legislative, administrative or judicial actions. PLANS AND
IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD
CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the assets
of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation," 29
C.F.R. Sec. 2510.3-101), when a Plan or IRA makes an equity investment in
another entity, the underlying assets of the entity will not be considered
Plan Assets if the equity interest is a "publicly-offered security."
For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable," (b) part of a class of
securities that is "widely held," and (c) sold to the Plan or IRA as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may
be allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred. The
Series A Preferred Shares will be registered under the Securities Act and the
Exchange Act within the time periods specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable." The Company believes that any
restrictions imposed on the transfer of the Series A Preferred Shares are
limited to the restrictions on transfer generally permitted under the Plan
Asset Regulation and are not likely to result in the failure of the Series A
Preferred Shares to be "freely transferable."
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan.
However, the Company believes that under the Plan Asset Regulation the Series
A Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to
be assets of any Plan or IRA investing in the Series A Preferred Shares.
55
<PAGE>
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and that
the trustee, or an investment manager (within the meaning of Section 3(38) of
ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, the assets of the Company under
current law do not appear likely to be assets of the Plans receiving Series A
Preferred Shares as a result of the Offering. However, if the assets of the
Company were deemed to be assets of the Plans under ERISA, certain directors
and officers of the Company might be deemed fiduciaries with respect to the
Plans that invest in the Company and the prudence and other fiduciary
standards set forth in ERISA would apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with
respect to the investing Plan or IRA could be prohibited transactions unless a
statutory or administrative exemption is available. In addition, investment
authority would also have been improperly delegated to such fiduciaries, and,
under certain circumstances, Plan fiduciaries who make the decision to invest
in the Series A Preferred Shares could be liable as co-fiduciaries for actions
taken by the Company that do not conform to the ERISA standards for
investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit
with a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction
involving the transfer of Plan assets to, or use of Plan assets by or for the
benefit of, a party in interest. Additionally, Section 406 prohibits a Plan
fiduciary from dealing with Plan assets in its own interest or for its own
account, from acting in any capacity in any transaction involving the Plan on
behalf of a party (or representing a party) whose interests are adverse to the
interests of the Plan, and from receiving any consideration for its own
account from any party dealing with the Plan in connection with a transaction
involving Plan assets. Similar provisions in Section 4975 of the Code apply to
transactions between disqualified persons and Plans and IRAs and result in the
imposition of excise taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his or her
beneficiary, the IRA would lose its tax-exempt status. The other penalties for
prohibited transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank or
any of their affiliates is a party in interest or disqualified person with
respect to the Plan. Any such prohibited transaction could be treated as
exempt under ERISA and the Code if the Series A Preferred Shares were acquired
pursuant to and in accordance with one or more "class exemptions" issued by
the Department of Labor, such as Prohibited Transaction Class Exemption
("PTCE") 75-1 (an exemption for certain transactions involving employee
benefit plans and broker-dealers (such as the Underwriters), reporting
dealers, and banks), PTCE 84-14 (an exemption for certain transactions
determined by an independent qualified professional asset manager), PTCE 90-1
(an exemption for certain transactions involving insurance company pooled
separate accounts), PTCE 91-38 (an exemption for certain transactions
involving bank collective investment funds), PTCE 95-60 (an exemption for
certain transactions involving an insurance company's general account) and
PTCE 96-23 (an exemption for certain transactions determined by a qualifying
in-house asset manager).
56
<PAGE>
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction. However, as indicated above under "--Plan Asset Regulation," the
Company believes that under the Plan Asset Regulation the Series A Preferred
Shares should be treated as "publicly-offered securities" and, accordingly,
the underlying assets of the Company should not be considered to be assets of
any Plan or IRA investing in the Series A Preferred Shares.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more than
10% of the Series A Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "U.S. Federal Income Tax Considerations--Taxation of
United States Stockholders--Treatment of Tax-Exempt Stockholders."
THE BANK
CERTAIN INFORMATION REGARDING THE BANK
The Bank is an Illinois banking corporation located at 111 West Monroe
Street, Chicago, Illinois 60603. The Bank is a wholly owned subsidiary of
Harris Bankcorp, Inc., a multibank holding company incorporated under the laws
of the State of Delaware and headquartered in Chicago. Harris Bankcorp, Inc.
also owns 13 other banks, 12 in the counties surrounding Chicago and one in
Arizona. The Bank maintains 60 domestic branch offices, an international
banking facility and 96 automated teller machines in the Chicago area. The
Bank also has representative offices in the cities of Los Angeles, New York
and Tokyo; a branch office in Nassau; and an Edge Act subsidiary in New York.
At September 30, 1997, the Bank had total assets of $15.3 billion, total
deposits of $10.3 billion, total loans (net of unearned income) of $8.4
billion and equity capital of $1.3 billion.
The Bank provides a broad range of banking and financial services to
individuals and corporations domestically and abroad. Services include
corporate banking, personal financial services, corporate and personal trust
services, charge cards and investment services. The Bank offers: demand and
time deposit accounts; various types of loans, including term, real estate,
revolving credit facilities and lines of credit; sales and purchases of
foreign currencies; interest rate management products, including swaps,
forward rate agreements and interest rate guarantees; cash management
services; underwriting of municipal bonds; financial consulting; and a wide
variety of trust and trust-related services including global custody, master
trust, transfer agent and registrar and estate administration.
Competitors of the Bank include commercial banks, savings and loan
associations, consumer and commercial finance companies, credit unions and
other financial services companies. Based on legislation passed in 1986 that
allows Illinois banks to be acquired by banks or holding companies in states
with a reciprocal law in effect together with the federal Interstate Banking
Efficiency Act of 1994 which will allow for both interstate banking and
interstate branching in certain circumstances, the Bank believes that the
level of competition will increase in the future.
The Bank is subject to regulation by the Federal Reserve Board and the
Federal Deposit Insurance Corporation (the "FDIC"). As a state-chartered bank,
it is also regulated by the Office of the Commissioner of Banks and Real
Estate of the State of Illinois (the "Illinois Commissioner of Banks"). These
regulatory bodies examine the Bank and supervise numerous aspects of its
business.
The audited consolidated financial statements of the Bank for the years
ended December 31, 1995 and 1996 are included herein. See "--Selected
Consolidated Financial and Other Data."
57
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial data set forth below for the year ended
December 31, 1996, have been derived from the Bank's consolidated financial
statements included elsewhere herein. The data presented for the quarter and
nine months ending September 30, 1997 and 1996 are unaudited but have been
prepared on the same basis as the audited consolidated financial statements
and include all adjustments, consisting of normal, recurring accruals that the
Bank considers necessary for a fair presentation of the financial position and
results of operations for the periods presented. Operating results for the
period ended September 30, 1997, are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1997. The
selected financial data presented below should be read in conjunction with the
Bank's consolidated financial statements and notes thereto and other
information appearing elsewhere herein.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
SEPTEMBER DECEMBER SEPTEMBER
30, 31, 30,
1997 1996 1996
----------- ----------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks. $ 1,188,255 $ 1,154,613 $ 1,747,589
Money market assets:
Interest-bearing deposits at banks.... 550,173 658,187 839,856
Federal funds sold and securities
purchased under agreement to resell.. 396,400 316,275 478,625
Portfolio securities available for sale. 3,685,983 2,759,331 3,137,919
Trading account assets.................. 35,467 110,355 28,225
Loans................................... 8,382,298 8,147,180 7,859,330
Allowance for possible loan losses...... (107,180) (108,408) (108,949)
Net loans............................. 8,275,118 8,038,772 7,750,381
Premises and equipment.................. 222,857 190,154 180,470
Customers' liability on acceptances..... 41,205 78,983 100,950
Goodwill and other valuation
intangibles............................ 283,839 294,420 306,162
Other assets............................ 611,872 605,576 542,725
----------- ----------- -----------
TOTAL ASSETS........................ $15,291,169 $14,206,666 $15,112,902
=========== =========== ===========
LIABILITIES
Deposits in domestic offices--
noninterest-bearing.................... 2,729,526 3,124,027 3,181,584
- --interest-bearing...................... 5,604,026 4,762,256 4,763,849
Deposits in foreign offices--
noninterest-bearing.................... 23,421 35,116 32,775
- --interest-bearing...................... 1,964,295 1,804,806 2,022,745
----------- ----------- -----------
Total deposits...................... 10,321,268 9,726,205 10,000,953
Federal funds purchased and securities
sold under agreement to repurchase..... 2,549,327 1,992,066 2,727,932
Other short-term borrowings............. 25,457 344,372 167,331
Senior notes............................ 605,000 350,000 439,000
Acceptances outstanding................. 41,205 78,983 100,950
Accrued interest, taxes and other
expenses............................... 117,605 125,968 149,148
Other liabilities....................... 55,932 86,506 61,233
Long-term subordinated notes............ 325,000 310,000 310,000
----------- ----------- -----------
TOTAL LIABILITIES................... 14,040,794 13,014,100 13,956,547
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized
10,000,000 shares; issued and
outstanding 10,000,000 shares.......... 100,000 100,000 100,000
Surplus................................. 600,853 600,377 600,295
Retained earnings....................... 553,257 506,300 486,054
Unrealized holding losses, net of
deferred tax benefits of $14,420 in
1997, $9,308 and $26,115 in 1996....... (3,735) (14,111) (29,994)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY.......... 1,250,375 1,192,566 1,156,355
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY............................. $15,291,169 $14,206,666 $15,112,902
=========== =========== ===========
</TABLE>
58
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------- -----------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees...................... $175,722 $168,054 $518,995 $478,379
Money market assets:
Deposits at banks........................ 7,120 9,118 24,036 20,443
Federal funds sold and securities
purchased under agreement to resell..... 3,457 2,132 9,216 8,373
Trading account............................ 841 880 2,441 2,986
Securities available-for-sale:
U.S. Treasury and Federal agency......... 55,788 43,802 161,484 123,571
State and municipal...................... 1,166 1,357 3,525 4,241
Other.................................... 316 317 947 1,502
-------- -------- -------- --------
Total interest income.................. 244,410 225,660 720,644 639,495
-------- -------- -------- --------
INTEREST EXPENSE
Deposits................................... 90,218 75,227 250,818 203,794
Short-term borrowings...................... 37,048 35,179 108,545 115,535
Senior notes............................... 8,433 6,437 31,594 16,723
Long-term subordinated notes............... 5,389 4,790 14,792 14,783
-------- -------- -------- --------
Total interest expense................. 141,088 121,633 405,749 350,835
-------- -------- -------- --------
NET INTEREST INCOME........................ 103,322 104,027 314,895 288,600
Provision for loan losses.................. 15,466 14,981 46,555 43,307
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................... 87,856 89,046 268,340 245,353
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees....... 25,978 19,704 74,791 62,070
Trading account............................ 735 626 3,130 4,132
Foreign exchange........................... 1,348 1,692 3,462 8,686
Charge card................................ 12,877 13,007 37,142 33,891
Service fees and charges................... 21,968 20,649 62,856 51,456
Portfolio securities gains................. 5,742 664 9,518 4,110
Other...................................... 15,166 8,970 38,806 28,042
-------- -------- -------- --------
Total noninterest income............... 83,814 65,312 229,705 192,387
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............ 63,131 56,055 183,950 155,293
Pension, profit sharing and other employee
benefits.................................. 12,385 9,602 36,520 32,034
Net occupancy.............................. 12,066 10,030 34,312 26,034
Equipment.................................. 10,344 8,453 29,234 24,905
Marketing.................................. 5,127 6,573 16,167 17,301
Communication and delivery................. 5,455 4,742 15,601 14,005
Deposit insurance.......................... 628 18,363 1,826 18,399
Expert services............................ 8,600 3,896 21,544 11,282
Other...................................... 9,432 8,533 28,220 21,181
-------- -------- -------- --------
127,168 126,247 367,374 320,434
Goodwill and other valuation intangibles... 6,235 6,079 18,505 8,885
-------- -------- -------- --------
Total noninterest expenses............. 133,403 132,326 385,879 329,319
-------- -------- -------- --------
Income before income taxes................. 38,267 22,032 112,166 108,421
Applicable income taxes.................... 11,405 6,121 34,810 34,088
-------- -------- -------- --------
NET INCOME............................. $ 26,862 $ 15,911 $ 77,356 $ 74,333
======== ======== ======== ========
EARNINGS PER SHARE (based on 10,000,000
average shares outstanding)............... $ 2.69 $ 1.59 $ 7.74 $ 7.43
======== ======== ======== ========
</TABLE>
59
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
1997 1996
---------- ----------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT JANUARY 1................................... $1,192,566 $ 837,241
Net income........................................... 77,356 74,333
Contributions to capital............................. 476 325,295
Cash dividends--common stock......................... (30,400) (33,400)
Net change in unrealized holding gains/(losses) on
available-for-sale securities,
net of tax.......................................... 10,377 (47,114)
---------- ----------
BALANCE AT SEPTEMBER 30................................ $1,250,375 $1,156,355
========== ==========
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1997 1996
CONSOLIDATED STATEMENT OF CASH FLOWS ----------- -----------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................ $ 77,356 $ 74,333
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses........................... 46,555 43,307
Depreciation and amortization, including
intangibles........................................ 42,554 30,744
Deferred tax benefit................................ (1,793) (1,881)
Gain on sales of portfolio securities............... (9,518) (4,110)
Trading account net sales........................... 74,888 70,413
Net increase in interest receivable................. (18,400) (10,032)
Net decrease in interest payable.................... (5,260) (2,377)
Net increase in loans held for resale............... (43,101) (66,851)
Other, net.......................................... (17,051) (66,591)
----------- -----------
Net cash provided by operating activities......... 146,230 66,955
----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits
at banks........................................... 108,014 (382,156)
Net increase in Federal funds sold and securities
purchased under agreement to resell................ (80,125) (314,681)
Proceeds from sales of securities available-for-
sale............................................... 980,407 723,245
Proceeds from maturities of securities available-
for-sale........................................... 6,725,657 3,418,401
Purchases of securities available-for-sale.......... (8,605,987) (5,317,326)
Net increase in loans............................... (239,800) (25,017)
Net cash received upon assumption of certain assets
and liabilities of Household Bank, f.s.b........... -- 2,244,009
Proceeds from sales of premises and equipment....... 17,989 7,032
Purchases of premises and equipment................. (74,741) (38,902)
Other, net.......................................... (17,011) (6,480)
----------- -----------
Net cash (used) provided by investing activities.. (1,185,597) 308,125
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits............................ 595,063 79,198
Net increase in Federal funds purchased and
securities sold under agreement to repurchase...... 557,261 623,795
Net decrease in short-term borrowings............... (318,915) (672,732)
Proceeds from issuance of senior notes.............. 5,310,000 1,199,436
Repayment of senior notes........................... (5,055,000) (1,238,436)
Proceeds from issuance of long-term notes........... 15,000 15,000
Proceeds from issuance of preferred stock........... -- 45,000
Contribution to capital surplus..................... -- 280,000
Cash dividends paid on common stock................. (30,400) (33,400)
Other, net.......................................... -- (335,112)
----------- -----------
Net cash provided (used) by financing activities.. 1,073,009 (37,251)
----------- -----------
NET INCREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS............................................ 33,642 337,829
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY
1................................................ 1,154,613 1,409,760
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT
SEPTEMBER 30..................................... $ 1,188,255 $ 1,747,589
=========== ===========
</TABLE>
61
<PAGE>
The selected consolidated financial data set forth below for each of the
years in the five year period ended December 31, 1996, has been derived from
the Bank's consolidated financial statements included elsewhere herein. The
selected consolidated financial data presented below should be read in
conjunction with the Bank's consolidated financial statements and notes
thereto and other information appearing elsewhere herein.
COMPARATIVE CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(FULLY TAXABLE EQUIVALENT (FTE) BASIS,
DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees........ $646,767 $608,241 $446,605 $376,820 $429,748
Money market assets:
Deposits at banks........... 30,480 38,153 30,227 23,870 30,691
Federal funds sold and
securities purchased under
agreement to resell........ 11,000 17,833 19,945 14,237 10,108
Trading account.............. 4,969 4,556 2,796 6,537 21,056
Securities held-to-maturity.. -- 51,642 54,221 130,556 134,531
Securities available-for-
sale........................ 188,022 109,048 87,487 -- --
-------- -------- -------- -------- --------
Total interest income 881,238 829,473 641,281 552,020 626,134
-------- -------- -------- -------- --------
INTEREST EXPENSE
Domestic deposits............ 168,431 110,815 87,028 72,556 97,114
Foreign deposits............. 114,299 144,528 90,452 57,850 65,072
Short-term borrowings........ 152,360 165,427 104,640 69,510 98,893
Senior notes................. 22,425 31,125 -- -- --
Long-term notes.............. 19,744 16,881 13,613 20,488 12,953
-------- -------- -------- -------- --------
Total interest expense.... 477,259 468,776 295,733 220,404 274,032
-------- -------- -------- -------- --------
NET INTEREST INCOME.......... 403,979 360,697 345,548 331,616 352,102
Provision for loan losses.... 57,382 42,756 37,308 52,265 55,326
-------- -------- -------- -------- --------
Net Interest Income after
Provision for Loan Losses... 346,597 317,941 308,240 279,351 296,776
-------- -------- -------- -------- --------
NONINTEREST INCOME
Trust and investment
management fees............. 83,195 117,078 115,042 113,193 111,083
Trading account.............. 7,725 4,831 (747) 4,803 (5,389)
Foreign exchange............. 9,978 14,230 19,749 23,804 24,536
Charge card.................. 46,830 41,368 36,997 36,134 35,992
Services fees and charges.... 71,440 58,106 62,224 66,618 70,069
Gain on sales of foreign
claims...................... -- -- -- -- 15,823
Securities gains............. 8,531 23,079 5,117 11,967 3,817
Other........................ 37,801 17,692 18,726 6,607 11,048
-------- -------- -------- -------- --------
Total noninterest income.. 265,500 276,384 257,108 263,126 266,979
-------- -------- -------- -------- --------
NONINTEREST EXPENSES
Employment................... 251,467 247,087 242,498 233,860 216,850
Net occupancy................ 36,530 35,060 34,571 36,688 38,173
Equipment.................... 34,208 35,267 35,076 36,252 39,708
Marketing.................... 24,973 21,335 21,055 19,147 16,879
Communication and delivery... 19,252 17,455 14,974 14,941 15,123
Deposit insurance............ 18,155 4,762 9,726 9,114 10,112
Experts services............. 17,696 18,425 12,428 12,549 12,917
Trust customer charge........ -- -- 51,335 -- --
Writedown of property held
for expansion............... -- -- -- -- 11,802
Other........................ 29,235 34,712 40,360 47,603 56,527
-------- -------- -------- -------- --------
431,516 414,103 462,023 410,154 418,091
Goodwill and other valuation
intangibles................. 14,930 5,969 6,791 7,708 8,469
-------- -------- -------- -------- --------
Total noninterest
expenses................. 446,446 420,072 468,814 417,862 426,560
-------- -------- -------- -------- --------
FTE pretax income............ 165,651 174,253 96,534 124,615 137,195
Applicable income taxes...... 48,179 53,566 12,151 27,243 16,223
FTE adjustment............... 14,391 11,401 16,441 17,915 23,611
-------- -------- -------- -------- --------
Income before cumulative
effect of a change in
accounting principle....... 103,081 109,286 67,942 79,457 97,361
Cumulative effect on prior
years (to December 31, 1992)
of changing the accounting
method for income taxes..... -- -- -- 1,782 --
-------- -------- -------- -------- --------
NET INCOME................ $103,081 $109,286 $ 67,942 $ 77,675 $ 97,361
======== ======== ======== ======== ========
PER COMMON SHARE STATISTICS
Net income per share......... $ 10.31 $ 10.93 $ 6.79 $ 7.77 $ 9.74
Common stock dividends....... 4.19 3.92 3.00 6.25 9.05
AVERAGE SHARES OUTSTANDING
(in thousands).............. 10,000 10,000 10,000 10,000 10,000
PROFITABILITY RATIOS
Net income:
% Average total assets...... 0.77% 0.91% 0.62% 0.79% 0.98%
% Average stockholder's
equity..................... 10.20% 14.07% 9.49% 11.11% 14.73%
CAPITAL RATIOS
Tier 1 leverage ratio....... 6.65% 6.44% 6.60% 7.15% 7.36%
Tier 1 risk-based capital
ratio...................... 7.44% 7.37% 7.82% 8.24% 8.47%
Total risk-based capital
ratio...................... 10.74% 10.86% 11.22% 12.05% 12.48%
NUMBER OF EMPLOYEES AT YEAR-
END (full-time equivalent
basis)...................... 4,813 4,256 4,179 4,293 3,983
</TABLE>
62
<PAGE>
COMPARATIVE CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
(DAILY AVERAGES, DOLLARS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and demand balances
due from banks......... $ 1,061,029 $ 1,081,748 $ 1,025,296 $1,028,000 $1,024,439
Money market assets;
Interest-bearing
deposits at banks..... 576,878 556,862 674,738 639,142 639,863
Federal funds sold and
securities purchased
under agreements to
resell................ 199,578 302,398 486,667 416,939 259,457
Portfolio securities:
Held-to-maturity....... -- 622,380 565,901 1,973,420 1,889,119
Available-for-sale..... 2,879,072 1,715,822 1,529,791 4,415 --
Trading account assets.. 70,452 64,777 39,812 110,493 250,578
Domestic loans, net of
unearned income........ 7,618,469 6,826,960 5,797,439 5,246,771 5,380,086
Foreign office loans,
net of unearned income. 59,235 50,183 43,177 55,970 76,787
----------- ----------- ----------- ---------- ----------
Total loans............ 7,677,704 6,877,143 5,840,616 5,302,741 5,456,873
Allowance for possible
loan losses............ (99,381) (89,661) (91,441) (93,516) (94,100)
Premises and equipment.. 164,020 145,659 144,465 149,222 162,304
Customers' liability on
acceptances............ 87,972 104,994 80,813 71,844 104,498
Goodwill and other
valuation intangibles.. 167,767 27,313 30,040 37,243 42,171
Other assets............ 562,002 641,800 566,437 220,419 248,688
----------- ----------- ----------- ---------- ----------
TOTAL ASSETS......... $13,347,093 $12,051,235 $10,893,135 $9,860,362 $9,983,890
=========== =========== =========== ========== ==========
LIABILITIES
Demand deposits......... $ 2,319,943 $ 2,307,609 $ 2,336,834 $2,176,362 $1,922,958
Interest checking
deposits............... 358,230 209,406 234,614 229,481 233,962
Money market accounts... 773,059 525,760 640,269 677,938 752,794
Savings deposits and
certificates........... 1,960,134 884,365 810,840 831,504 913,725
Other time deposits..... 673,968 681,547 719,478 751,011 712,515
Deposits in foreign
officers............... 2,168,342 2,455,804 2,129,070 1,854,646 1,653,201
----------- ----------- ----------- ---------- ----------
Total deposits....... 8,253,676 7,064,491 6,871,105 6,520,942 6,189,155
Short-term borrowings... 3,066,484 2,929,729 2,553,653 2,229,355 2,803,769
Senior notes............ 392,283 512,205 -- -- --
Acceptances outstanding. 87,969 105,064 80,818 73,711 104,501
Other liabilities....... 233,489 426,940 436,894 102,012 87,439
Long-term notes......... 302,705 235,822 235,000 235,000 138,005
----------- ----------- ----------- ---------- ----------
TOTAL LIABILITIES.... 12,336,606 11,274,251 10,177,470 9,161,020 9,322,869
Stockholder's equity.... 1,010,487 776,984 715,665 699,342 661,021
----------- ----------- ----------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S
EQUITY.............. $13,347,093 $12,051,235 $10,893,135 $9,860,362 $9,983,890
=========== =========== =========== ========== ==========
RATIOS (Percentage of
total average assets)
Money market assets..... 5.8% 7.1% 10.7% 10.7% 9.0%
Portfolio securities and
trading account assets. 22.1 19.9 19.6 21.2 21.4
Loans, net of unearned
income................. 57.5 57.1 53.6 53.8 54.7
Deposits................ 61.8 58.6 63.1 66.1 62.0
Short-term borrowings... 23.0 24.3 23.4 22.6 28.1
Common stockholder's
equity................. 7.6 6.4 6.6 7.1 6.6
SELECTED YEAR-END DATA
Loans, net of unearned
income................. $ 8,147,180 $ 7,459,857 $ 6,356,771 $5,924,320 $5,300,023
Allowance for possible
loan losses............ 108,408 94,153 90,492 93,990 94,258
Total assets............ 14,206,666 11,970,485 11,928,006 10,224,452 9,581,034
Deposits................ 9,726,205 7,030,551 7,015,566 6,552,316 6,070,590
Long-term subordinated
notes.................. 310,000 295,000 235,000 235,000 235,000
Common stockholder's
equity................. 1,192,566 837,241 729,731 734,451 695,134
YEAR-END STOCKHOLDER'S
EQUITY PER COMMON
SHARE.................. $ 119.26 $ 83.72 $ 72.97 $ 73.45 $ 69.51
</TABLE>
63
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1996 Compared to 1995
The Bank's 1996 net income was $103.1 million. Earnings and return on
average common equity ("ROE") comparability between years was affected by the
June 1996 purchase of Household Bank's Chicagoland retail banking business. As
part of the Household transaction, the Bank was assessed a one-time $10
million after-tax charge resulting from third quarter 1996 legislation to
recapitalize the Savings Association Insurance Fund ("SAIF"). This charge
should significantly reduce the Bank's obligation for future deposit insurance
premiums. In addition to the Household acquisition, the Bank's earnings
comparability was affected by net gains from debt portfolio securities
transactions amounting to $23.1 million in 1995 compared to an $8.5 million
net gain for 1996. Most of the 1995 gains were recognized during the second
quarter when conditions in the U.S. bond market led to significant price
rallies and profit opportunities not typically available. Excluding the effect
of these debt portfolio securities gains and the impact of the Household
transaction (which includes the $10 million after-tax SAIF charge), 1996
earnings increased 26 percent from 1995. This increase in earnings is
attributable to strong business growth across corporate, private and retail
banking, and to sustained cost control.
ROE for 1996, excluding the Household transaction, was 13.77 percent and
return on average assets ("ROA") was 0.91 percent. For 1995, ROE was 14.07
percent and ROA was 0.91 percent.
For 1996, net interest income on a fully taxable equivalent basis of $404.0
million was up 12 percent from 1995. Net interest margin increased from 3.56
percent to 3.78 percent in 1996, while average earning assets rose 12 percent
from $10.14 billion to $11.40 billion, and average loans increased 12 percent
or $807 million. Excluding the contribution of the Household transaction, net
interest income would have increased $17.8 million or 5 percent year-to-year.
Noninterest income decreased 4 percent to $265.5 million for 1996, primarily
because of the reduction in net gains from debt portfolio securities
transactions and a $33.9 million or 29 percent decline in trust fees. While
personal and corporate trust fees grew strongly during 1996, total trust fees
and related noninterest expenses decreased as a result of the Bank's sale of
its securities custody and related trustee services business for large
institutions in January 1996.
Total noninterest expenses were $446.4 million in the current year.
Excluding the effect of charges related to the acquisition and ongoing
operations of the Household retail banking business acquired at the end of
second quarter 1996 (including the one-time special SAIF assessment), expenses
declined by 6 percent compared to 1995.
Income taxes decreased by $5.4 million during 1996 primarily reflecting
lower pretax income.
The 1996 provision for loan losses of $57.4 million was up $14.6 million
from $42.8 million in 1995. Net loan charge-offs during 1996 were $47.9
million compared to $39.1 million in 1995, primarily reflecting higher
writeoffs in the charge card portfolio.
Nonperforming assets at December 31, 1996, totaled $18.5 million, or 0.2
percent of total loans compared to $37.4 million or 0.5 percent at the end of
the previous year. At December 31, 1996, the allowance for possible loan
losses was $108.4 million or 1.3 percent of total loans outstanding compared
to $94.2 million or 1.3 percent of loans at the end of 1995. As a result, the
ratio of the allowance for possible loan losses to nonperforming assets
increased from 252 percent at December 31, 1995, to 586 percent at December
31, 1996.
At December 31, 1996, the Bank's consolidated equity capital amounted to
$1.19 billion, up from $837 million at December 31, 1995. The increase
resulted from a $325 million equity infusion by Harris Bankcorp, Inc., and
earnings for the prior twelve months, offset somewhat by $31 million of after-
tax unrealized holding losses related to the Bank's debt and equity securities
classified as available for sale. Also, the Bank paid $41.9 million of
dividends on common stock. In conjunction with the acquisition of Household
Bank's Chicagoland retail banking business, the Bank increased its capital
base by $340 million, in part through the issuance of $15 million of long term
subordinated debt. The balance of the capital, $325 million, was provided via
the aforementioned infusion of equity by Harris Bankcorp, Inc.
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<PAGE>
The Bank's regulatory capital leverage ratio was 6.65 percent compared to
6.44 percent one year earlier. Regulators require most banking institutions to
maintain capital leverage ratios of not less than 4.0 percent. At December 31,
1996, the Bank's Tier 1 and Total Risk-based capital ratios were 7.44 percent
and 10.74 percent, respectively, compared to respective ratios of 7.37 percent
and 10.86 percent at December 31, 1995. The 1996 year-end ratios substantially
exceeded minimum required regulatory ratios of 4.0 percent and 8.0 percent,
respectively.
1995 Compared to 1994
The Bank's 1995 net income was $109.3 million, up 61 percent from $67.9
million in 1994. For 1995, the return on average common equity was 14.07
percent and the return on average assets was 0.91 percent, compared to returns
of 9.49 percent and 0.62 percent, respectively, in 1994. Year to year earnings
comparisons were significantly affected by a one-time $33.4 million after-tax
charge in 1994 resulting from management's decision to absorb the impact of
higher interest rates on mortgage-backed securities held in certain customer
accounts of the Bank's Securities Lending unit. Excluding the effect of the
securities lending charge, returns on average common equity and average assets
were, respectively, 14.16 percent and 0.93 percent in 1994, compared to 14.07
percent and 0.91 percent in 1995; and 1995 earnings increased by 8 percent
compared to 1994. The earnings gain was attributable to strong growth and
business momentum broadly across the Bank - and in particular loan growth in
corporate banking, community banking and the credit card business; sustained
cost control, overhead reduction and operations consolidation; gains from
securities transactions; and reduced FDIC premiums.
Net interest income on a fully taxable equivalent ("FTE") basis was $360.7
million in 1995, up $15.2 million or 4 percent from $345.5 million in 1994.
Average earning assets rose 11 percent to $10.14 billion from $9.14 billion in
1994, attributable to an increase of 18 percent or $1.04 billion in average
loans. Net interest margin declined to 3.56 percent in 1995 from 3.78 percent
in 1994, reflecting rate compression in certain asset categories, a lower mix
of noninterest-bearing deposits, and the relationship which existed in the
markets between short and longer term rates.
Noninterest income increased $19.3 million or 7 percent in 1995, to $276.4
million. In 1995, net gains from the sale of debt securities amounted to $23.1
million, compared to $5.1 million in 1994. Most of these 1995 gains were
recognized in the second quarter when conditions in the U.S. bond market led
to significant price rallies. This enabled the Bank to sell certain U.S.
government agency securities and reinvest the proceeds to reposition its
portfolio, taking advantage of profit opportunities not typically available.
Money market and bond trading profits increased by $5.5 million in 1995, while
charge card fees increased $4.4 million, and trust and investment management
revenue rose $2.0 million. Other sources of non-interest income, which include
fees for letters of credit, corporate finance income and gains on asset sales,
decreased $1.0 million year to year. Service charges declined by $4.1 million
due to the higher interest rate environment and to customer refunds with
respect to FDIC insurance. Foreign exchange revenue decreased by $5.5 million.
This revenue is now reported net of expenses under a new profit sharing
arrangement with Bank of Montreal effective April 3, 1995.
Noninterest expenses in 1995 declined to $420.1 million from $468.8 million
in the previous year, reflecting the one-time $51.3 million (pretax) charge in
the securities lending unit in 1994 and lower FDIC insurance premiums in 1995.
Excluding the effect of these two events, noninterest expenses increased by 2
percent.
Income taxes increased by $41.4 million in 1995, reflecting substantially
higher pretax income and a smaller tax-exempt municipal bond portfolio.
The 1995 provision for loan losses was $42.8 million, up from $37.3 million
in 1994. Net loan charge-offs for the current year were $39.1 million, down
from $40.8 million in 1994, resulting primarily from lower write-offs in the
commercial loan and real estate mortgage loan portfolios.
Nonperforming assets at December 31, 1995 totaled $37.4 million or 0.5
percent of total loans, down from $65.3 million or 1.03 percent of loans at
December 31, 1994. At December 31, 1995, the allowance for possible loan
losses was $94.2 million or 1.3 percent of total loans outstanding, compared
with $90.5 million or 1.4
65
<PAGE>
percent of loans at the end of 1994. As a result, the ratio of the allowance
for possible loan losses to nonperforming assets increased from 139 percent at
December 31, 1994, to 252 percent at December 31, 1995. During the first
quarter of 1995, the Bank adopted Statement of Financial Accounting Standards
("SFAS") No. 114--Accounting by Creditors for Impairment of a Loan and SFAS
No. 118--Accounting by Creditors for Impairment of a Loan--Income Recognition
and Disclosures. SFAS No. 114 addresses accounting by creditors for impairment
of certain loans. It requires that impaired loans within the scope of the
statement (primarily commercial credits) be measured based on the present
value of expected future cash flows (discounted at the loan's effective
interest rate) or, alternatively, at the loan's observable market price or the
fair value of supporting collateral. The Bank determines loan impairment when
assessing the adequacy of the allowance for possible loan losses. SFAS No. 118
permits existing income recognition practices to continue. The adoption of
these Statements did not have a material impact on the Bank's net income or
financial position.
At December 31, 1995, the Bank's consolidated equity capital increased
$107.5 million from 1994 year-end to $837 million. The increase resulted from
earnings for the prior twelve months and $37.4 million of after-tax unrealized
holding gains related to the Bank's debt and equity securities classified as
available for sale. Also, the Bank paid $39.2 million of dividends. To support
continued business growth and expansion, effective December 27, 1995, the Bank
increased its capital base by $60 million by issuing long-term subordinated
debt, purchased by Harris Bankcorp, Inc.
The Bank's regulatory capital leverage ratio was 6.44 percent for fourth
quarter 1995 compared to 6.60 percent for fourth quarter 1994. Regulators
require most banking institutions to maintain capital leverage ratios of not
less than 4.0 percent. At December 31, 1995, the Bank's Tier 1 and Total Risk-
based capital ratios were 7.37 percent and 10.86 percent, respectively,
compared to respective ratios of 7.82 percent and 11.22 percent at December
31, 1994. The 1995 year-end ratios substantially exceeded minimum required
regulatory ratios of 4.0 percent and 8.0 percent, respectively.
DESCRIPTION OF BANK PREFERRED SHARES
Absent the occurrence of an Exchange Event, no Bank Preferred Shares will be
issued. Upon the occurrence of an Exchange Event, the Bank Preferred Shares to
be issued as part of the Automatic Exchange would constitute a newly issued
series of Preferred Shares of the Bank and would constitute 100% of the issued
and outstanding Bank Preferred Shares. The Bank Preferred Shares would have
the same liquidation preference and be subject to redemption on the same terms
as the Series A Preferred Shares (except that there would be no redemption for
a Tax Event). Any accrued and unpaid dividends on the Series A Preferred
Shares as of the Exchange Event would be accounted for as accrued and unpaid
dividends on the Bank Preferred Shares. The Bank Preferred Shares would rank
pari passu, in terms of dividend payments and liquidation preference, with, or
senior to, any outstanding Preferred Shares of the Bank. The Bank Preferred
Shares would not entitle the holders to vote except in certain circumstances.
Dividends on the Bank Preferred Shares would be non-cumulative and payable at
the rate of % per annum of the liquidation preference, if, when and as
declared by the board of directors of the Bank. Potential investors in the
Series A Preferred Shares should carefully consider the information set forth
herein under the heading "Risk Factors--Certain Risks Associated with the
Bank" and "--Bank Preferred Shares Will Not Be Listed on any Exchange." The
Bank does not intend to apply for listing of the Bank Preferred Shares on any
national securities exchange or for quotation of the Bank Preferred Shares
through the Nasdaq Stock Market. Absent the occurrence of an Exchange Event,
however, the Bank will not issue any Bank Preferred Shares, although the Bank
will be able to issue Preferred Shares in series other than that of the Bank
Preferred Shares. There can be no assurance as to the liquidity of the trading
markets for the Bank Preferred Shares, if issued, or that an active public
market for the Bank Preferred Shares would develop or be maintained.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company, the Bank and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Nesbitt Burns Securities Inc. and
(the "Underwriters"), the Company has agreed to sell to
the Underwriters, and the
66
<PAGE>
Underwriters have severally agreed to purchase, the number of Series A
Preferred Shares set forth opposite its name below. In the Purchase Agreement,
the several Underwriters have agreed, subject to the terms and conditions set
forth therein, to purchase all the Series A Preferred Shares offered hereby if
any are purchased. In the event of default by an Underwriter, the Purchase
Agreement provides that, in certain circumstances, the purchase commitments of
the nondefaulting Underwriters may be increased or the Purchase Agreement may
be terminated.
<TABLE>
<CAPTION>
NUMBER OF SERIES
A
UNDERWRITER PREFERRED SHARES
----------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Nesbitt Burns Securities Inc............................
............................
----------
Total............................................... 10,000,000
==========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Series A Preferred Shares directly to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the initial
public offering of the Series A Preferred Shares, the public offering price,
concession and discount may be changed.
The Company has agreed in the Purchase Agreement that, during the period
beginning from the date of this Prospectus and continuing to and including the
date days after the date of this Prospectus, it will not (i) directly
or indirectly offer, pledge, sell, contract to sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any securities that
are substantially similar to the Series A Preferred Shares or any securities
convertible into or exercisable or exchangeable for securities that are
substantially similar to the Series A Preferred Shares or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, the economic consequences of
ownership of securities that are substantially similar to the Series A
Preferred Shares, whether any such swap or transaction discussed in (i) or
(ii) above is to be settled by delivery of securities that are substantially
similar to the Series A Preferred Shares or such other securities, in cash or
otherwise, without the prior written consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated.
Prior to the Offering there has been no public market for the Series A
Preferred Shares. Application has been made to list the Series A Preferred
Shares on the NYSE. Listing is subject to fulfilling all the requirements of
the NYSE. If approved for listing, trading of the Series A Preferred Shares on
the NYSE is expected to commence within 30 days after the initial delivery of
the Series A Preferred Shares. The Underwriters have advised the Company that
they intend to make a market in the Series A Preferred Shares prior to the
commencement of trading on the NYSE. The Underwriters will have no obligation
to make a market in the Series A Preferred Shares, however, and may cease
market making activities, if commenced, at any time.
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.
Until the distribution of the Series A Preferred Shares is completed, rules
of the Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Series A Preferred Shares.
As an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Series A Preferred
Shares. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Series A Preferred Shares.
67
<PAGE>
If the Underwriters create a short position in the Series A Preferred Shares
in connection with the Offering, i.e., if they sell more Series A Preferred
Shares than are set forth on the cover page of this Prospectus, the
Underwriters may reduce that short position by purchasing Series A Preferred
Shares in the open market.
The Underwriters may also impose a penalty bid on certain Underwriters and
selling group members. This means if the Underwriters purchase Series A
Preferred Shares in the open market to reduce the Underwriters' short position
or to stabilize the price of the Series A Preferred Shares, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the security to the extent that
it were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any offset that the
transactions described above may have on the price of the Series A Preferred
Shares. In addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Nesbitt Burns Securities Inc., one of the Underwriters, is a wholly owned
subsidiary of Bankmont Financial Corp., which also owns the Bank, the parent
of the Company. Pursuant to Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD"), when an NASD member,
such as Nesbitt Burns Securities Inc., participates in the distribution of an
affiliated company's securities, the offering must be conducted in accordance
with the applicable provisions of Rule 2720. The Company is considered to be
an "affiliate" (as such term is defined in Rule 2720) of Nesbitt Burns
Securities Inc. Accordingly, the offer and sale of any Series A Preferred
Shares by Nesbitt Burns Securities Inc. will comply with the requirements of
Rule 2720 regarding the distribution of securities of affiliates. In addition,
such offers and sales will comply with any restrictions as may be imposed on
Nesbitt Burns Securities Inc. by the Board of Governors. Pursuant to Rule
2720(1), no NASD member participating in offers and sales of the Series A
Preferred Shares may execute a transaction in the Series A Preferred Shares in
a discretionary account without specific prior written approval of the
member's customer.
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.
EXPERTS
The Statement of Financial Condition of the Company as of , 1997
and the Consolidated Financial Statements of the Bank as of December 31, 1996
and 1995 and for each of the years in the three year period ended December 31,
1996 included in this Prospectus have been audited by KPMG Peat Marwick LLP
and Coopers & Lybrand L.L.P., independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firms as experts in giving said reports.
RATINGS
The Series A Preferred Shares will be rated " " by Moody's Investors
Service, Inc. and " " by Standard & Poor's Ratings Services. A security
rating is not a recommendation to buy, sell or hold securities and may be
68
<PAGE>
subject to revision or withdrawal at any time by the assigning rating
organization. No person is obligated to maintain any rating on the Series A
Preferred Shares, and, accordingly, there can be no assurance that the ratings
assigned to the Series A Preferred Shares upon initial issuance will not be
lowered or withdrawn by the assigning rating organization at any time
thereafter.
LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby and certain tax
matters described under "U.S. Federal Income Tax Considerations" will be
passed upon for the Company by Chapman and Cutler, Chicago, Illinois. The
validity of the Series A Preferred Shares will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York,
who will rely on the opinion of with respect to matters of
Maryland law.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus forms a part) on Form S-11 (the "Registration Statement")
under the Securities Act, with respect to the Series A Preferred Shares
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information regarding the Company and the Series A
Preferred Shares offered hereby, reference is made to the Registration
Statement and the exhibits thereto.
The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
The terms of the Series A Preferred Shares provide that the Company shall
maintain its status as a reporting company under the Exchange Act, for as long
as any of the Series A Preferred Shares are outstanding and pursuant thereto
will furnish shareholders with annual reports containing audited financial
statements.
GLOSSARY
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the Company
pursuant to which the Bank will (i) administer the day-to-day operations of
the Company, (ii) monitor the credit quality of the Mortgage Assets held by
the Company and (iii) advise the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets.
"ARM" or "adjustable rate mortgage" means a Mortgage Loan that features
adjustments of the underlying interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to periodic
interest rate and/or payment caps and a lifetime interest rate cap.
"ATMs" means automated teller machines.
69
<PAGE>
"Automatic Exchange" means the automatic exchange on a share-for-share basis
of Series A Preferred Shares for Bank Preferred Shares upon the occurrence of
the Exchange Event.
"Balloon mortgage" means a mortgage loan originated with a term to stated
maturity that is shorter than the period on which the corresponding
amortization schedule is based. As a result, upon the maturity of a balloon
loan, the mortgagor will be required to make a "balloon payment" which will be
significantly larger than previous monthly payments due on such balloon loans.
"Bank" means Harris Trust and Savings Bank, a wholly owned subsidiary of
Harris Bankcorp, Inc., a multibank holding company incorporated under the laws
of the State of Delaware, headquartered in Chicago and registered under the
Bank Holding Company Act of 1956, as amended.
"Bank Preferred Shares" means the newly issued series of preferred stock of
the Bank for which the Series A Preferred Shares will be exchanged
automatically upon the occurrence of the Exchange Event.
"Bank Secured Obligations" means obligations issued by the Bank that are
recourse only to the Securing Mortgage Loans and are secured by real property.
"Biweekly mortgage" is a fixed-rate mortgage loan with payments made every
two weeks.
"Board of Governors" means the Board of Governors of the Federal Reserve
System or other appropriate successor federal regulatory agency.
"Board of Directors" means the board of directors of the Company.
"Business Day" means a day of the year on which banks are not required or
authorized by law to close in the states of Illinois or New York.
"Bylaws" means the bylaws of the Company.
"Charter" means the Articles of Amendment and Restatement of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loan" means a loan secured by a first mortgage or deed
of trust on a commercial real estate property.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock, par value $1.00 per share, of the
Company.
"Company" means Harris Preferred Capital Corporation, a Maryland corporation.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a shareholder in excess of
the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Event" means (i) the Bank becomes less than "adequately
capitalized" under regulations established pursuant to FDICIA, (ii) the Bank is
placed into conservatorship or receivership, (iii) the Board of Governors
directs such exchange in writing because, in its sole discretion and even if
the Bank is not less than
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<PAGE>
"adequately capitalized," the Board of Governors anticipates that the Bank may
become less than "adequately capitalized" in the near term, or (iv) the Board
of Governors in its sole discretion directs in writing an exchange in the
event that the Bank has a Tier 1 risk-based capital ratio of less than 5.0%
(i.e., the Exchange Event).
"Fannie Mae" means the Federal National Mortgage Association.
"Fannie Mae Required Net Yield" means (i) with respect to any Mortgage Loan
with an original term of 20, 25 or 30 years, Fannie Mae's required net yield
for 30-year fixed rate mortgages (covered by 60-day mandatory commitments)
that was in effect 45 days prior to the effective date of any conversion of
such Mortgage Loan and (ii) with respect to any Mortgage Loan with an original
term of 15 years, Fannie Mae's required net yield for 15-year fixed rate
mortgages (covered by 60-day mandatory commitments) that was in effect 45 days
prior to the effective date of any conversion of such Mortgage Loan.
"FDIC" means the Federal Deposit Insurance Corporation.
"FDICIA" means the Federal Deposit Insurance Corporation Improvement Act of
1991, as amended.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"15-year fixed" is a mortgage loan with fixed, equal monthly payments
amortized over a fifteen year period.
"5/1 year ARM" means a fixed rate Residential Mortgage Loan that
automatically converts to a one-year ARM in the month in which the 60th
monthly payment is due.
"Five or Fewer Test" means the Code requirement that not more than 50% in
value of the Company's outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code).
"Five-year extendable mortgage" is a mortgage loan which has an interest
rate which is fixed for an initial period of five years, at which time the
loan automatically converts to a One-year ARM.
"Foreign Stockholders" means holders of Series A Preferred Shares that are
for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii)
foreign trusts and estates.
"GNMA" means the Government National Mortgage Association.
"Gross Margin" means, with respect to a Residential Mortgage Loan that is an
ARM, the applicable fixed percentage which is added to the applicable index to
calculate the current interest rate paid by the borrower of the adjustable
rate Mortgage Loan (without taking into account any interest rate caps or
minimum interest rates). Gross Margin is inapplicable to fixed rate loans.
"Independent Directors" means the members of the Board of Directors who are
not current officers or employees of the Company and who are not current
directors, officers or employees of the Bank or any affiliate of the Bank.
"Initial Mortgage Assets" means the initial mortgage assets acquired by the
Company from the Bank.
"Initial Mortgage-Backed Securities" means the initial Mortgage-Backed
Securities acquired by the Company from the Bank.
"Interested Stockholder" means a person beneficially owning 10% or more of
the aggregate voting power of a Maryland corporation.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
71
<PAGE>
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Inter-Bank Offered Rate.
"Lifetime interest rate cap" means, with respect to Mortgage Loans that are
ARMs, the maximum interest rate that may accrue during any period over the
term of such Mortgage Loan as stated in the governing instruments evidencing
such Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the mortgaged
property underlying such Mortgagee Loan 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 in effect from time to
time or any successor statute thereto.
"Mortgage Assets" means real estate mortgage assets, including but not
limited to Residential Mortgage Loans, Commercial Mortgage Loans and Mortgage-
Backed Securities.
"Mortgage-Backed Securities" means securities rated by at least one
nationally recognized independent rating organization and representing
interests in or obligations backed by pools of Mortgage Loans.
"Mortgage Loan Purchase Agreement" means the residential mortgage loan
purchase agreement between the Company and the Bank.
"Mortgage Loans" means whole loans secured by single-family (one-to-four-
unit) residential real estate properties or by commercial real estate
properties.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering of Series A Preferred Shares pursuant to the
Prospectus.
"One Hundred Persons Test" means the Code requirement that the capital stock
of the Company be owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
"One-year ARM" means an ARM that adjusts annually beginning in the month in
which the 12th monthly payment is due.
"Ownership Limit" means the provision in the Company's Charter limiting any
person from owning (including shares deemed to be owned by the attribution
provisions of the Code) more than 5% of any issued and outstanding class or
series of Preferred Stock.
"Periodic interest rate cap" means, with respect to ARMs, the maximum change
in the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic interest rate caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.
"Plan" means a pension, profit-sharing, retirement or other employee benefit
plan.
"Plan Asset Regulation" means the DOL regulations determining the assets of
the Plan for purposes of ERISA and the related prohibited transaction excise
tax provisions of the Code.
"Preferred Stock" means preferred stock, par value $.01 per share, of the
Company.
"Prospectus" means this prospectus, as the same may be amended or
supplemented.
72
<PAGE>
"Purchase Agreement" means the underwriting agreement by and among the
Company, the Bank and the Underwriters.
"Rate Adjustment Date" means, with respect to any ARM, a date on which the
interest rate on such ARM adjusts.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.
"REIT taxable income" shall have the meaning set forth in "U.S. Federal
Income Tax Considerations--Taxation of the Company--Annual Distribution
Requirements."
"Residential Mortgage Loan" means a loan secured by a first mortgage or deed
of trust on a single family (one- to four-unit) residential real estate
property.
"SAIF" means the Savings Association Insurance Fund.
"Securing Mortgage Loans" means those Mortgage Loans pledged by the Bank as
security for the Bank Secured Obligations.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.
"Servicer" means the Bank in its role as servicer under the Servicing
Agreement.
"Servicing Agreement" means the servicing agreement between the Bank and the
Company pursuant to which the Bank will service the Securing Mortgage Loans and
other Mortgage Loans held by the Company.
"Seven-year extendable mortgage" is a mortgage loan which has an interest
rate which is fixed for an initial period of seven years, at which time the
loan automatically converts to a One-year ARM.
"Six-month LIBOR" means an adjustable rate mortgage which has an interest
rate related to the six-month London Inter-Bank Offered Rate.
"Tax Event" means the receipt by the Company of an opinion of a nationally
recognized law firm experienced in such matters to the effect that, as a result
of (i) any amendment to, clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, (ii) any judicial decision, official administrative
pronouncement, ruling, regulatory procedure, notice or announcement (including
any notice or announcement of intent to adopt such procedures or regulations)
("Administrative Action") or (iii) any amendment to, clarification of, or
change in the official position or the interpretation of such Administrative
Action or judicial decision or any interpretation or pronouncement that
provides for a position with respect to such Administrative Action or judicial
decision that differs from the theretofore generally accepted position, in each
case, by any legislative body, court, governmental authority or regulatory
body, irrespective of the manner in which such amendment, clarification or
change is made known, which amendment, clarification, or change is effective or
such pronouncement or decision is announced on or after the date of issuance of
the Series A Preferred Shares, there is a material risk that (a) dividends
payable by the Company
73
<PAGE>
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.
"3/1 year ARM" means a fixed rate Residential Mortgage Loan that
automatically converts to a One-year ARM in the month in which the 36th
monthly payment is due.
"Ten-year balloon" is a balloon mortgage with a stated maturity of ten
years.
"Ten-year fixed" is a mortgage loan with fixed, equal monthly payments
amortized over a ten year period.
"30-year fixed" is a mortgage loan with fixed, equal monthly payments
amortized over a thirty year period.
"Three-year ARM" means a fixed rate Residential Mortgage loan that is fixed
at an initial rate for the first 36 monthly payments and adjusts every three
years thereafter.
"Time of Exchange" means the time at which the Automatic Exchange occurs,
deemed to be as of 8:00 a.m. Eastern Time on the earliest possible Business
Day such exchange could occur following the Exchange Event, as evidenced by
the issuance by the Bank of a press release prior to such time.
"TIN" means Taxpayer Identification Number.
"Treasury Index" means the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank
or by any United States government department or agency.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means those underwriters to which the Company will sell the
Series A Preferred Shares pursuant to the terms of the Purchase Agreement.
"United States Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) citizens or residents of
the United States, (ii) corporations, partnerships, or other entities created
or organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
"USRPI" means United States real property interest.
74
<PAGE>
INDEX TO COMPANY FINANCIAL STATEMENT
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. CF-2
Statement of Financial Condition of Harris Preferred Capital Corporation
as of , 1997............................................... CF-3
Note to Financial Statement............................................... CF-4
</TABLE>
CF-1
<PAGE>
INDEX TO BANK FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... BF-2
Consolidated Statement of Condition........................................ BF-3
Consolidated Statement of Income........................................... BF-4
Consolidated Statement of Changes in Stockholder's Equity.................. BF-5
Consolidated Statement of Cash Flows....................................... BF-6
Notes to Financial Statements.............................................. BF-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board
of Directors of Harris Trust
and Savings Bank:
We have audited the accompanying consolidated statements of condition of
Harris Trust and Savings Bank and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the years in the three year
period ended December 31, 1996. These consolidated financial statements are
the responsibility of Harris Trust and Savings Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harris
Trust and Savings Bank and Subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
January 31, 1997
BF-2
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
----------- -----------
(IN THOUSANDS EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks.............. $1,154,613 $1,409,760
Money market assets:
Interest-bearing deposits at banks................. 658,187 457,700
Federal funds sold and securities purchased under
agreement to resell............................... 316,275 163,944
Portfolio securities available for sale.............. 2,759,331 2,036,329
Trading account assets............................... 110,355 98,638
Loans................................................ 8,147,180 7,459,857
Allowance for possible loan losses................... (108,408) (94,153)
----------- -----------
Net loans.......................................... 8,038,772 7,365,704
Premises and equipment............................... 190,154 144,307
Customers' liability on acceptances.................. 78,983 95,326
Goodwill and other valuation intangibles............. 294,420 18,881
Other assets......................................... 605,576 179,897
----------- -----------
TOTAL ASSETS..................................... $14,206,666 $11,970,486
=========== ===========
LIABILITIES
Deposits in domestic offices--noninterest-bearing.... 3,124,027 2,420,886
- --interest bearing................................... 4,762,256 2,216,811
Deposits in foreign offices--noninterest-bearing..... 35,116 41,003
- --interest bearing................................... 1,804,806 2,351,850
----------- -----------
Total deposits................................... 9,726,205 7,030,550
Federal funds purchased and securities sold under
agreement to repurchase............................. 1,992,066 2,104,137
Short-term borrowings................................ 344,372 840,063
Senior notes......................................... 350,000 478,000
Acceptances outstanding.............................. 78,983 95,326
Accrued interest, taxes and other expenses........... 125,968 114,691
Other liabilities.................................... 86,506 175,478
Long-term subordinated notes......................... 310,000 295,000
----------- -----------
TOTAL LIABILITIES................................ 13,014,100 11,133,245
----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized, issued and
outstanding 10,000,000 shares....................... 100,000 100,000
Surplus.............................................. 600,377 275,000
Retained earnings.................................... 506,300 445,119
Unrealized holding gains (losses), net of deferred
taxes of ($9,308) in 1996 and $11,301 in 1995....... (14,111) 17,122
----------- -----------
TOTAL STOCKHOLDER'S EQUITY....................... 1,192,566 837,241
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....... $14,206,666 $11,970,486
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
BF-3
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees.............................. $645,319 $606,008 $444,077
Money market assets:
Deposits at banks................................. 30,480 38,153 30,227
Federal funds sold and securities purchased under
agreement to resell.............................. 11,000 17,833 19,945
Trading account.................................... 3,960 3,842 2,190
Securities available-for-sale:
U.S. Treasury and federal agency.................. 168,665 102,766 83,374
State and municipal............................... 5,550 -- --
Other............................................. 1,873 6,137 4,032
Securities held-to-maturity:
U.S. Treasury and federal agency.................. -- 27,613 16,522
State and municipal............................... -- 15,720 24,237
Other............................................. -- -- 236
-------- -------- --------
Total interest income........................... 866,847 818,072 624,840
-------- -------- --------
INTEREST EXPENSE
Deposits........................................... 282,730 255,343 177,480
Short-term borrowings.............................. 152,360 165,427 104,640
Senior notes....................................... 22,425 31,125 --
Long-term notes.................................... 19,744 16,881 13,613
-------- -------- --------
Total interest expense.......................... 477,259 468,776 295,733
-------- -------- --------
NET INTEREST INCOME................................ 389,588 349,296 329,107
Provision for loan losses.......................... 57,382 42,756 37,308
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 332,206 306,540 291,799
-------- -------- --------
NONINTEREST INCOME
Trust and investment management fees............... 83,195 117,078 115,042
Trading account.................................... 7,725 4,831 (747)
Foreign exchange................................... 9,978 14,230 19,749
Charge card........................................ 46,830 41,368 36,997
Service fees and charges........................... 71,440 58,106 62,224
Securities gains................................... 8,531 23,079 5,117
Other.............................................. 37,801 17,692 18,726
-------- -------- --------
Total noninterest income........................ 265,500 276,384 257,108
-------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation.................... 211,083 201,936 190,769
Pension, profit sharing and other employee
benefits.......................................... 40,384 45,151 51,729
Net occupancy...................................... 36,530 35,060 34,571
Equipment.......................................... 34,208 35,267 35,076
Marketing.......................................... 24,973 21,335 21,055
Communication and delivery......................... 19,252 17,455 14,974
Deposit insurance.................................. 18,155 4,762 9,726
Expert services.................................... 17,696 18,425 12,428
Trust customer charge.............................. -- -- 51,335
Other.............................................. 29,235 34,712 40,360
-------- -------- --------
431,516 414,103 462,023
Goodwill and other valuation intangibles........... 14,930 5,969 6,791
-------- -------- --------
Total noninterest expenses...................... 446,446 420,072 468,814
-------- -------- --------
Income before income taxes......................... 151,260 162,852 80,093
Applicable income taxes............................ 48,179 53,566 12,151
-------- -------- --------
NET INCOME......................................... $103,081 109,286 67,942
======== ======== ========
EARNINGS PER SHARE (based on 10,000,000 average
shares outstanding)............................... $ 10.31 $ 10.93 $ 6.79
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
BF-4
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
UNREALIZED
HOLDING TOTAL
COMMON RETAINED GAINS STOCKHOLDER'S
STOCK SURPLUS EARNINGS (LOSSES) EQUITY
-------- -------- -------- ---------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993..................... $100,000 $275,000 $337,091 $ 22,360 $ 734,451
Net income.............. -- -- 67,942 -- 67,942
Dividends ($3.00 per
common share).......... -- -- (30,000) -- (30,000)
Change in unrealized
holding gains (losses)
on available for sale
securities, net of tax
effect of ($14,749).... -- -- -- (42,662) (42,662)
-------- -------- -------- -------- ----------
Balance at December 31,
1994..................... 100,000 275,000 375,033 (20,302) 729,731
Net income.............. -- -- 109,286 -- 109,286
Dividends ($3.92 per
common share).......... -- -- (39,200) -- (39,200)
Change in unrealized
holding gains (losses)
on available for sale
securities, net of tax
effect of $24,690...... -- -- -- 37,424 37,424
-------- -------- -------- -------- ----------
Balance at December 31,
1995..................... 100,000 275,000 445,119 17,122 837,241
Contribution to capital
surplus................ -- 325,377 -- -- 325,377
Net income.............. -- -- 103,081 -- 103,081
Dividends (common stock
$4.19 per share)....... -- -- (41,900) -- (41,900)
Change in unrealized
holding gains (losses)
on available for sale
securities, net of tax
effect of ($20,609).... -- -- -- (31,233) (31,233)
-------- -------- -------- -------- ----------
Balance at December 31,
1996..................... $100,000 $600,377 $506,300 $(14,111) $1,192,566
======== ======== ======== ======== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
BF-5
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................ $ 103,081 $ 109,286 $ 67,942
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses........... 57,382 42,756 37,308
Depreciation and amortization,
including intangibles.............. 44,704 36,385 37,878
Deferred tax benefit................ (3,319) (1,086) (8,740)
Gain on sales of portfolio
securities......................... (8,531) (23,079) (5,117)
Trading account net cash (purchases)
sales.............................. (11,717) (62,571) 13,994
Increase in interest receivable..... (14,989) 7,766 (36,366)
(Decrease) increase in interest
payable............................ (445) 3,479 8,286
(Increase) decrease in loans held
for sale........................... (87,707) (15,293) 219,600
Other, net.......................... 12,286 46,274 (50,812)
----------- ----------- -----------
Net cash provided by operating
activities......................... 90,745 143,917 283,973
----------- ----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-
bearing deposits at banks............ (200,487) 274,383 (224,754)
Net (increase) decrease in Federal
funds sold and securities purchased
under agreement to resell............ (152,331) 220,087 103,514
Proceeds from maturities of securities
held-to-maturity..................... -- 923,361 144,248
Purchases of securities held-to-
maturity............................. -- (205,287) (510,380)
Proceeds from sales of securities
available-for-sale................... 1,269,870 1,976,729 130,937
Proceeds from maturities of securities
available-for-sale................... 4,868,823 3,270,325 1,816,306
Purchases of securities available-for-
sale................................. (6,905,006) (5,414,682) (2,170,354)
Net increase in loans................. (306,628) (1,126,889) (692,878)
Net cash received upon assumption of
certain assets and liabilities of
Household Bank f.s.b................. 2,244,009 -- --
Proceeds from sales of premises and
equipment............................ 10,270 25,745 23,926
Purchases of premises and equipment... (59,739) (58,087) (49,931)
Other, net............................ (48,343) 185,474 (10,965)
----------- ----------- -----------
Net cash provided (used) by investing
activities........................... 720,438 71,159 (1,440,331)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits... (195,549) 14,984 463,250
Net increase (decrease) in Federal
funds purchased and securities sold
under agreement to repurchase........ (112,071) (718,685) 759,704
Net (decrease) increase in other
short-term borrowings................ (495,690) 172,832 210,039
Proceeds from issuance of senior
notes................................ 1,239,436 2,978,345 --
Repayment of senior notes............. (1,367,436) (2,500,345) --
Proceeds from issuance of long-term
notes................................ 15,000 60,000 --
Proceeds from contribution to capital
surplus.............................. 325,377 -- --
Cash dividends paid on common stock... (41,900) (39,200) (30,000)
Other, net............................ (433,497) -- --
----------- ----------- -----------
Net cash provided (used) by financing
activities........................... (1,066,330) (32,069) 1,402,993
----------- ----------- -----------
Net (decrease) increase in cash and
demand balances due from banks....... (255,147) 183,007 246,635
Cash and demand balances due from
banks at January 1................... 1,409,760 1,226,753 980,118
----------- ----------- -----------
Cash and demand balances due from
banks at December 31................. $ 1,154,613 $ 1,409,760 $ 1,226,753
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of amount
capitalized)....................... $ 467,006 $ 457,517 $ 290,606
Income taxes........................ $ 54,288 $ 58,095 $ 24,461
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
BF-6
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and nature of operations
Harris Trust and Savings Bank ("Bank"), is a wholly-owned subsidiary of
Harris Bankcorp, Inc. ("Bankcorp") a Delaware Corporation, which is a wholly-
owned subsidiary of Bankmont Financial Corp. ("Bankmont"), a Delaware
corporation which is a wholly-owned subsidiary of Bank of Montreal ("BMO").
The consolidated financial statements include the accounts of the Bank and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. See Note 19 for additional information on
business combinations and Note 20 for additional information on related party
transactions.
The Bank provides banking, trust and other services domestically and
internationally through the main banking facility and 6 active nonbank
subsidiaries. The Bank and its subsidiaries provide a variety of financial
services to commercial and industrial companies, financial institutions,
governmental units, not-for-profit organizations and individuals throughout
the U.S., primarily the Midwest, and abroad. Services rendered and products
sold to customers include demand and time deposit accounts and certificates;
various types of loans; sales and purchases of foreign currencies; interest
rate management products; cash management services; underwriting of municipal
bonds; and financial consulting.
Basis of accounting
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles and conform to practices within the
banking industry.
Foreign currency and foreign exchange contracts
Assets and liabilities denominated in foreign currencies have been
translated into United States dollars at respective year-end rates of
exchange. Monthly translation gains or losses are computed at rates prevailing
at month-end. There were no material translation gains or losses during any of
the years presented. Foreign exchange trading positions including spot,
forward, futures and options contracts are revalued monthly using prevailing
market rates. Exchange adjustments are included with foreign exchange income
in the Consolidated Statement of Income.
Interest rate futures, forward rate agreements, options and guarantees
Interest rate futures contracts can be used in the management of the Bank's
risk strategy or as part of its dealer and trading activities. Open positions
on such contracts not designated as hedges of existing positions or
anticipated transactions are marked to market daily and the resulting gains
and losses are recognized in noninterest income. Deferred gains and losses on
futures contracts used to hedge existing assets and liabilities are included
in the basis of the item being hedged. For hedges of anticipated transactions,
the Bank recognizes deferred gains or losses on futures transactions as
adjustments to the cash position eventually taken. Interest rate forward rate
agreements, options and guarantees, including caps, floors and collars, are
marked to market with the resulting gains and losses recorded in trading
account income.
Interest rate swaps
The Bank engages in interest rate swaps in order to manage its interest rate
risk exposure, generate fee income and as a trading vehicle. Gains and losses
on swaps designated as hedges are deferred and recognized over the lives of
the related hedged positions. Contractual payments under interest rate swaps
designated as hedges are recognized in the Consolidated Statement of Income.
Swaps not designated as hedges are marked to market with realized and
unrealized gains and losses included with trading account income.
BF-7
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Securities
The Bank classifies securities as either trading account assets, held-to-
maturity or available-for-sale. Trading account assets include securities
acquired as part of trading activities and are typically purchased with the
expectation of near-term profit. These assets consist primarily of municipal
bonds and U.S. government securities. Securities are classified as held-to-
maturity when the Bank has both the positive intent and ability to hold them
to maturity. All other securities are classified as available-for-sale, even
if the Bank has no current plans to divest. Trading account assets are
reported at fair value with unrealized gains and losses included in trading
account income, which also includes realized gains and losses from closing
such positions. Held-to-maturity securities are stated at cost, adjusted for
amortization of premium and accretion of discount. Available-for-sale
securities are reported at fair value with unrealized gains and losses
included, on an after-tax basis, in a separate component of stockholder's
equity.
On December 29, 1995, the Bank transferred all held-to-maturity securities
to available-for-sale. See Note 2 of these Statements for further information.
Interest income on securities, including amortization of discount or
premium, is included in earnings. Realized gains and losses, as a result of
portfolio securities sales, are included in securities gains, with the cost of
securities sold determined on the specific identification basis.
Loans, loan fees and commitment fees
Loans not held for sale are recorded at the principal amount outstanding,
net of unearned income, deferred fees and origination costs. Origination fees
collected on commercial loans, loan commitments, mortgage loans and standby
letters of credit, which are not held for sale, are generally deferred and
amortized over the life of the related facility. Other loan-related fees that
are not the equivalent of yield adjustments are recognized as income when
received or earned. At December 31, 1996 and 1995, the Bank's Consolidated
Statement of Condition included approximately $9.6 million and $7.7 million,
respectively, of deferred loan-related fees net of deferred origination costs.
In conjunction with its mortgage and commercial banking activities, the Bank
will originate loans with the intention of selling them in the secondary
market. These loans are carried at the lower of allocated cost or current
market value, on a portfolio basis. Prior to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights, the loans were carried at the lower of original cost or
current market value, on a portfolio basis. Deferred origination fees and
costs associated with these loans are not amortized, and are included as part
of the basis of the loan at time of sale. Realized gains and unrealized losses
are included with other noninterest income.
During the first quarter of 1996, the Bank adopted SFAS No. 122, Accounting
for Mortgage Servicing Rights, amended by SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The Statement applies to transactions in which a mortgage banking
enterprise acquires mortgage servicing rights through the purchase or
origination of mortgage loans and then sells or securitizes those loans with
servicing rights retained by the seller. As required by the Statement, the
rights to service mortgage loans for others are recognized as separate assets
by allocating the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. The capitalized mortgage servicing rights are amortized
in proportion to, and over the period of, estimated net servicing income. The
capitalized mortgage servicing rights are periodically evaluated for
impairment based on the fair value of those rights. Fair values are estimated
using discounted cash flow analyses. The risk characteristics of the
underlying loans used to stratify capitalized mortgage servicing rights for
purposes of measuring impairment are current market interest rates, loan type
and repricing interval. Mortgage servicing rights of $3.5 million were
capitalized in 1996. Amortization of mortgage servicing rights was $.1 million
in 1996. The $3.4 million unamortized balance of the mortgage servicing rights
at December 31, 1996 is reflective
BF-8
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of the fair value of those rights. Additions and reductions to the valuation
allowance for mortgage servicing rights in 1996 were $.6 million and $.1
million, respectively, resulting in a year-end balance of $.5 million at
December 31, 1996. The adoption of the Statement did not have a material
effect on the Bank's financial position or results of operations.
Commercial and real estate loans are placed on nonaccrual status when the
collection of interest is doubtful or when principal or interest is 90 days
past due, unless the credit is adequately collateralized and the past due
amount is in process of collection. When a loan is placed on nonaccrual
status, all interest accrued but not yet collected which is deemed
uncollectible is charged against interest income in the current year. Interest
on nonaccrual loans is recognized as income only when cash is received and the
Bank expects to collect the entire principal balance of the loan. Interest
income on restructured loans is accrued according to the most recently agreed
upon contractual terms.
Commercial and real estate loans are charged off when, in management's
opinion, the loan is deemed uncollectible. Charge card and consumer
installment loans are charged off when 180 days past due. Accrued interest on
these loans is charged to interest income. Such loans are not normally placed
on nonaccrual status.
Loan commitments and letters of credit are executory contracts and are not
reflected on the Bank's Consolidated Statement of Condition. Fees collected
are generally deferred and recognized over the life of the facility.
During the first quarter of 1995, the Bank adopted SFAS No. 114--Accounting
by Creditors for Impairment of a Loan and SFAS No. 118--Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures. SFAS
No. 114 addresses accounting by creditors for impairment of certain loans. It
requires that impaired loans within the scope of the statement (primarily
commercial credits) be measured based on the present value of expected future
cash flows (discounted at the loan's effective interest rate) or,
alternatively, at the loan's observable market price or the fair value of
supporting collateral. Impaired loans are defined as those where it is
probable that amounts due according to contractual terms, including principal
and interest, will not be collected. Both nonaccrual and certain restructured
loans meet this definition. Large groups of smaller-balance, homogeneous
loans, primarily charge card, residential real estate and consumer installment
loans, are excluded from the scope of these Statements. The Bank determines
loan impairment when assessing the adequacy of the allowance for possible loan
losses. SFAS No. 118 permits existing income recognition practices to
continue. The adoption of these Statements did not have a material impact on
the Bank's net income or financial position.
Allowance for possible loan losses
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs. Known
losses of principal on impaired loans are charged off. The provision for loan
losses is based on past loss experience, management's evaluation of the loan
portfolio under current economic conditions and management's estimate of
anticipated, but as yet not specifically identified, loan losses. Such
estimates are reviewed periodically and adjustments, if necessary, are
recorded during the periods in which they become known.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Interest costs associated with long-term construction projects
are capitalized and then amortized over the life of the related asset after
the project is completed. For financial reporting purposes, the provision for
depreciation and amortization is computed on the straight-line basis over the
estimated useful lives of the assets.
BF-9
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Other assets
The Bank records specifically identifiable and unidentifiable (goodwill)
intangibles in connection with the acquisition of assets from unrelated
parties or the acquisition of new subsidiaries. Original lives range from 3 to
15 years. Goodwill is amortized on the straight-line basis. Identifiable
intangibles are amortized on either an accelerated or straight-line basis
depending on the character of the acquired asset. Goodwill and other valuation
intangibles are reviewed for impairment when events indicate that the carrying
value may not be recoverable.
Property or other assets received in satisfaction of debt are included in
"Other Assets" on the Bank's Consolidated Statement of Condition and are
recorded at the lower of remaining cost or fair value. Fair values for other
real estate owned generally are reduced by estimated costs to sell. Losses
arising from subsequent write-downs to fair value are charged directly to
expense.
Retirement and other postemployment benefits
The Bank has noncontributory defined benefit pension plans covering
virtually all its employees. For its primary plan, the policy of the Bank is
to, at a minimum, fund annually an amount necessary to satisfy the
requirements under the Employee Retirement Income Security Act ("ERISA"),
without regard to prior years' contributions in excess of the minimum.
The Bank adopted SFAS No. 112, Employers' Accounting for Postemployment
Benefits, in the first quarter of 1994. As required by the Statement,
postemployment benefits provided to former or inactive employees after
employment but before retirement are accrued in accordance with SFAS No. 43,
Accounting for Compensated Absences, if they meet the conditions for accrual
of compensated absences. Otherwise, postemployment benefits are accrued or
disclosed in accordance with SFAS No. 5, Accounting for Contingencies.
Cash flows
On December 29, 1995, the Bank transferred all held-to-maturity securities
to available-for-sale. See Note 2 on page 9 for further information. The non-
cash portion of this transaction was excluded from the Bank's Consolidated
Statement of Cash Flows.
Income taxes
Bankmont, Bankcorp and their wholly-owned subsidiaries including the Bank
file a consolidated Federal income tax return. Income tax return liabilities
for the Bank are not materially different than they would have been if
computed on a separate return basis.
Management's estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The areas
requiring significant management judgment include provision and allowance for
possible loan losses, income taxes, pension cost, postemployment benefits,
valuation of intangible assets, fair values and temporary vs. other-than-
temporary impairment.
BF-10
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PORTFOLIO SECURITIES
The amortized cost and estimated fair value of securities available-for-sale
were as follows as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury..................... $ 858,027 421 15,540 842,908
Federal agency.................... 1,844,961 -- 13,374 1,831,587
State and municipal............... 57,749 5,141 -- 62,890
Other............................. 22,013 -- 67 21,946
---------- ------ ------ ---------
Total securities................ $2,782,750 5,562 28,981 2,759,331
========== ====== ====== =========
<CAPTION>
1995
------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury..................... $ 713,104 11,250 -- 724,354
Federal agency.................... 1,159,386 11,184 1,345 1,169,225
State and municipal............... 82,027 7,345 -- 89,372
Other............................. 53,389 3 14 53,378
---------- ------ ------ ---------
Total securities................ $2,007,906 29,782 1,359 2,036,329
========== ====== ====== =========
</TABLE>
At December 31, 1996 and 1995, portfolio and trading account securities
having a par value of $1.8 billion and $1.2 billion, respectively, were
pledged as collateral for certain liabilities, securities sold under agreement
to repurchase, public and trust deposits, trading account activities and for
other purposes where permitted or required by law. Securities carried at
approximately $1.4 billion and $1.3 billion were sold under agreement to
repurchase at December 31, 1996 and 1995, respectively.
On November 15, 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with that report, the Corporation
conducted a one-time reassessment of the classifications of securities held.
As a result, the Corporation reclassified all held-to-maturity securities to
available-for-sale on December 29, 1995. The amortized cost of the transferred
securities was $534 million and the related unrealized holding gain was $10
million.
BF-11
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1996, by contractual maturity, are shown below. Expected
maturities can differ from contractual maturities since borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996
--------------------
AMORTIZED FAIR
COST VALUE
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Within 1 year...................................... $ 879,703 877,551
1 to 5 years....................................... 732,452 733,437
5 to 10 years...................................... 1,148,816 1,126,564
Over 10 years...................................... -- --
Other securities without stated maturity............. 21,779 21,779
---------- ---------
Total securities................................. $2,782,750 2,759,331
========== =========
</TABLE>
In 1996, 1995, and 1994 proceeds from the sale of securities available-for-
sale amounted to $1.3 billion, $2.0 billion and $146.0 million. Gross gains of
$8.6 million and gross losses of $220,000 were realized on these sales in
1996, while gross gains of $25.5 million and gross losses of $2.4 million were
realized on these sales in 1995, and gross gains of $5.1 million and virtually
no gross losses were realized in 1994. Net unrealized holding gain or loss on
trading securities included in earnings during 1995 changed by $.2 million
from an unrealized gain of $.8 million at December 31, 1995 to an unrealized
gain of $1.0 million at December 31, 1996.
3. LOANS
The following table summarizes loan balances by category:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and
dealers.......................................... $5,962,675 5,200,984
Real estate construction.......................... 101,668 113,799
Real estate mortgage.............................. 870,807 781,966
Installment....................................... 35,663 68,955
Charge card....................................... 1,034,847 1,091,502
Direct lease financing............................ -- --
Foreign loans:
Government and official institutions.............. 984 984
Banks and other financial institutions............ 137,560 160,808
Other, primarily commercial and industrial........ 2,976 40,859
---------- ---------
Total loans..................................... $8,147,180 7,459,857
---------- ---------
Less unearned income................................ -- --
Loans, net of unearned income..................... 8,147,180 7,459,857
Less allowance for possible loan losses............. 108,408 94,153
---------- ---------
Loans, net of allowance for possible loan losses.. $8,038,772 7,365,704
========== =========
</TABLE>
BF-12
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Bank had approximately $115 million and $76 million of loans classified
as held for sale at December 31, 1996 and 1995, respectively. Approximately
69% and 73% of these respective amounts were real estate mortgages. Nonaccrual
loans, restructured loans and other nonperforming assets are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans................................... $17,879 34,775 61,290
Restructured loans................................. 40 2,059 2,239
------- ------ ------
Total nonperforming loans.......................... 17,919 36,834 63,529
Other assets received in satisfaction of debt...... 582 608 1,780
------- ------ ------
Total nonperforming assets......................... 18,501 37,442 65,309
Gross amount of interest income that would have
been recorded if year-end nonperforming loans had
been accruing interest at their original terms.... 2,267 3,997 3,194
Interest income actually recognized................ 67 1,527 915
------- ------ ------
Interest shortfall, before consideration of any
income tax effect................................. $ 2,200 2,470 2,279
======= ====== ======
</TABLE>
At December 31, 1996 and 1995, the Bank had no aggregate public and private
sector outstanding to any single country experiencing a liquidity problem
which exceeded one percent of the Bank's consolidated assets.
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................... $ 94,153 90,492 93,990
-------- ------- -------
Charge-offs................................. (57,935) (54,340) (53,268)
Recoveries.................................. 10,008 15,245 12,462
-------- ------- -------
Net charge-offs............................. (47,927) (39,095) (40,806)
Provisions charged to operations............ 57,382 42,756 37,308
Allowance related to acquired loans......... 4,800 -- --
-------- ------- -------
Balance, end of year.......................... $108,408 94,153 90,492
======== ======= =======
</TABLE>
BF-13
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Details on impaired loans and related allowance are as follows:
<TABLE>
<CAPTION>
IMPAIRED LOANS IMPAIRED LOANS TOTAL
FOR WHICH THERE IS FOR WHICH THERE IS IMPAIRED
A RELATED ALLOWANCE NO RELATED ALLOWANCE LOANS
------------------- -------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1996:
Balance............... $2,394 15,485 17,879
Related allowance..... 2,308 -- 2,308
------ ------ ------
Balance, net of
allowance.............. 86 15,485 15,571
====== ====== ======
December 31, 1995:
Balance............... 18,382 16,393 34,775
Related allowance..... 12,459 -- 12,459
------ ------ ------
Balance, net of
allowance.............. $5,923 16,393 22,316
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Average impaired loans.................................... $29,018 49,757
Total interest income on impaired loans................... 67 1,527
Interest income on impaired loans recorded on a cash
basis.................................................... 67 1,527
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. A summary of these accounts is set forth below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 24,988 $ 14,546
Premises............................................... 230,466 199,099
Equipment.............................................. 234,866 209,389
Leasehold improvements................................. 17,787 16,299
-------- --------
Total................................................ 508,107 $439,333
-------- --------
Accumulated depreciation and amortization.............. 317,953 295,026
-------- --------
Premises and equipment................................. $190,154 $144,307
======== ========
</TABLE>
The provision for depreciation and amortization was $28.8 million in 1996,
$30.4 million in 1995, and $31.0 million in 1994.
6. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL AND SECURITIES SOLD UNDER
AGREEMENT TO REPURCHASE
The Bank enters into purchases of U.S. Treasury and Federal agency
securities under agreements to resell identical securities. The amounts
advanced under these agreements represent short-term loans and are reflected
as receivables in the Consolidated Statement of Condition. There were no
securities purchased under agreement to resell outstanding at December 31,
1996. Securities purchased under agreement to resell totaled $79 million at
December 31, 1995. The securities underlying the agreements are book-entry
securities. Securities are transferred by appropriate entry into the Bank's
account with Bank of New York at the Federal Reserve Bank of New York under a
written custodial agreement with Bank of New York that explicitly recognizes
the Bank's interest in these securities.
BF-14
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Bank also enters into sales of U.S. Treasury and Federal agency
securities under agreements to repurchase identical securities. The amounts
received under these agreements represent short-term borrowings and are
reflected as liabilities in the Consolidated Statement of Condition.
Securities sold under agreement to repurchase totaled $1.38 billion and $1.27
billion at December 31, 1996 and 1995, respectively. Securities sold under
agreement to repurchase are transferred via book-entry to the counterparty, if
transacted with a financial institution or a broker-dealer, or are delivered
to customer safekeeping accounts.
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Amount outstanding at end of year................... $ -- $ 79,344
Highest amount outstanding as of any month-end
during the year.................................... 49,625 266,588
Daily average amount outstanding during the year.... 19,641 89,599
========== =========
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Securities sold under agreement to repurchase....... 1,381,557 1,277,657
Highest amount outstanding as of any month-end
during the year.................................... 2,082,633 1,960,385
Daily average amount outstanding during the year.... 1,765,949 1,620,207
========== =========
</TABLE>
7. SHORT, MEDIUM AND LONG-TERM NOTES AND UNUSED LINES OF CREDIT
The following table summarizes the Bank's long-term notes:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Fixed rate 10 1/2% subordinated note to Bankcorp due
May 31, 2001.......................................... $ 35,000 $ 35,000
Floating rate subordinated note to Bankcorp due March
31, 2005.............................................. 50,000 50,000
Floating rate subordinated note to Bankcorp due
December 1, 2006...................................... 50,000 50,000
Floating rate subordinated note to Bankcorp due
December 1, 2004...................................... 100,000 100,000
Fixed rate 6 1/2% subordinated note to Bankcorp due
December 27, 2007..................................... 60,000 60,000
Fixed rate 7 5/8% subordinated note to Bankcorp due
June 27, 2008......................................... 15,000 --
-------- --------
Total................................................ $310,000 $295,000
======== ========
</TABLE>
All of the Bank notes are unsecured obligations, ranking on a parity with
all unsecured and subordinated indebtedness of the Bank and are not subject to
redemption prior to maturity at the election of the debtholder. The interest
rate on the floating rate notes reprice semiannually and float at 50 basis
points above 180 day LIBOR. At year-end 1996, 180 day LIBOR was 5.60 percent.
The Bank offers to institutional investors from time to time, unsecured
short-term and medium-term bank notes in an aggregate principal amount of up
to $1.5 billion outstanding at any time. The term of each note could range
from fourteen days to fifteen years. The notes are subordinated to deposits
and rank pari passu with all
BF-15
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
other unsecured senior indebtedness of the Bank. As of December 31, 1996, $350
million of short-term notes were outstanding with original maturities of 365
days (remaining maturities ranged from 85 to 168 days) and stated interest
rates ranging from 5.50 to 6.04 percent. As of December 31, 1995, $478 million
of short-term notes were outstanding with original maturities from 29 to 180
days and stated interest rates ranging from 5.50 to 5.79 percent.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require the disclosure of estimated
fair values for both on- and off-balance-sheet financial instruments. The
Bank's fair values are based on quoted market prices when available. For
financial instruments not actively traded, such as certain loans, deposits,
off-balance-sheet transactions and long term borrowings, fair values have been
estimated using various valuation methods and assumptions. Although management
used its best judgment in estimating these values, there are inherent
limitations in any estimation methodology. In addition, accounting
pronouncements require that fair values be estimated on an item-by-item basis,
thereby ignoring the impact a large sale would have on a thin market and
intangible values imbedded in established lines of business. Therefore, the
fair value estimates presented herein are not necessarily indicative of the
amounts the Bank could realize in an actual transaction. The fair value
estimation methodologies employed by the Bank were as follows:
The carrying amounts for cash and demand balances due from banks along with
short-term money market assets and liabilities reported on the Bank's
Consolidated Statement of Condition were considered to be the best estimates
of fair value for these financial instruments. Fair values of trading account
assets and portfolio securities were based on quoted market prices.
A variety of methods were used to estimate the fair value of loans. Changes
in estimated fair value of loans reflect changes in credit risk and general
interest rates which have occurred since the loans were originated. Fair
values of floating rate loans, including commercial, broker dealer, financial
institution, construction, charge card, consumer and home equity, were assumed
to be the same as carrying value since the loans' interest rates automatically
reprice to market. Fair values of residential mortgages were based on current
prices for securities backed by similar loans. For long-term fixed rate loans,
including consumer installment and commercial mortgage loans, fair values were
estimated based on the present value of future cash flows with current market
rates as discount rates. A fair-value discount related to nonperforming loans
included in the above categories, along with a discount for future credit risk
throughout the portfolio, was based on an analysis of expected and
unidentified future losses. Accordingly, the fair value estimate for total
loans was reduced by these discounts, which in total approximated the
allowance for possible loan losses on the Bank's Consolidated Statement of
Condition. Additionally, management considered appraisal values of collateral
when nonperforming loans were secured by real estate.
The fair values of demand deposits, savings accounts, interest checking
deposits, and money market accounts were the amounts payable on demand at the
reporting date, or the carrying amounts. The fair value of time deposits was
estimated using a discounted cash flow calculation with current market rates
offered by the Bank as discount rates.
The fair value of long-term notes was determined using a discounted cash
flow calculation with current rates available to the Bank for similar debt as
discount rates.
BF-16
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Bank's financial instruments at December
31, 1996 and 1995 are presented in the following table. See Note 9 for
additional information regarding fair values of off-balance-sheet financial
instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and demand balances due
from banks................... $ 1,154,613 1,154,613 1,409,760 1,409,760
Money market assets:
Interest-bearing deposits at
banks...................... 658,187 658,187 457,700 457,700
Federal funds sold and
securities purchased under
agreement to resell........ 316,275 316,275 163,944 163,944
Portfolio securities available
for sale..................... 2,759,331 2,759,331 2,036,329 2,036,329
Trading account assets........ 110,355 110,355 98,638 98,638
Loans, net of unearned income
and allowance for possible
loan losses.................. 8,038,772 8,033,804 7,365,704 7,376,809
Customers' liability on
acceptances.................. 78,983 78,983 95,326 95,326
----------- ---------- ---------- ----------
Total on-balance-sheet
financial assets............. $13,116,516 13,111,548 11,627,401 11,638,506
=========== ========== ========== ==========
LIABILITIES:
Deposits:
Demand deposits............. $ 5,635,111 5,635,111 3,529,215 3,529,215
Time deposits............... 4,091,094 4,091,094 3,501,335 3,503,158
Federal funds purchased and
securities sold under
agreement to repurchase...... 1,992,066 1,992,066 2,104,137 2,104,137
Other short-term borrowings... 344,372 344,372 840,062 840,062
Acceptances outstanding....... 78,983 78,983 95,326 95,326
Senior notes.................. 350,000 350,000 478,000 478,000
Long-term notes............... 310,000 312,639 295,000 304,139
----------- ---------- ---------- ----------
Total on-balance-sheet
financial liabilities........ $12,801,626 12,804,265 10,843,075 10,854,037
=========== ========== ========== ==========
OFF BALANCE-SHEET FINANCIAL
INSTRUMENTS (positive
positions/(obligations))
Credit facilities............. $ (9,613) (9,613) (7,646) (7,646)
Interest rate contracts:
Dealer and trading
contracts.................. 803 803 1,041 1,041
Risk management contracts... 12,697 9,714 (5,521) (11,784)
----------- ---------- ---------- ----------
Total off-balance-sheet
financial instruments........ $ 3,887 904 (12,126) (18,389)
=========== ========== ========== ==========
</TABLE>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank utilizes various financial instruments with off-balance-sheet risk
in the normal course of business to a) meet its customers' financing and risk
management needs, b) reduce its own risk exposure, and c) produce fee income
and trading profits. The Bank's major categories of financial instruments with
off-balance-sheet risk include credit facilities, interest rate and foreign
exchange contracts, and various securities-related activities. Fair values of
off-balance-sheet instruments are based on fees currently charged to enter
into similar agreements, market prices of comparable instruments, pricing
models using year-end rates and counterparty credit ratings.
BF-17
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Credit facilities
Credit facilities with off-balance-sheet risk include commitments to extend
credit, standby letters of credit and commercial letters of credit.
Commitments to extend credit are contractual agreements to lend to a
customer as long as contract terms have been met. They generally require
payment of a fee and have fixed expiration dates. The Bank's commitments serve
both business and individual customer needs, and include commercial loan
commitments, credit card lines, home equity lines, commercial real estate loan
commitments and mortgage loan commitments. The Bank's maximum risk of
accounting loss is represented by the total contractual amount of commitments
which was $8.8 billion and $7.6 billion at December 31, 1996 and 1995,
respectively. Since only a portion of commitments will ultimately be drawn
down, the Bank does not expect to provide funds for the total contractual
amount. Risks associated with certain commitments are reduced by
participations to third parties, which at December 31, 1996, totaled $351
million and at December 31, 1995, totaled $244 million.
Standby letters of credit are unconditional commitments which guarantee the
obligation of a customer to a third party should that customer default. They
are issued to support financial and performance-related obligations including
brokers' margin maintenance, industrial revenue bond repayment, debt
repayment, construction contract performance and trade agreement performance.
The Bank's maximum risk of accounting loss for these items is represented by
the total commitments outstanding of $1.67 billion at December 31, 1996 and
$1.56 billion at December 31, 1995. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $435
million at December 31, 1996 and $270 million at December 31, 1995.
Commercial letters of credit are commitments to make payments on behalf of
customers when letter of credit terms have been met. Maximum risk of
accounting loss is represented by total commercial letters of credit
outstanding of $122 million at December 31, 1996 and $130 million at December
31, 1995.
Credit risks associated with all of these facilities are mitigated by
reviewing customers' creditworthiness on a case-by-case basis, obtaining
collateral, limiting loans to individual borrowers, setting restrictions on
long-duration maturities and establishing stringent covenant terms outlining
performance expectations which, if not met, may cause the Bank to terminate
the contract. Credit risks are further mitigated by monitoring and maintaining
portfolios that are well-diversified.
Collateral is required to support certain of these credit facilities when
they are drawn down and may include equity and debt securities, commodities,
inventories, receivables, certificates of deposit, savings instruments, fixed
assets, real estate, life insurance policies and seats on national or regional
exchanges. Requirements are based upon the risk inherent in the credit and are
more stringent for firms and individuals with greater default risks. The Bank
monitors collateral values and appropriately perfects its security interest.
Periodic evaluations of collateral adequacy are performed by Bank personnel.
The fair value of credit facilities (i.e. deferred income) is approximately
equal to their carrying value of $9.6 million at December 31, 1996 and $7.6
million at December 31, 1995.
Interest rate contracts
Interest rate contracts include futures, forward rate agreements, option
contracts, guarantees (caps, floors and collars) and swaps. The Bank enters
into these contracts for dealer, trading and risk management purposes.
Dealer and trading activity
As dealer, the Bank serves customers seeking to manage interest rate risk by
entering into contracts as a counterparty to their (customer) transactions. In
its trading activities, the Bank uses interest rate contracts to profit from
expected future market movements.
BF-18
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
These contracts may create exposure to both credit and market risk.
Replacement risk, the primary component of credit risk, is the risk of loss
should a counterparty default following unfavorable market movements and is
measured as the Bank's cost of replacing contracts at current market rates.
The Bank manages credit risk by establishing credit limits for customers and
products through an independent corporate-wide credit review process and
continually monitoring exposure against those limits to ensure they are not
exceeded. Credit risk is, in many cases, further mitigated by the existence of
netting agreements which provide for netting of contractual receivables and
payables in the event of default or bankruptcy.
Market risk is the risk of loss as a result of changes in interest rates.
The Bank manages market risk by establishing limits which are based on dollars
at risk given a parallel shift in the yield curve. Limits are established by
product, maturity and volatility. Limits are approved by management and
monitored independently of the traders on a regular basis. Market risk is
further diminished by entering into offsetting positions. Senior management
oversees all dealer risk-related activities.
Futures and forward contracts are agreements in which the Bank is obligated
to make or take delivery, at a specified future date, of a specified
instrument, at a specified price or yield. Futures contracts are exchange
traded and, because of exchange requirements that gains and losses be settled
daily, create negligible exposure to credit risk.
Forward rate agreements are arrangements between two parties to exchange
amounts, at a specified future date, based on the difference between an agreed
upon interest rate and reference rate applied to a notional principal amount.
These agreements enable purchasers and sellers to fix interest costs and
returns.
Options are contracts that provide the buyer the right (but not the
obligation) to purchase or sell a financial instrument, at a specified price,
either within a specified period of time or on a certain date. Interest rate
guarantees (caps, floors and collars) are agreements between two parties that,
in general, establish for the purchaser a maximum level of interest expense or
a minimum level of interest revenue based on a notional principal amount for a
specified term. Options and guarantees written create exposure to market risk.
As a writer of interest rate options and guarantees, the Bank receives a
premium at the outset of the agreement and bears the risk of an unfavorable
change in the price of the financial instrument underlying the option or
guarantee. Options and guarantees purchased create exposure to credit risk
and, to the extent of the premium paid or unrealized gain recognized, market
risk.
Interest rate swaps are contracts involving the exchange of interest
payments based on a notional amount for a specified period. Most of the Bank's
activity in swaps is as intermediary in the exchange of interest payments
between customers, although the Bank also uses swaps to manage its own
interest rate exposure (see discussion of risk management activity below).
BF-19
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Bank's dealer/trading interest rate
contracts and their related contractual or notional amounts and maximum
replacement costs. Contractual or notional amount gives an indication of the
volume of activity in the contract. Maximum replacement cost reflects the
potential loss resulting from customer defaults and is computed as the cost of
replacing, at current market rates, all outstanding contracts with unrealized
gains.
<TABLE>
<CAPTION>
MAXIMUM
CONTRACTUAL OR REPLACEMENT
NOTIONAL AMOUNT COST
--------------------- --------------
DECEMBER 31
------------------------------------
1996 1995 1996 1995
---------- ---------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards................. $ 146,861 $ 56,175 $ -- $ --
Forward rate agreements.............. 155,000 5,000 98 2
Options written...................... -- -- -- --
Options purchased.................... 1,000 -- 2 --
Guarantees written................... 855,967 1,632,121 -- --
Guarantees purchased................. 856,117 1,638,157 1,802 5,801
Swaps................................ 1,631,091 876,320 9,198 12,585
</TABLE>
The following table summarizes average end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1996 1995 1995
------------- ------------- ------------- -------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards
Unrealized gains.... $ -- $ -- $ -- $ --
Unrealized losses... -- -- -- --
Forward rate
agreements
Unrealized gains.... 98 38 2 357
Unrealized losses... (27) (21) -- (284)
Options
Purchased........... 2 -- -- 228
Written............. -- -- -- (164)
Guarantees
Purchased........... 1,802 11,588 5,801 7,867
Written............. (1,749) (11,580) (5,789) (7,987)
Swaps
Unrealized gains.... 9,198 6,187 12,585 9,806
Unrealized losses... (8,521) (4,428) (11,558) (8,624)
------- -------- -------- -------
Total Interest
Rate Contracts... $ 803 $ 1,784 $ 1,041 $ 1,199
======= ======== ======== =======
</TABLE>
BF-20
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31,
1996, 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards........................... $ 926 $(1,462) $ 1,020
Forward rate agreements........................ -- (285) (628)
Options........................................ (66) (545) (224)
Guarantees..................................... (1,215) 988 (134)
Swaps.......................................... 69 603 279
Debt Instruments................................. 8,011 5,531 (1,060)
------- ------- -------
Total Trading Revenue........................ $ 7,725 $ 4,830 $ (747)
======= ======= =======
</TABLE>
The following table summarizes the maturities and weighted average interest
rates paid and received on dealer/trading interest rate swaps:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
WITHIN 1 1 TO 3 3 TO 5 5 TO 10
YEAR YEARS YEARS YEARS TOTAL
-------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount....... $145,729 $200,408 $289,023 $167,385 $802,545
Average pay rate...... 6.36% 6.24% 6.30% 6.54% 6.35%
Average receive rate.. 5.66% 5.58% 3.85% 5.54% 4.96%
Receive Fixed Swaps:
Notional amount....... $145,729 $200,409 $229,023 $167,385 $742,546
Average pay rate...... 5.66% 5.58% 4.86% 6.11% 5.49%
Average receive rate.. 6.32% 6.37% 6.29% 6.54% 6.37%
Basis Swaps:
Notional amount....... $86,000 -- -- -- $86,000
Average pay rate...... 5.39% -- -- -- 5.39%
Average receive rate.. 5.43% -- -- -- 5.43%
Total notional
amount............. $377,458 $400,817 $518,046 $334,770 $1,631,091
</TABLE>
BF-21
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Risk management activity
In addition to its dealer activities, the Bank uses interest rate contracts,
primarily swaps, to reduce the level of financial risk inherent in mismatches
between the interest rate sensitivities of certain assets and liabilities.
During 1996 and 1995, interest rate swaps were primarily used to alter the
character of funds supporting certain fixed rate loans, the senior note
program and the municipal bond portfolio. The Bank had $584 million notional
amount of swap contracts, used for risk management purposes, outstanding at
December 31, 1996 with a fair value of $9.7 million and a replacement cost of
$13.2 million. At December 31, 1995, the Corporation had $281 million notional
amount of swap contracts outstanding with a fair value of $(11.8) million and
a replacement cost of zero. Gross unrealized gains and losses, representing
the difference between fair value and carrying value (i.e. accrued interest
payable or receivable) on these contracts, totaled $0.8 million and $3.8
million, respectively, at December 31, 1996 and zero and $6.3 million,
respectively, at December 31, 1995. Risk management activity, including the
related cash positions, had no material effect on the Bank's net income for
the year ended December 31, 1996 or 1995. There were no deferred gains or
losses on terminated contracts at December 31, 1996 or 1995.
The following table summarizes swap activity for risk management purposes:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Amount, December 31, 1994.................................. $ 496,853
Additions.................................................. 609,406
Maturities................................................. (475,226)
Terminations............................................... (350,000)
---------
Amount, December 31, 1995.................................. 281,033
---------
Additions.................................................. 680,707
Maturities................................................. (377,659)
Terminations............................................... --
---------
Amount, December 31, 1996.................................. $ 584,081
=========
</TABLE>
The following table summarizes the maturities and weighted average interest
rates paid and received on interest rate swaps used for risk management:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------
5 TO
WITHIN 1 1 TO 3 3 TO 5 10
YEAR YEARS YEARS YEARS TOTAL
-------- ------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount................ $ 31,000 110,804 57,401 34,876 234,081
Average pay rate............... 10.60% 5.81% 6.18% 6.88% 6.69%
Average receive rate 5.73 5.67 5.62 5.64 5.67
Basis Swaps:
Notional amount................ 350,000 -- -- -- 350,000
Average pay rate............... 5.42 -- -- -- 5.42
Average receive rate........... 5.81 -- -- -- 5.81
-------- ------- ------ ------ -------
Total notional amount........ $381,000 110,804 57,401 34,876 584,081
======== ======= ====== ====== =======
</TABLE>
BF-22
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Foreign exchange contracts
DEALER ACTIVITY
The Bank is a dealer in foreign exchange. Foreign exchange contracts may
create exposure to market and credit risk, including replacement risk and
settlement risk. Credit risk is managed by establishing limits for customers
through an independent corporate-wide credit approval process and continually
monitoring exposure against those limits. In addition, both settlement and
replacement risk are reduced through netting by novation, agreements with
counterparties to offset certain related obligations. Market risk is managed
through establishing exposure limits by currency and monitoring actual
exposure against those limits, entering into offsetting positions, and closely
monitoring price behavior. Effective April 3, 1995, the Bank and BMO agreed to
combine their U.S. foreign exchange activities ("FX"). Under this arrangement,
FX net profit is shared by the Bank and BMO in accordance with a specific
formula set forth in the agreement. This agreement expires in April 2002 but
may be extended at that time. Either party may terminate the arrangement at
its option. Beginning with second quarter 1995, FX revenues were reported net
of expenses. This agreement did not have a material impact on the Bank's 1996
or 1995 net income or financial position at December 31, 1996 or 1995.
At December 31, 1996, approximately two-thirds of the Bank's gross notional
positions in foreign currency contracts are represented by seven currencies:
English pounds, German deutsche marks, Canadian dollars, Japanese yen, Belgian
francs, Italian lira and French francs.
Foreign exchange contracts include spot, future, forward and option
contracts that enable customers to manage their foreign exchange risk. Spot,
future and forward contracts are agreements to exchange currencies at a future
date, at a specified rate of exchange. Foreign exchange option contracts give
the buyer the right and the seller an obligation (if the buyer asserts his
right) to exchange currencies during a specified period (or on a certain date
in the case of "European" options) at a specified exchange rate.
The following table summarizes the Bank's dealer/trading foreign exchange
contracts and their related contractual or notional amount and maximum
replacement cost:
<TABLE>
<CAPTION>
MAXIMUM
CONTRACTUAL OR REPLACEMENT
NOTIONAL AMOUNT COST
--------------------- --------------
DECEMBER 31
------------------------------------
1996 1995 1996 1995
---------- ---------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards........... $1,896,730 $4,786,883 $9,345 $45,100
Options written...................... 56,408 85,551 -- --
Options purchased.................... 56,408 85,551 1,324 1,386
</TABLE>
BF-23
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the years ended December 31, 996
and 1995:
<TABLE>
<CAPTION>
1996 1996 1995 1995
------------- ------------- ------------- -------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange
Contracts:
Spot, futures and
forwards
Unrealized gains...... $ 60,666 $ 43,477 $ 45,100 $ 137,511
Unrealized losses..... (60,666) (43,477) (45,100) (139,447)
Options
Purchased............. 1,324 1,388 1,386 6,301
Written............... (1,324) (1,398) (1,386) (6,301)
-------- -------- -------- ---------
Total Foreign
Exchange........... $ -- $ (10) $ -- $ (1,936)
======== ======== ======== =========
</TABLE>
At December 31,1996,spot, futures and forward contracts with BMO represent
$39,766 and ($24,031) of unrealized gains and unrealized losses, respectively.
Options contracts with BMO represent $1,284 and ($40) of options purchased and
options written, respectively.
Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1996, 1995 and 1994 are summarized below. 1996 and
1995 net foreign exchange gains include $10.0 million and $8.8 million,
respectively, of net profit under the aforementioned agreement with BMO.
<TABLE>
<CAPTION>
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
-------- -------- --------
YEARS ENDED DECEMBER 31
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Spot, futures and forwards....................... $9,978 $14,290 $19,609
Options.......................................... -- (60) 140
------ ------- -------
Total Foreign Exchange......................... $9,978 $14,230 $19,749
====== ======= =======
</TABLE>
Securities activities
The Bank's securities activities that have off-balance-sheet risk include
municipal bond underwriting and short selling of securities.
Through its municipal bond underwriting activities, the Bank commits to buy
and offer for resale newly issued bonds. The Bank is exposed to market risk
because it may be unable to resell its inventory of bonds profitably as a
result of unfavorable market conditions. In syndicate arrangements, the Bank
is obligated to fulfill syndicate members' commitments should they default.
The syndicates of which the Bank was a member had underwriting commitments
totaling $41.9 million at December 31, 1996 and $15.5 million at December 31,
1995.
Security short selling, defined as selling of securities not yet owned,
exposes the Bank to off-balance-sheet market risk because the Bank may be
required to buy securities at higher prevailing market prices to cover its
short positions. The Bank had no short position at December 31, 1996 or 1995.
BF-24
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. CONCENTRATIONS OF CREDIT RISK IN FINANCIAL INSTRUMENTS
The Bank had two concentrations of credit risk arising from financial
instruments at December 31, 1996 and 1995. These concentrations were the
Midwest geographic area and individuals. Each concentration exceeded 10
percent of the Bank's total credit exposure, which is the total potential
accounting loss should all customers fail to perform according to contract
terms and all collateral prove to be worthless.
Midwestern geographic area
A majority of the Bank's customers are located in the Midwestern region of
the United States, defined here to include Illinois, Indiana, Iowa, Michigan,
Minnesota, Missouri, Ohio and Wisconsin. The Bank provides credit to these
customers through a broad array of banking and trade financing products
including commercial loans, commercial loan commitments, commercial real
estate loans, consumer installment loans, charge card loans and lines,
mortgage loans, home equity loans and lines, standby and commercial letters of
credit and banker's acceptances. The financial viability of customers in the
Midwest is, in part, dependent on the region's economy. Corporate customers
headquartered in the region and serving a national or international market are
not included in this concentration because their business is broad-based and
not dependent on the region's economy. The Bank's maximum risk of accounting
loss, should all customers making up the Midwestern concentration fail to
perform according to contract terms and all collateral prove to be worthless,
was approximately $10.2 billion or 43 percent of the Bank's total credit
exposure at December 31, 1996 and $10.4 billion or 47 percent of the Bank's
total credit exposure at December 31, 1995.
The Bank manages this exposure by continually reviewing local market
conditions and customers, adjusting individual and industry exposure limits
within the region and by obtaining or closely monitoring collateral values.
See Note 9 for information on collateral supporting credit facilities.
Individuals
The Bank extends credit to individuals through credit card lines, style
lines of credit, installment and single payment loans. Credit card and style
lines are unsecured revolving lines of credit, accessed through VISA and
MasterCard, special drafts, and/or automated teller machines. The Bank's
credit card lines represent most of its total credit exposure to individuals.
Although credit card loans are not collateralized, measures have been
implemented to reduce credit loss. These measures include strict credit
approval criteria, card use monitoring, automated authorization procedures and
aggressive collection procedures. Further, credit card customers are broad-
based geographically, although currently about 50 percent are located in the
Midwest.
Installment and single payment loans are generally collateralized by
personal property and have a fixed maturity. The Bank ensures that it has
sufficient collateral by monitoring its value and perfecting its legal rights
to the property upon default.
The Bank's maximum risk of accounting loss, should all individual customers
fail to perform according to contract terms and all available collateral prove
to be worthless, was approximately $5.2 billion or 22 percent of the Bank's
total credit exposure at December 31, 1996 and $5.1 billion or 23 percent of
the Bank's total credit exposure at December 31, 1995.
11. RETIREMENT AND OTHER POSTEMPLOYMENT PLANS
The Bank has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1996. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1996. The benefit
formula for this plan is
BF-25
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
based upon length of service and an employee's highest qualifying compensation
during five consecutive years of active employment. The plan is a multiple-
employer plan covering the Bank's employees as well as persons employed by
certain affiliated entities. In 1995, the Bank prospectively expanded the
definition of qualifying compensation and reduced the rate used to compute
retirement benefits.
The policy for this plan is to have the participating entities, at a
minimum, fund annually an amount necessary to satisfy the requirements under
ERISA, without regard to prior years' contributions in excess of the minimum.
For 1996, cumulative contributions were less than the amount recorded as
pension expense for financial reporting purposes. For 1995, cumulative
contributions were greater than the amount recorded as pension expense for
financial reporting purposes. For 1994, the minimum and maximum deductible
contribution were both zero as a result of the full funding limitation.
In 1995, the Bank changed mortality assumption rates from the 1984 Unisex
Pensioner Mortality Table to the 1983 Group Annuity Mortality Table in
accordance with the Retirement Protection Act of 1994. In addition, the
assumptions regarding future annual increases were modified as follows: the
wage base was decreased from 6% to 5% and the Consumer Price Index was reduced
by 1% at each age. These changes had no material effect on 1995 pension
expense. In 1994, the Bank elected to change the measurement date for plan
assets and liabilities from December 31 to September 30. The change had no
material effect on 1994 or prior years pension expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1996** 1995** 1994**
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $109,720 in 1996,
$108,756 in 1995 and $79,398 in 1994.... $ 122,445 $ 121,391 $ 91,820
========= ========= =========
Projected benefit obligation for services
rendered to date.......................... (158,286) (157,216) (127,400)
Plan assets at fair value*................. 165,439 154,445 140,516
--------- --------- ---------
Excess of plan assets over projected
benefit obligations....................... 7,153 (2,761) 13,116
Unrecognized net (gain) loss from past
experiences different from that assumed
and effects of changes in assumptions..... 618 13,013 (2,563)
Prior services cost not yet recognized in
net periodic pension cost................. (6,065) (6,578) (3,168)
Unrecognized net asset at December 31 being
recognized over 16.3 years from January 1,
1986...................................... (1,423) (1,662) (1,934)
Contributions made between measurement date
(September 30) and end of year............ 5,417 5,853 --
--------- --------- ---------
Prepaid pension cost..................... $ 5,700 $ 7,865 $ 5,451
========= ========= =========
Assumptions used:
Discount rate............................ 7.50% 7.25% 7.75%
Rate of increase in compensation......... 5.70% 5.70% 6.60%
Expected long-term asset return.......... 8.00% 8.00% 8.00%
</TABLE>
- --------
* Plan assets consist primarily of participating units in collective trust
funds administered by the Bank.
** Plan assets and obligations are allocated to the Bank based on the Bank's
pension expense as a percentage of Bankcorp's total pension expense. Plan
assets and obligations measured as of September 30.
BF-26
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense included the following components for the primary plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1996** 1995** 1994**
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the
period...................................... $ 7,823 $ 5,727 $ 8,101
Interest cost on projected benefit
obligation.................................. 11,584 10,259 10,150
Actual return on plan assets................. (16,655) (24,026) 1,027
Net amortization and deferral................ 4,104 12,168 (13,102)
-------- -------- --------
Net periodic pension expense............... $ 6,856 $ 4,128 $ 6,176
======== ======== ========
</TABLE>
Certain employees participating in the primary plan are also covered by a
supplemental unfunded retirement plan. The purpose of this plan is to extend
full retirement benefits to individuals without regard to statutory
limitations for qualified funded plans. The following table sets forth the
status of this supplemental plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------
1996*** 1995*** 1994***
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated benefit obligation................... $ 7,241 $ 5,786 $ 7,580
Projected benefit obligation for service rendered
to date......................................... 15,486 14,332 19,260
Accrued pension liability........................ 8,827 7,489 6,040
Net periodic pension expense..................... 2,435 4,244 6,849
Assumptions used:
Discount rate.................................. 5.25% 5.25% 5.75%
Rate increase in compensation.................. 5.70% 5.70% 6.60%
</TABLE>
- --------
*** Amounts allocated based on the Bank's supplemental retirement expense as
a percentage of Bankcorp's total supplemental retirement expense.
During 1996, 1995 and 1994, the Bank's lump-sum benefit payments to retirees
resulted in settlement losses of approximately $0.1 million, $0.8 million and
$3.1 million, respectively, reflected above as a portion of net periodic
pension expense.
The total consolidated pension expense of the Bank, including the
supplemental plan, for 1996, 1995 and 1994 was $9.4 million, $7.9 million and
$13.0 million, respectively.
In addition to pension benefits, the Bank provides medical care benefits for
retirees (and their dependents) who have attained age 55 and have at least 10
years of service. In 1994, the Bank expanded the plan to provide medical care
benefits for disabled employees and widows of former employees (and their
dependents). The Bank provides these medical care benefits through a self-
insured plan. Under the terms of the plan, the Bank contributes to the cost of
coverage based on employees' length of service. Cost sharing with plan
participants is accomplished through deductibles, coinsurance and out-of-
pocket limits. Funding for the plan largely comes from the general assets of
the Bank, although recently contributions to a trust fund have been made under
Internal Revenue Code Section 401(h).
BF-27
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1994 the Bank elected to change the measurement date for plan assets and
liabilities from December 31 to September 30; the change had no material
effect on 1994 benefit expense. The following table sets forth the
postretirement medical care benefit plan's status at December 31, 1996, 1995
and 1994 for the Bank:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996** 1995** 1994**
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligation:
Retirees............................ $(11,737) $(15,261) $(18,111)
Fully eligible active plan
participants....................... (2,204) (2,585) (3,197)
Other active employees not fully
eligible........................... (9,040) (9,264) (8,647)
-------- -------- --------
Accumulated postretirement benefit
obligation........................... (22,981) (27,110) (29,955)
Plan assets at fair value*............ 7,233 5,765 4,391
-------- -------- --------
Accumulated postretirement benefit
obligation in excess of plan assets.. (15,748) (21,345) (25,564)
Unrecognized net (gain) loss from past
experience different from that
assumed.............................. (8,006) (7,861) (602)
Prior service cost not yet recognized
in net periodic postretirement
benefit cost......................... 1,662 2,059 2,015
Unrecognized transition obligation.... 18,756 23,081 22,444
-------- -------- --------
Prepaid (accrued) postretirement
benefit cost......................... $ (3,336) $ (4,066) $ (1,707)
======== ======== ========
Assumptions used in determining actuarial present value of benefit
obligation:
Discount rate....................... 7.50% 7.25% 7.75%
Rate of increase in health costs:
Initial........................... 8.50% 9.00% 12.00%
Ultimate.......................... 6.00% 6.00% 7.00%
Expected long-term asset return..... 8.00% 8.00% 8.00%
</TABLE>
- --------
* Plan assets consist primarily of participating units in collective trust
funds administered by the Bank.
** Plan assets and obligations are allocated to the Bank based on the Bank's
net prepaid postretirement expense as a percentage of Bankcorp's net
prepaid post retirement expense. Plan assets and obligations measured as of
September 30.
Net postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996* 1995* 1994*
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period...... $1,248 $ 898 $1,660
Interest cost on accumulated postretirement benefit
obligation......................................... 2,228 2,268 2,817
Actual return on plan assets........................ (888) (1,216) 2
Amortization of transition obligation over 20 years. 1,774 1,774 1,774
Net amortization and deferral....................... 68 560 (168)
------ ------ ------
Net postretirement benefit expense................ $4,430 $4,284 $6,085
====== ====== ======
</TABLE>
- --------
*Amounts allocated based on the Bank's postretirement benefit expense as a
percentage of Bankcorp's total postretirement benefit expense.
BF-28
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For 1996, the weighted average annual rate of increase in the per capita
cost of covered benefits was assumed to be 8.5 percent and was assumed to
decrease gradually to 6 percent in 2001 and remain level thereafter. For 1995
and 1994, the weighted average annual rate of increase in the per capita cost
of covered benefits was assumed to be 9 percent and 12 percent, respectively,
and was assumed to decrease gradually to 6 percent and 7 percent,
respectively, in 2001 and remain level thereafter. This health care cost trend
rate assumption had a significant effect on the amounts reported. Increasing
the assumed health care cost trend rates by one percentage point each year
would have increased the accumulated postretirement benefit obligation as of
September 30, 1996, September 30, 1995 and September 30, 1994 by $5.2 million,
$5.3 million and $6.2 million, respectively, and the aggregate service and
interest cost components of net postretirement benefit expense for 1996 by
approximately $0.7 million.
12. STOCK OPTIONS
At December 31, 1996, the Bank has two stock-based compensation plans which
are described below. During the first quarter of 1996, the Bank adopted SFAS
No. 123, Accounting for Stock-based Compensation, and elected the fair value
based method of accounting for its stock-based compensation plans. Employment
expense for these plans was $3.9 million and $0.5 million in 1996 and 1995,
respectively. There was no expense in 1994.
In January 1996, the Bank adopted the Harris Bank Stock Option Program under
the Bank of Montreal Stock Option Plan. The plan was established for certain
designated executives and certain other employees of the Bank in order to
provide incentive to attain long-term strategic goals and to attract and
retain services of key employees. On February 26, 1996, the Bank granted
451,800 stock options with a ten-year term which are exercisable only during
the second five years of their term, assuming cumulative performance goals are
met. The stock options are exercisable for Bank of Montreal common stock at a
price of Canadian $31.00 per share, equal to the market price on the date of
grant (equivalent to U.S. $22.55). The estimated grant-date fair value of the
options granted on February 26, 1996 was Canadian $5.79, equivalent to U.S.
$4.26. The fair value of the option grant was estimated using the Bloomberg
model with the following assumptions: risk-free interest rate of 7.57%,
expected life of 7.5 years, expected volatility of 16.97% and compound annual
dividend growth of 5.24%. A summary of the status of the stock option plan as
of December 31, 1996 and changes during the year ended December 31, 1996 is
presented below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE
------- -------- ----------------
<S> <C> <C>
Outstanding at 1/1/96.......................... -- --
Granted........................................ 451,800 $22.55
Exercised...................................... -- --
Forfeited, cancelled........................... 8,800 22.55
Expired........................................ -- --
-------- ------
Outstanding at 12/31/96........................ 443,000 $22.55
======== ======
Options exercisable at 12/31/96................ None
Weighted-average fair value of options granted
during 1996................................... $ 4.26
</TABLE>
The Bank maintains the Harris Bank Stock Appreciation Rights Plan which was
established in January 1995. The rights granted under this plan have either a
three-year or five-year term and are exercisable after the expiration of the
respective term, assuming cumulative performance goals are met. No rights were
granted in 1996. There are 528,000 rights outstanding at December 31, 1996.
BF-29
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. LEASE EXPENSE AND OBLIGATIONS
Rental expense for all operating leases was $15.5 million in 1996, $13.7
million in 1995 and $13.0 million in 1994. These amounts include real estate
taxes, maintenance and other rental-related operating costs of $4.4 million,
$4.1 million and $4.1 million for 1996, 1995, and 1994, respectively, paid
under net lease arrangements. Lease commitments are primarily for office
space.
Minimum rental commitments as of December 31, 1996 for all noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997....................................................... $10,337
1998....................................................... 8,438
1999....................................................... 6,200
2000....................................................... 4,949
2001....................................................... 4,964
2002 and thereafter........................................ 13,735
-------
Total minimum future rentals............................. $48,623
=======
</TABLE>
Occupancy expenses for 1996, 1995, and 1994 have been reduced by $13.8
million, $12.8 million, and $13.4 million, respectively, for rental income
from leased premises.
14. INCOME TAXES
The 1996, 1995, and 1994 applicable income tax expense (benefit) was as
follows:
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Current................................. $45,637 $ 4,648 $1,213 $51,498
Deferred................................ (2,164) (1,155) -- (3,319)
------- ------- ------ -------
Total................................. $43,473 $ 3,493 $1,213 $48,179
======= ======= ====== =======
1995:
Current................................. $51,415 $ 3,208 $ 29 $54,652
Deferred................................ (2,242) 1,156 -- (1,086)
------- ------- ------ -------
Total................................. $49,173 $ 4,364 $ 29 $53,566
======= ======= ====== =======
1994:
Current................................. $20,277 $ 583 $ 31 $20,891
Deferred................................ (3,602) (5,138) -- (8,740)
------- ------- ------ -------
Total................................. $16,675 $(4,555) $ 31 $12,151
======= ======= ====== =======
</TABLE>
BF-30
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross deferred tax assets:
Allowance for possible loan losses................ $41,038 $36,742 $38,835
Intangible assets................................. 7,122 7,350 6,719
Deferred employee compensation.................... 4,196 6,515 6,124
Deferred expense and prepaid income............... 3,848 2,729 2,003
Pension and medical trust......................... 3,438 4,025 3,421
Other assets...................................... 3,359 2,729 2,686
------- ------- -------
Deferred tax assets............................. 63,001 60,090 59,788
------- ------- -------
Gross deferred tax liabilities:
Other liabilities................................. (876) (1,284) (2,068)
------- ------- -------
Deferred tax liabilities........................ (876) (1,284) (2,068)
Valuation allowance................................. -- -- --
------- ------- -------
Net deferred tax assets........................... 62,125 58,806 57,720
------- ------- -------
Tax effect of adjustment related to available-for-
sale securities.................................... 9,308 (11,301) 13,389
------- ------- -------
Net deferred tax assets including adjustment related
to available-for-sale securities................... $71,433 $47,505 $71,109
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the respective net deferred tax assets of
$62.1 million and $58.8 million included $51.5 million and $49.4 million for
Federal tax and $10.6 million and $9.4 million for Illinois tax, respectively.
The Bank has fully recognized both its Federal and Illinois deferred tax
assets. Current taxable income and taxable income generated in the statutory
carryback period is sufficient to support the entire deferred tax asset. The
deferred taxes reported on the Bank's Consolidated Statement of Condition at
December 31, 1996 and 1995 also include a $9.3 million deferred tax asset and
a $11.3 million deferred tax liability, respectively, for the tax effect of
the net unrealized gains associated with marking to market certain securities
designated as available for sale.
BF-31
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Total income tax expense of $48.2 million for 1996, $53.6 million for 1995,
and $12.2 million for 1994 reflects effective tax rates of 31.9 percent, 32.9
percent, and 15.2 percent, respectively. The reasons for the differences
between actual tax expense and the amount determined by applying the U.S.
Federal income tax rate of 35 percent to income before income taxes were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
PERCENT
OF PRETAX
AMOUNT INCOME
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Computed tax expense............................ $ 52,940 35.0%
Increase (reduction) in income tax expense due
to:
Tax-exempt income from loans and investments
net of municipal interest expense
disallowance................................. (3,254) (2.1)
Bank owned life insurance..................... (2,969) (2.0)
Reduction of deferred tax valuation allowance. -- --
Other, net.................................... 1,461 1.0
------------ ----------
Actual tax expense.......................... $ 48,178 31.9%
============ ==========
<CAPTION>
DECEMBER 31, 1995
--------------------------
PERCENT
OF PRETAX
AMOUNT INCOME
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Computed tax expense............................ $ 56,998 35.0%
Increase (reduction) in income tax expense due
to:
Tax-exempt income from loans and investments
net of municipal interest expense
disallowance................................. (6,422) (3.9)
Bank owned life insurance..................... (1,061) (0.7)
Reduction of deferred tax valuation allowance. -- --
Other, net.................................... 4,050 2.5
------------ ----------
Actual tax expense.......................... $ 53,565 32.9%
============ ==========
<CAPTION>
DECEMBER 31, 1994
--------------------------
PERCENT
OF PRETAX
AMOUNT INCOME
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Computed tax expense............................ $ 28,032 35.0%
Increase (reduction) in income tax expense due
to:
Tax-exempt income from loans and investments
net of municipal interest expense
disallowance................................. (9,757) (12.2)
Bank owned life insurance..................... -- --
Reduction of deferred tax valuation allowance. (2,600) (3.2)
Other, net.................................... (3,525) (4.4)
------------ ----------
Actual tax expense............................ $ 12,151 15.2%
============ ==========
</TABLE>
The tax expense from net gains on security sales amounted to $3.3 million,
$9.0 million and $4.4 million in 1996, 1995, 1994, respectively.
BF-32
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. REGULATORY CAPITAL
The Bank as a state-member bank, must adhere to the capital adequacy
guidelines of the Federal Reserve Board (the "Board"), which are not
significantly different than those published by other U.S. banking regulators.
Effective December 31, 1992, the guidelines specify minimum ratios for Tier 1
capital to risk-weighted assets of 4 percent and total regulatory capital to
risk-weighted assets of 8 percent.
Risk-based capital guidelines define total capital to consist of Tier 1
(core) and Tier 2 (supplementary) capital. In general, Tier 1 capital is
comprised of stockholder's equity, including certain types of preferred stock,
less goodwill and certain other intangibles. Core capital must comprise at
least 50 percent of total capital. Tier 2 capital basically includes
subordinated debt (less a discount factor during the five years prior to
maturity), other types of preferred stock and the allowance for possible loan
losses. At year-end 1996, the portion of the allowance for possible loan
losses includable in Tier 2 capital is limited to 1.25 percent of risk-
weighted assets.
The Board also requires an additional measure of capital adequacy, the Tier
1 leverage ratio, which is evaluated in conjunction with risk-based capital
ratios. The Tier 1 leverage ratio is computed by dividing period-end Tier 1
capital by adjusted quarterly average assets. The Board established a minimum
ratio of 3 percent applicable only to the strongest banking organizations
having, among other things, excellent asset quality, high liquidity, good
earnings and no undue interest rate risk exposure. Other institutions,
including those experiencing or anticipating significant growth, are expected
to maintain a ratio which exceeds the 3 percent minimum by at least 100 to 200
basis points.
The Federal Deposit Insurance Corporation Improvement Act of 1991 contains
prompt corrective action provisions that established five capital categories
for all Federal Deposit Insurance Corporation ("FDIC")-insured institutions
ranging from "well capitalized" to "critically undercapitalized."
Classification within a category is based primarily on the three capital
adequacy measures. An institution is considered "well capitalized" if its
capital level significantly exceeds the required minimum levels, "adequately
capitalized" if it meets the minimum levels, "undercapitalized" if it fails to
meet the minimum levels, "significantly undercapitalized" if it is
significantly below the minimum levels and "critically undercapitalized" if it
has a ratio of tangible equity to total assets of 2 percent or less.
Noncompliance with minimum capital requirements may result in regulatory
corrective actions which could have a material effect on the Bank. Depending
on the level of noncompliance, regulatory corrective actions may include the
following: requiring a plan for restoring the institution to an acceptable
capital category, restricting or prohibiting certain activities and appointing
a receiver or conservator for the institution.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. Management is not aware of any conditions or events
since December 31, 1996 that have changed the capital category of the Bank.
BF-33
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Bank's risk-based capital ratios and Tier
1 leverage ratio for the past two years as well as the minimum amounts and
ratios as per capital adequacy guidelines and FDIC prompt corrective action
provisions.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ -------------------------
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ---------- ------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital to Risk-
Weighted Assets...... $1,340,198 10.74% ^ $998,285 ^8.00% ^$ 1,247,857 ^10.00%
Tier 1 Capital to
Risk-Weighted Assets. $ 928,872 7.44% ^ $499,394 ^4.00% ^$ 749,090 ^ 6.00%
Tier 1 Capital to
Average Assets....... $ 928,872 6.65% ^ $558,720 ^4.00% ^$ 698,400 ^ 5.00%
As of December 31, 1995:
Total Capital to Risk-
Weighted Assets...... $1,208,671 10.86% ^ $890,365 ^8.00% ^$ 1,112,957 ^10.00%
Tier 1 Capital to
Risk-Weighted Assets. $ 819,818 7.37% ^ $444,949 ^4.00% ^$ 667,423 ^ 6.00%
Tier 1 Capital to
Average Assets....... $ 819,818 6.44% ^ $509,204 ^4.00% ^$ 636,505 ^ 5.00%
</TABLE>
16. INVESTMENTS IN SUBSIDIARIES AND STATUTORY RESTRICTIONS
The Bank's investment in the combined net assets of its wholly-owned
subsidiaries was $18.1 million and $18.6 million at December 31, 1996 and
1995, respectively.
Provisions of both Illinois and Federal banking laws place restrictions upon
the amount of dividends that can be paid to Bankcorp by its bank subsidiaries.
Illinois law requires that no dividends may be paid in an amount greater than
the net profits then on hand, reduced by certain loan losses (as defined). In
addition to these restrictions, Federal Reserve member banking subsidiaries
require prior approval of Federal banking authorities if dividends declared by
a subsidiary bank, in any calendar year, will exceed its net profits (as
defined in the applicable statute) for that year, combined with its retained
net profits, as so defined, for the preceding two years. Based on these and
certain other prescribed regulatory limitations, Bancorp subsidiaries could
have declared, without regulatory approval, $211.1 million of dividends at
December 31, 1996. Actual dividends paid, however, would be subject to prudent
capital maintenance. Cash dividends paid to Bankcorp by the Bank amounted to
$41.9 million and $39.2 million in 1996 and 1995, respectively.
The Bank is required by the Federal Reserve Act to maintain reserves against
certain of their deposits. Reserves are held either in the form of vault cash
or balances maintained with the Federal Reserve Bank. Required reserves are
essentially a function of daily average deposit balances and statutory reserve
ratios prescribed by type of deposit. During 1996 and 1995, daily average
reserve balances of $185 million and $171 million, respectively, were required
for the Bank. At year-end 1996 and 1995, balances on deposit at the Federal
Reserve Bank totaled $131 million and $419 million, respectively.
17. CONTINGENT LIABILITIES
The Bank and certain subsidiaries are defendants in various legal
proceedings arising in the normal course of business. In the opinion of
management, based on the advice of legal counsel, the ultimate resolution of
these matters will not have a material adverse effect on the Bank's financial
position.
BF-34
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
18. FOREIGN ACTIVITIES (BY DOMICILE OF CUSTOMER)
Income and expenses identifiable with foreign and domestic operations are
summarized in the table below:
<TABLE>
<CAPTION>
1996 (IN THOUSANDS) FOREIGN DOMESTIC CONSOLIDATED
------------------- ---------- ----------- ------------
<S> <C> <C> <C>
Total operating income................... $ 40,067 $ 1,092,280 $ 1,132,347
Total expenses........................... 13,399 967,689 981,088
---------- ----------- -----------
Income before taxes...................... 26,668 124,591 151,259
Applicable income taxes.................. 10,599 37,579 48,178
---------- ----------- -----------
Net income............................... $ 16,069 $ 87,012 $ 103,081
========== =========== ===========
Identifiable assets at year-end.......... $ 835,657 $13,371,009 $14,206,666
========== =========== ===========
<CAPTION>
1995 (IN THOUSANDS)
-------------------
<S> <C> <C> <C>
Total operating income................... $ 49,329 $ 1,045,124 $ 1,094,453
Total expenses........................... 23,922 907,680 931,602
---------- ----------- -----------
Income before taxes...................... 25,407 137,444 162,851
Applicable income taxes.................. 10,098 43,467 53,565
---------- ----------- -----------
Net income............................... $ 15,309 $ 93,977 $ 109,286
========== =========== ===========
Identifiable assets at year-end.......... $ 792,433 $11,178,052 $11,970,485
========== =========== ===========
<CAPTION>
1994 (IN THOUSANDS)
-------------------
<S> <C> <C> <C>
Total operating income................... $ 53,416 $ 828,532 $ 881,948
Total expenses........................... 23,584 778,271 801,855
---------- ----------- -----------
Income before taxes...................... 29,832 50,261 80,093
Applicable income taxes.................. 11,857 294 12,151
---------- ----------- -----------
Net income............................... $ 17,975 $ 49,967 $ 67,942
========== =========== ===========
Identifiable assets at year-end.......... $1,017,784 $10,910,222 $11,928,006
========== =========== ===========
</TABLE>
Determination of rates for foreign funds generated or used are based on the
actual external costs of specific interest-bearing sources or uses of funds
for the periods. Internal allocations for certain unidentifiable income and
expenses were distributed to foreign operations based on the percentage of
identifiable foreign income to total income. As of December 31, 1996, 1995 and
1994, identifiable foreign assets accounted for 6, 7 and 9 percent,
respectively, of total consolidated assets.
19. BUSINESS COMBINATIONS AND DISPOSITIONS/INTANGIBLES
At December 31, 1996 and 1995, intangible assets, including goodwill
resulting from business combinations, amounted to $294,420,000 and
$18,881,000, respectively. Amortization of these intangibles amounted to
$14,930,000 in 1996, $5,969,000 in 1995, and $6,791,000 in 1994. The impact of
purchase accounting adjustments, other than amortization of intangibles, was
not material to the Bank's reported results.
In January 1996, the Bank announced the sale of its securities custody and
related trustee services business for large institutions to Citibank. After
restructuring charges, the Bank recognized a $4.0 million gain on the sale.
The gain was recorded net of certain anticipated costs to exit this activity,
including employee termination benefits, amounting to approximately $13.0
million. Computation of the gain also included the Bank's estimated
BF-35
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
obligation to service affected customers on an interim basis. The Bank is
entitled to contingent revenue in the event certain levels of customer
retention are achieved by the purchaser of the business. The right to receive
such revenue in 1998 was included as consideration in an arrangement
consummated with Bankmont during 1996 (see Note 20).
On June 28, 1996, the Bank completed the acquisition of 54 branches
previously owned by Household Bank, f.s.b. ("Household"), a wholly-owned
subsidiary of Household International, Inc. The 54 branches are located
throughout the metropolitan Chicago area. In addition to acquiring real and
personal property, the Bank has assumed certain deposit liabilities and
purchased other assets, primarily consumer loans. The transaction has been
accounted for as a purchase and the Bank's consolidated financial statements
include the results of the acquired branches from the date of acquisition. In
anticipation of this transaction, on June 27, 1996 the Bank increased its
capital base by $340 million, in part through a direct cash infusion of $325
million of common equity by Bankcorp and the issuance of $15 million of long-
term subordinated debt.
At the closing, the Bank assumed deposits totaling $2.9 billion. In
addition, the Bank acquired loans amounting to $340 million along with real
property and certain other miscellaneous assets. In consideration of the
purchase price of $277 million, the Bank received approximately $2.24 billion
in cash from Household as consideration for the deposit liabilities assumed,
net of assets purchased.
The purchase price of $277 million was recorded as an intangible asset,
along with certain fair value adjustments and deferred acquisition costs,
resulting in goodwill and other intangibles recognized of $284 million.
Following is an unaudited condensed statement of condition of the Bank at
June 30, 1996, reflecting the impact of the transaction on the Bank's
financial position at the acquisition date.
<TABLE>
<CAPTION>
UNAUDITED
--------------------------------------------------
JUNE 30, 1996 HOUSEHOLD JUNE 30, 1996
WITHOUT HOUSEHOLD IMPACT AS REPORTED
----------------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and demand balances
due from banks.......... $ 1,065 $ 105 (a,f) $ 1,170
Money market and trading
account assets.......... 869 869
Portfolio securities..... 3,027 3,027
Loans, net of unearned
income.................. 7,694 340 (b) 8,034
Allowance for possible
loan losses............. (100) (5)(b) (105)
Premises and equipment... 146 30 (c) 176
Other assets............. 552 294 (b,c,d,g) 846
------- ------- -------
TOTAL ASSETS........... $13,253 $ 764 $14,017
======= ======= =======
LIABILITIES
Total deposits........... 7,726 1,643 (e,f) 9,369
Short-term borrowings.... 4,173 (1,244)(f) 2,929
Other liabilities........ 236 25 (g) 261
Long-term notes.......... 295 15 (a) 310
------- ------- -------
TOTAL LIABILITIES...... 12,430 439 12,869
------- ------- -------
STOCKHOLDER'S EQUITY
Common equity............ 823 325 (a) 1,148
------- ------- -------
TOTAL STOCKHOLDER'S
EQUITY................ 823 0 1,148
------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY.. $13,253 $ 439 $14,017
======= ======= =======
</TABLE>
BF-36
<PAGE>
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
- --------
(a) The Bank received a contribution to capital surplus from Bankcorp of $325
million and issued to Bankcorp $15 million of subordinated debt.
(b) The Bank acquired loans amounting to $340 million plus accrued interest
receivable and established a related allowance for possible loan losses of
$4.8 million in order to record the loans at fair value.
(c) The Bank acquired fixed assets totaling $30 million including a $3.9
million adjustment to reflect land acquired at fair market value.
(d) The Bank recorded the $277 million purchase price as an intangible asset.
(e) The Bank assumed deposit liabilities totaling $2.9 billion.
(f) The Bank reduced short-term borrowings (wholesale time deposits, Federal
funds purchased, etc.) with the net cash available from Household and the
related capital infusion from Bankcorp. In addition, cash and due from
bank balances increased as a result of statutory reserve requirements on
deposits.
(g) The Bank recorded $17 million of accrued interest payable on the assumed
deposit liabilities and capitalized as apart of the purchase price
approximately $6.8 million for investment banker fees, severance costs and
other charges.
20. RELATED PARTY TRANSACTIONS
During 1996, 1995, and 1994, the Bank engaged in various transactions with
BMO and its subsidiaries. These transactions included the payment and receipt
of service fees and occupancy expenses, and purchasing and selling Federal
funds, repurchase and reverse repurchase agreements, long-term borrowings and
interest rate and foreign exchange contracts. The purpose of these
transactions was to facilitate a more efficient use of combined resources and
to better serve customers. Fees for these services were determined in
accordance with applicable banking regulations. During 1996, 1995 and 1994,
the Bank received from BMO approximately $14.3 million, $15.7 million and
$12.8 million respectively, primarily for trust services, data processing and
other operations support provided by the Bank.
In order to facilitate the Bank's exit from the securities custody and
related trustee services business for large institutions (see Note 19), the
Bank and Bankmont entered into an agreement effective December 31, 1996
whereby Bankmont will assume responsibility for potential costs (subject to
limits) related to certain litigation matters involving the Bank. As part of
this agreement, Bankmont incurred $2.7 million of costs through the date of
the agreement. In return for assuming this obligation, Bankmont is entitled to
receive funds from a contingent revenue arrangement between the Bank and
Citibank. Bankmont paid the Bank $480,000 as consideration for accepting this
arrangement, which was recorded as income.
Effective April 3, 1995, the Bank and BMO agreed to combine their U.S.
foreign exchange activities. Under this arrangement, FX net profit is shared
by the Bank and BMO in accordance with a specific formula set forth in the
agreement. This agreement expires in April 2002 but may be extended at that
time. Either party may terminate the arrangement at its option. Beginning with
second quarter 1995, FX revenues were reported net of expenses. 1996 and 1995
foreign exchange revenues included $10.0 million and $8.8 million of net
profit, respectively, under this agreement.
BF-37
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE BANK OR THE UNDERWRITERS. THIS PRO-
SPECTUS 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 CIRCUM-
STANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 14
The Company................................................................ 20
Use of Proceeds............................................................ 20
Capitalization............................................................. 21
Business and Strategy...................................................... 22
Management................................................................. 34
Certain Transactions Constituting the Formation............................ 35
Description of Series A Preferred Shares................................... 39
Description of Capital Stock............................................... 44
U.S. Federal Income Tax Considerations..................................... 47
ERISA Considerations....................................................... 54
The Bank................................................................... 57
Underwriting............................................................... 66
Experts.................................................................... 68
Ratings.................................................................... 68
Legal Matters.............................................................. 69
Available Information...................................................... 69
Glossary................................................................... 69
Index to Company Financial Statement....................................... CF-1
Index to Bank Financial Statements......................................... BF-1
</TABLE>
----------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE COMMENCEMENT
OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI-
TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 SHARES
HARRIS PREFERRED
CAPITAL CORPORATION
% NONCUMULATIVE
EXCHANGEABLE
PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE
$25.00 PER SHARE)
EXCHANGEABLE INTO
PREFERRED SHARES
OF
HARRIS TRUST AND SAVINGS
BANK
LOGO
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
NESBITT BURNS
SECURITIES INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee................................................. $75,758
NASD Filing Fee.................................................. 25,500
NYSE Listing Fee.................................................
Printing and Engraving Expenses..................................
Legal Fees and Expenses..........................................
Accounting Fees and Expenses.....................................
Rating Agency Fees...............................................
Blue Sky Fees and Expenses.......................................
Miscellaneous....................................................
-------
Total ....................................................... $
=======
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
The response to Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the formation of the Company, the Company has issued
1,000 shares of Common Stock, par value $1.00 per share, to Harris Trust and
Savings Bank for $1,000. The description of these transactions in the
Prospectus under the heading "Certain Transactions Constituting the Formation"
is incorporated herein by reference. These shares of Common Stock were issued
in reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Charter provides that the liability of the directors and
officers of the Company for money damages shall be eliminated to the maximum
extent permitted by Maryland law. The Charter also provides that no amendment
thereto may limit or eliminate this limitation of liability with respect to
events occurring prior to the effective date of such amendment. The Company's
Charter and Bylaws require it to indemnify its directors and officers to the
fullest extent permitted by Maryland law.
The Company expects to purchase an insurance policy that purports to insure
officers and directors of the Company against certain liabilities incurred by
them in the discharge of their official functions.
The Purchase Agreement to be filed as Exhibit 1 to this Registration
Statement will provide for reciprocal indemnification by the Underwriters of
the Company, the Bank and their directors, officers and controlling persons,
and by the Company and the Bank of the Underwriters and their respective
directors, officers and controlling persons, against certain liabilities under
the Securities Act.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
See Index to Company Financial Statements and Index to Bank Financial
Statements in the Prospectus.
II-1
<PAGE>
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------- ---
<S> <C> <C>
*1 Form of Purchase Agreement among the Company, the Bank and the Underwriters
3(a)(i) Articles of Incorporation of the Company
3(a)(ii) Form of Articles of Amendment and Restatement of the Company establishing the
Series A Preferred Shares
3(b) Bylaws of the Company
4 Specimen of certificate representing Series A Preferred Shares
*5 Opinion of Chapman and Cutler, counsel to the Company, relating to
Series A Preferred Shares
*8 Opinion of Chapman and Cutler, counsel to the Company, relating to certain tax
matters
10(a) Form of Servicing Agreement between the Company and the Bank
10(b) Form of Advisory Agreement between the Company and the Bank
10(c) Form of Bank Loan Agreement between the Company and the Bank
10(d) Form of Mortgage Loan Assignment Agreement between the Company and the Bank
*23(a) Consent of Independent Accountants with respect to the Company's Financial Statement
23(b) Consent of Independent Accountants with respect to the Bank's Financial Statements
*23(c) Consent of Chapman and Cutler (included in opinions filed as Exhibits 5 and 8)
24 Power of Attorney (included on the signature page to this Registration Statement)
</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 Purchase 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
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 Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding), is asserted 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 Securities 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 Securities 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 Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN CHICAGO, ILLINOIS ON NOVEMBER 14, 1997.
Harris Preferred Capital Corporation
/s/ Paul R. Skubic
By: _________________________________
Paul R. Skubic
President
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS PAUL R. SKUBIC, THOMAS R. SIZER AND FRANK M.
NOVOSEL, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS,
WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR AND IN HIS NAME, PLACE
AND STEAD, IN ANY AND ALL CAPACITIES TO SIGN ANY OR ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY OR ALL OTHER
DOCUMENTS IN CONNECTION THEREWITH, AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, WITH THE SECURITIES AND EXCHANGE COMMISSION GRANTING UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT
AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS
FULLY TO ALL INTENTS AND PURPOSES AS MIGHT OR COULD BE DONE IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM,
OR THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY
VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON NOVEMBER 14, 1997 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Michael D. Williams Chairman of the Board of Directors
___________________________________________
Michael D. Williams
/s/ Paul R. Skubic President, Chief Executive Officer and
___________________________________________ Director
Paul R. Skubic
/s/ Pierre O. Greffe Chief Financial and Accounting Officer
___________________________________________
Pierre O. Greffe
/s/ Thomas R. Sizer Secretary and Director
___________________________________________
Thomas R. Sizer
/s/ Frank M. Novosel Treasurer and Director
___________________________________________
Frank M. Novosel
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
*1 Form of Purchase Agreement among the Company, the Bank
and the Underwriters
3(a)(i) Articles of Incorporation of the Company
3(a)(ii) Form of Articles of Amendment and Restatement of the
Company establishing the
Series A Preferred Shares
3(b) Bylaws of the Company
4 Specimen of certificate representing Series A Pre-
ferred Shares
*5 Opinion of Chapman and Cutler, counsel to the Company,
relating to
Series A Preferred Shares
*8 Opinion of Chapman and Cutler, counsel to the Company,
relating to certain tax
matters
10(a) Form of Servicing Agreement between the Company and
the Bank
10(b) Form of Advisory Agreement between the Company and the
Bank
10(c) Form of Bank Loan Agreement between the Company and
the Bank
10(d) Form of Mortgage Loan Assignment Agreement between the
Company and the Bank
*23(a) Consent of Independent Accountants with respect to the
Company's Financial Statement
23(b) Consent of Independent Accountants with respect to the
Bank's Financial Statements
*23(c) Consent of Chapman and Cutler (included in opinions
filed as Exhibits 5 and 8)
24 Power of Attorney (included on the signature page to
this Registration Statement)
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 3(A)(I)
ARTICLES OF INCORPORATION
HARRIS PREFERRED CAPITAL CORPORATION
FIRST: The undersigned, Todd N. Sheldon, whose address is 111 West Monroe
Street, Suite 1500, Chicago, Illinois 60603-4080, being at least eighteen years
of age, does hereby form a corporation under the laws of the State of Maryland.
SECOND: The name of the corporation is Harris Preferred Capital
Corporation.
THIRD: The purposes for which the Corporation is formed are to engage in
any lawful act or activity (including, without limitation or obligation,
engaging in business as a real estate investment trust under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended, or any successor
statute) for which corporations may be organized under the general laws of the
State of Maryland as now or hereafter in force.
FOURTH: The post office address of the principal office of the corporation
in Maryland is 711 Mayton Court, Belair, MD 21201.
FIFTH: The name and post office address of the resident agent of the
corporation in Maryland are Ken Kramer, 711 Mayton Court, Belair, MD 21201.
SIXTH: The corporation has authority to issue 1,000 common shares at $1.00
par value per share.
SEVENTH: The number of directors of the corporation shall be four which
number may be increased or decreased pursuant to the bylaws of the corporation,
and so long as there are less than three (3) stockholders, the number of
directors may be less than three (3) but not less than the number of
stockholders, and the name(s) of the director(s) who shall act until the first
meeting or until their successors are duly chosen and qualified are:
Michael Williams
Paul R. Skubic
Frank M. Novosel
Thomas R. Sizer
EIGHTH: IN WITNESS WHEREOF, I have signed these Articles and acknowledge
the same to be my act.
RETURN TO: SIGNATURE
Todd N. Sheldon /s/ Todd N. Sheldon
111 West Monroe Street, Suite 1500 -----------------------------
Chicago, Illinois 60603-4080 Todd N. Sheldon
<PAGE>
EXHIBIT 3(A)(II)
HARRIS PREFERRED CAPITAL CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: Harris Preferred Capital Corporation, a Maryland corporation (the
"Corporation"), desires to amend and restate its charter as currently in effect
and as hereinafter amended.
SECOND: The following provisions are all the provisions of the charter
currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned,__________________________________________, whose address
is c/o _____________________________________,__________________________________,
_______________________, Maryland________________________, being at least 18
years of age, does hereby form a corporation under the general laws of the State
of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") is: Harris Preferred
Capital Corporation.
ARTICLE III
PURPOSE AND DURATION
The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code")) for which corporations
may be organized under the general laws of the State of Maryland as now or
hereafter in force. For purposes of these Articles, "REIT" means a real estate
investment trust under Sections 856 through 860 of the Code.
The Corporation's existence will be perpetual, except that effective as of
the close of business on the date that the Corporation delivers the notice of an
Exchange Event (as defined herein), pursuant to Section 6.6.4 hereof, without
the need for any approval by the Board of Directors of the Corporation (the
"Board of Directors") or the stockholders of the Corporation, the existence of
the Corporation shall terminate and the Corporation will be liquidated and its
affairs wound up in accordance with the procedures set forth in Title 3,
Subtitle 5 of the Maryland General Corporation Law (the "MGCL") relating to
forfeiture of the charter of a corporation and expiration of corporate
existence.
<PAGE>
Article IV
Principal Office in State and Resident Agent
The address of the principal office of the Corporation in the State of
Maryland is c/o ___________________________, _______________________________,
_________________, Maryland _____________, Attention: _____________. The name of
the resident agent of the Corporation in the State of Maryland is _____________,
whose post address is c/o _____________________________________________________,
_________________________________________, _________________, Maryland. The
resident agent is a citizen of and resides in the State of Maryland.
Article V
Provisions for Defining, Limiting and
Regulating Certain Powers of the Corporation
and of the Stockholders and Directors
Section 5.1. Number of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation initially shall be [six,] which number
may be increased or decreased pursuant to the Bylaws of the Corporation (the
"Bylaws"), but shall never be less than the minimum number required by the MGCL.
At all times that any shares of Series A Preferred Stock (as defined herein) are
outstanding, at least two of the directors shall be Independent Directors (as
defined herein). The names of the directors who shall serve until their
successors are duly elected and qualify are:
_____________________________
_____________________________
_____________________________
_____________________________
These directors may increase the number of directors and may fill any vacancy,
whether resulting from an increase in the number of directors or otherwise, on
the Board of Directors occurring before the first annual meeting of stockholders
in the manner provided in the Bylaws.
Section 5.2. Extraordinary Actions. Except as specifically provided in
Section 6.6, notwithstanding any provision of law permitting or requiring any
action to be taken or approved by the affirmative vote of the holders of shares
entitled to cast a greater number of votes, any such action shall be effective
and valid if taken or approved by the affirmative vote of holders of shares
entitled to cast a majority of all the votes entitled to be cast on the matter.
-2-
<PAGE>
Section 5.3. Authorization by Board of Certain Matters.
Section 5.3.1. Stock Issuance. The Board of Directors may authorize
the issuance from time to time of shares of stock of the Corporation of any
class or series, whether now or hereafter authorized, or securities or rights
convertible into shares of its stock of any class or series, whether now or
hereafter authorized, for such consideration as the Board of Directors may deem
advisable (or without consideration in the case of a stock split or stock
dividend), subject to such restrictions or limitations, if any, as may be set
forth in the Charter (as such term is defined in the MGCL) of the Corporation or
the Bylaws.
Section 5.3.2. Filing voluntary Petition of Bankruptcy. Approval by
two thirds of the members of the Board of Directors is required in order for the
Corporation to file a voluntary petition of bankruptcy.
Section 5.4. Preemptive Rights. Except as may be provided by the Board
of Directors in setting the terms of classified or reclassified shares of stock
pursuant to Section 6.4., no holder of shares of stock of the Corporation shall,
as such holder, have any preemptive right to purchase or subscribe for any
additional shares of stock of the Corporation or any other security of the
Corporation which it may issue or sell.
Section 5.5. Indemnification. The Corporation shall have the power, to
the maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to 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 of the Corporation or (b) any individual
who, while a director of the Corporation at and at the request of the
Corporation, serves or has served as a director, officer, partner or trustee of
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise from and against any claim
or liability to which such person may become subject or which such person may
incur by reason of his status as a present or former director or officer of the
Corporation. The Corporation shall have the power, with the approval of the
Board of Directors, to provide such indemnification and advancement of expenses
to a person who served a predecessor of the Corporation in any of the capacities
described in (a) or (b) above and to any employee or agent of the Corporation or
a predecessor of the Corporation.
Section 5.6. Determinations by the Board. The determination as to any of
the following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the Charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which reserves or charges shall
-3-
<PAGE>
have been created shall have been paid or discharged); the fair value, or any
sale, bid or asked price to be applied in determining the fair value, of any
asset owned or held by the Corporation; any matter relating to the acquisition,
holding and disposition of any assets by the Corporation; or any other matter
relating to the business and affairs of the Corporation.
Section 5.7. REIT Qualification. If the Corporation elects to qualify for
federal income tax treatment as a REIT, the Board of Directors shall use its
reasonable best efforts to take such actions as are necessary or appropriate to
preserve the status of the Corporation as a REIT; however, if the Board of
Directors determines that it is no longer in the best interests of the
Corporation to continue to be qualified as a REIT, the Board of Directors may
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code; provided, however, that as long as any shares of
Series A Preferred Stock (as defined in Section 6.1) remain outstanding, any
such determination may not be made without the approval of a majority of the
Independent Directors. The Board of Directors also may determine that compliance
with any restriction or limitation on stock ownership and transfers set forth in
Article VII is no longer required for REIT qualification.
Section 5.8. Removal of Directors. Subject to the rights of holders of one
or more classes or series of Preferred Stock to elect one or more directors, any
director, or the entire Board of Directors, may be removed from office at any
time, but only by the affirmative vote of at least two thirds of the votes
entitled to be cast in the election of directors.
Section 5.9. Advisory Agreements. Subject to such approval of stockholders
and other conditions, if any, as may be required by any applicable statute, rule
or regulation, the Board of Directors may authorize the execution and
performance by the Corporation of one or more agreements with any person,
corporation, association, company, trust, partnership (limited or general) or
other organization whereby, subject to the supervision and control of the Board
of Directors, any such other person, corporation, association, company, trust,
partnership (limited or general) or other organization shall render or make
available to the Corporation managerial, investment, advisory and/or related
services, office space and other services and facilities (including, if deemed
advisable by the Board of Directors, the management or supervision of the
investments of the Corporation) upon such terms and conditions as may be
provided in such agreement or agreements (including, if deemed fair and
equitable by the Board of Directors, the compensation payable thereunder by the
Corporation).
Article VI
Stock
Section 6.1. Authorized Shares. Subject to the last sentence of this
paragraph, the Corporation has authority to issue 20,001,000 shares of stock,
consisting of 1,000 shares of Common Stock, $1.00 par value per share ("Common
Stock"), and 20,000,000 shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock"), with the preferences, conversion or other rights,
voting powers, restrictions, limitations as to
-4-
<PAGE>
dividends or other distributions, qualifications and terms and conditions of
redemption as set forth in Section 6.6 hereof. The aggregate par value of all
authorized shares of stock having par value is $201,000. If shares of one class
of stock are classified or reclassified into shares of another class of stock
pursuant to Sections 6.2, 6.3 and 6.4, the number of authorized shares of the
former class shall be automatically decreased and the number of shares of the
latter class shall be automatically increased, in each case by the number of
shares so classified or reclassified, so that the aggregate number of shares of
stock of all classes that the Corporation has authority to issue shall not be
more than the total number of shares of stock set forth in the first sentence of
this paragraph.
Section 6.2. Common Stock. Subject to the provisions of Article VII, each
share of Common Stock shall entitle the holder thereof to one vote. The Board of
Directors may reclassify any unissued shares of Common Stock from time to time
in one or more classes or series of stock.
Section 6.3. Preferred Stock. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more series of stock.
Section 6.4. Classified or Reclassified Shares. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and series of stock of the Corporation; (b) specify the number
of shares to be included in the class or series; (c) set or change, subject to
the provisions of Article VII and subject to the express terms of any class or
series of stock of the Corporation outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption for each class or series; and (d) cause the Corporation to file
articles supplementary with the State Department of Assessments and Taxation of
Maryland ("SDAT"). Any of the terms of any class or series of stock set or
changed pursuant to clause (c) of this Section 6.4 may be made dependent upon
facts or events ascertainable outside the Charter (including determinations by
the Board of Directors or other facts or events within the control of the
Corporation) and may vary among holders thereof, provided that the manner in
which such facts, events or variations shall operate upon the terms of such
class or series of stock is clearly and expressly set forth in the articles
supplementary filed with the SDAT.
Section 6.5. Charter and Bylaws. All persons who shall acquire stock in
the Corporation shall acquire the same subject to the provisions of the Charter
and the Bylaws.
Section 6.6. Series A Preferred Shares. The Corporation shall have the
authority to issue 20,000,000 shares of Preferred Stock, $.01 par value per
share (the "Series A Preferred Shares"), with the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption as follows:
Section 6.6.1. Liquidation Value. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of the Series A Preferred Shares at the time outstanding will be
entitled to receive out of assets of the Corporation available for distribution
to stockholders, before any distribution of assets is made to holders of Common
Stock or any other class of stock ranking junior to the Series A Preferred
Shares upon liquidation, liquidating distributions in the amount of $25.00 per
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share, plus the quarterly accrued and unpaid dividend thereon, if any, to the
date of liquidation.
After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Series A Preferred Shares will have no
right or claim to any of the remaining assets of the Corporation. In the event
that, upon any such voluntary or involuntary liquidation, dissolution or winding
up, the available assets of the Corporation are insufficient to pay the amount
of the liquidation distributions on all outstanding Series A Preferred Shares
and the corresponding amounts payable on all shares of other classes or series
of capital stock of the Corporation ranking on a parity with the Series A
Preferred Shares in the distribution of assets upon any liquidation, dissolution
or winding up of the affairs of the Corporation, then the holders of the Series
A Preferred Shares and such other classes or series of capital stock shall share
ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Corporation with
or into any other entity, or the sale, lease or conveyance of all or
substantially all of the property or business of the Corporation, shall not be
deemed to constitute liquidation, dissolution or winding up of the Corporation.
Section 6.6.2 Dividends. (a) Payment of Dividends. Holders of Series
A Preferred Shares shall be entitled to receive, if, when and as authorized and
declared by the Board of Directors, out of assets of the Corporation legally
available therefor, noncumulative cash dividends at an annual rate of ____% of
the $______ liquidation preference per share (equivalent to $______ per share
per annum), and no more. Such noncumulative cash dividends shall be payable, if
authorized and declared, quarterly in arrears on March 30, June 30, September 30
and December 30 of each year, or, if such day is not a Business Day (as defined
herein), on the next Business Day (each such date, a "Dividend Payment Date").
Each authorized and declared dividend shall be payable to holders of record of
the Series A Preferred Shares as they appear on the stock books of the
Corporation at the close of business on such record dates, not more than 45
calendar days nor less than ten calendar days preceding the Dividend Payment
Date therefor, as determined by the Board of Directors (each such date, a
"Record Date"); provided, however, that if the date fixed for redemption of any
of the Series A Preferred Shares occurs after a dividend is authorized and
declared but before it is paid, such dividend shall be paid as part of the
redemption price to the person to whom the redemption price is paid. Quarterly
dividend periods (each, a "Dividend Period") shall commence on and include the
first day, and shall end on and include the last day, of the calendar quarter in
which the corresponding Dividend Payment Date occurs; [provided, however, that
the first Dividend Period (the "Initial Dividend Period") shall commence on and
include _______, 1997 and shall end on and include December 31, 1997.]
The amount of dividends payable for [the Initial Dividend Period and
for] any other Dividend Period which, as to a share of Series A Preferred Shares
(determined by reference to the issuance date and the redemption or retirement
date thereof), is greater or less than a full Dividend Period shall be computed
on the basis of the number of days elapsed in the
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period using a 360-day year composed of twelve 30-day months, provided, however,
that in the event of the Automatic Exchange (as defined herein), any accrued and
unpaid dividends on the Series A Preferred Shares as of the Time of Exchange (as
defined herein) shall be deemed to be accrued and unpaid dividends on the Bank
Preferred Shares (as defined herein).
Holders of the Series A Preferred Shares shall not be entitled to any
interest, or any sum of money in lieu of interest, in respect of any dividend
payment or payments on the Series A Preferred Shares authorized and declared by
the Board of Directors which may be unpaid. Any dividend payment made on the
Series A Preferred Shares shall first be credited against the earliest
authorized and declared but unpaid cash dividend with respect to the Series A
Preferred Shares.
(b) Dividends Noncumulative. The right of holders of Series A
Preferred Shares to receive dividends is noncumulative. Accordingly, if the
Board of Directors does not authorize or declare a dividend payable in respect
to any Dividend Period, holders of Series A Preferred Shares shall have no right
to receive a dividend in respect of such Dividend Period, and the Corporation
shall have no obligation to pay a dividend in respect of such Dividend Period,
whether or not dividends are authorized and declared payable in respect of any
future Dividend Period.
(c) Priority as to Dividends. If full dividends on the Series A
Preferred Shares for any dividend period shall not have been declared and paid,
or declared and a sum sufficient for the payment thereof set apart for such
payments, no dividends shall be authorized, declared or paid or set aside for
payment with respect to the Common Stock or any other stock of the Corporation
ranking junior to or on parity with the Series A Preferred Shares as to
dividends or amounts upon liquidation, nor shall any Common Stock or any other
stock of the Corporation ranking junior to or on a parity with the Series A
Preferred Shares as to dividends or amounts upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any monies to be paid
to or made available for a sinking fund for the redemption of any such stock) by
the Corporation (except by conversion into or exchange for other stock of the
Corporation ranking junior to the Series A Preferred Shares as to dividends and
amounts upon liquidation), until such time as dividends on all outstanding
Series A Preferred Shares have been (i) declared and paid for three consecutive
dividend periods and (ii) declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the fourth consecutive dividend
period.
When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) for any Dividend Period on the Series A Preferred
Shares, all dividends declared on the Series A Preferred Shares and any other
series ranking on a parity as to dividends with the Series A Preferred Shares
shall be declared pro rata so that the amount of dividends declared per share on
the Series A Preferred Shares and such other series of capital stock shall in
all cases bear to each other the same ratio that full dividends, for the then
current Dividend Period, per Series A Preferred Share (which shall not include
any accumulation in respect of unpaid dividends for prior Dividend Periods) and
full dividends, including required or permitted accumulations, if any, on such
the stock of any other series ranking on a parity as to dividends with the
Series A Preferred Shares bear to each other.
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(d) Any reference to "dividends" or "distributions" in this Section
6.6.2 shall not be deemed to include any distribution made in connection with
any voluntary or involuntary dissolution, liquidation or winding up of the
Corporation.
Section 6.6.3. Optional Redemption. The Series A Preferred Shares will
not be redeemable prior to ______, 2002, except upon the occurrence of a Tax
Event (as such term is hereinafter defined). On or after such date, the Series A
Preferred Shares will be redeemable at the option of the Corporation, 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 the principal amount thereof, plus the quarterly
accrued and unpaid dividend to the date of redemption, if any, thereon.
In the event that fewer than all the outstanding Series A Preferred
Shares are to be redeemed, the number of Series A Preferred Shares to be
redeemed shall be determined by the Board of Directors, and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method as may be determined by the Board of
Directors in its sole discretion to be equitable, provided that such method
satisfies any applicable requirements of any securities exchange on which the
Series A Preferred Shares are then listed.
Unless full dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for the then-current dividend
period, no Series A Preferred Shares shall be redeemed unless all outstanding
Series A Preferred Shares are redeemed and the Corporation shall not purchase or
otherwise acquire any Series A Preferred Shares; provided, however, that the
Corporation may purchase or acquire Series A Preferred Shares pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
Series A Preferred Shares.
The Corporation will also have the right at any time, upon the
occurrence of a Tax Event, to redeem the Series A Preferred Shares, in whole
(but not in part) at a redemption price of $25.00 per share, plus the quarterly
accrued and unpaid dividend to the date of redemption, if any, thereon. "Tax
Event" means the receipt by the Corporation 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
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issuance of the Series A Preferred Shares, there is a material risk that (a)
dividends paid or to be paid by the Corporation with respect to the capital
stock of the Corporation are not, or will not be, fully deductible by the
Corporation for united States federal income tax purposes or (b) the Corporation
is, or will be, subject to more than a de minimis amount of other taxes, duties
or other governmental charges.
Series A Preferred Shares redeemed pursuant to this Section 6.6.3,
purchased or otherwise acquired for value by the Corporation shall, after such
acquisition, have the status of authorized and unissued shares of Preferred
Stock and may be reissued by the Corporation at any time as shares of any series
of Preferred Stock other than as Series A Preferred Shares.
Section 6.6.4. Automatic Exchange. (a) General. Subject to the terms
and conditions of this Section 6.6.4, each Series A Preferred Share will be
exchanged automatically for one newly issued share of preferred stock (each, a
"Bank Preferred Share") of Harris Trust and Savings Bank (the "Bank") in the
event (i) the Bank becomes less than "adequately capitalized" under regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended, (ii) the Bank is placed into conservatorship or
receivership, (iii) the Board of Governors of the Federal Reserve System or
other appropriate successor federal agency (the "Board of Governors") directs
such exchange in writing because, in its sole discretion and even if the Bank is
not less than "adequately capitalized," the Board of Governors anticipates that
the Bank may become less than "adequately capitalized" in the near term, or (iv)
the Board of Governors in its sole discretion directs in writing an exchange in
the event that the Bank has a Tier 1 risk-based capital ratio of less than 5%
(each, an "Exchange Event"). The Bank will be considered to be less than
"adequately capitalized" under the regulations if it has (i) a Tier 1 leverage
ratio of less than 4%, (ii) a Tier 1 risk-based capital ratio of less than 4%,
or (iii) a total risk-based capital ratio of less than 8%. Upon the occurrence
of an Exchange Event, each holder of Series A Preferred Shares shall be
unconditionally obligated to surrender to the Bank the certificates representing
each Series A Preferred Share of such holder, and the Bank shall be
unconditionally obligated to issue to such holder in exchange for each such
Series A Preferred Share a certificate representing one Bank Preferred Share.
Any Series A Preferred Share purchased or redeemed by the Company prior to the
Time of Exchange (as defined below) shall not be deemed outstanding and shall
not be subject to the Automatic Exchange. Holders of Series A Preferred Shares
cannot exchange their Series A Preferred Shares for Bank Preferred Shares
voluntarily. In addition, absent the occurrence of an Exchange Event and the
subsequent exchange provided for in this Section 6.6.4, holders of Series A
Preferred Shares will have no dividend, voting, liquidation preference or other
rights with respect to any security of the Bank; such rights as are conferred by
the Series A Preferred Shares exist solely as to the Corporation.
(b) Effectiveness of and Procedure for Exchange. The exchange
contemplated by this Section 6.6.4 (the "Automatic Exchange") shall occur as of
8:00 a.m. Eastern Time on the earliest possible Business Day such an exchange
could occur following the Exchange Event (the "Time of Exchange"), as evidenced
by the issuance by the Bank of a press release prior to such time. As of the
Time
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of Exchange, all of the Series A Preferred Shares will be deemed canceled
without any further action by the Corporation, all rights of the holders of
Series A Preferred Shares as stockholders of the Corporation will cease, and
such persons shall thereupon and thereafter be deemed to be and shall be for all
purposes the holders of Bank Preferred Shares. The Corporation will mail notice
of the occurrence of the Exchange Event to each holder of Series A Preferred
Shares within 30 days of such event, and the Bank will deliver to each such
holder certificates for Bank Preferred Shares upon surrender of certificates for
Series A Preferred Shares. Until such replacement stock certificates are
delivered (or in the event such replacement certificates are not delivered);
certificates previously representing Series A Preferred Shares shall be deemed
for all purposes to represent Bank Preferred Shares. All corporate action
necessary for the Bank to issue the Bank Preferred Shares will be completed upon
completion of the Offering. Accordingly, once the Directive is issued, no action
will be required to be taken by holders of Series A Preferred Shares, by the
Bank or by the Corporation in order to effect the Automatic Exchange as of the
Time of Exchange.
(c) Status of Shares Redeemed; Treatment of Dividends. Any Series A
Preferred Shares purchased or redeemed by the Corporation in accordance with
Section 6.6.3 hereof prior to the Time of Exchange shall not be deemed
outstanding and shall not be subject to the Automatic Exchange. In the event of
the Automatic Exchange, any accrued and unpaid dividends on the Series A
Preferred Shares as of the Time of Exchange shall be deemed to be accrued and
unpaid dividends on the Bank Preferred Shares.
Section 6.6.5. Voting Rights.
(a) General. Except as expressly provided in this Section 6.6.5,
holders of Series A Preferred Shares shall have no voting rights. When the
holders of Series A Preferred Shares are entitled to vote, each Series A
Preferred Share will be entitled to one vote.
(b) Right to Elect Directors. If, at the time of any annual meeting
of the Corporation's stockholders for the election of directors, the Corporation
has failed to pay or declare and set aside for payment a quarterly dividend
during any of the four preceding quarterly dividend periods on any series of
Preferred Stock of the Corporation, including the Series A Preferred Shares, the
number of directors then constituting the Board of Directors of the Corporation
will be increased by two (if not already increased by two due to a default in
preference dividends), and the holders of the Series A Preferred Shares, voting
together with the holders of all other series of Preferred Stock as a single
class, will be entitled to elect such two additional directors to serve on the
Corporation's Board of Directors at each such annual meeting. Each director
elected by the holders of shares of the Preferred Stock shall continue to serve
as such director until the later of (i) the full term for which he or she shall
have been elected or (ii) the payment of four quarterly dividends on the
Preferred Stock, including the Series A Preferred Shares. Any Preferred Director
may be removed by, and shall not be removed except by, the vote of the holders
of record of the outstanding Series A Preferred Shares entitled to vote, voting
together as a single class with the holders of all other series of Preferred
Stock entitled to vote on the matter, at a meeting of the Corporation's
stockholders, or of the holders of the Series A Preferred Shares and all other
series of Preferred Stock so entitled to vote thereon, called for that
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purpose. As long as dividends on the Series A Preferred Shares shall not have
been paid for the preceding quarterly Dividend Period, (i) any vacancy in the
office of any Preferred Director may be filled (except as provided in the
following clause (ii)) by an instrument in writing signed by the remaining
Preferred Director and filed with the Corporation, and (ii) in the case of the
removal of any Preferred Director, the vacancy may be filled by the vote of the
holders of the outstanding Series A Preferred Shares entitled to vote, voting
together as a single class with the holders of all other series of Preferred
Stock entitled to vote on the matter, at the same meeting at which such removal
shall be voted. Each director appointed as aforesaid by the remaining Preferred
Director shall be deemed, for all purposes hereof, to be a Preferred Director.
Any Preferred Director will be deemed to be an Independent Director for purposes
of the actions requiring the approval of a majority of the Independent
Directors.
(c) Certain Voting Rights. The affirmative vote or consent of the
holders of at least 67% of the outstanding share of each series of Preferred
Stock of the Corporation, including the Series A Preferred Shares, will be
required (a) to create any class or series of stock which shall, as to dividends
or distribution of assets, rank prior to or on a parity with any outstanding
series of Preferred Stock of the Corporation other than a series which shall not
have any right to object to such creation or (b) alter or change the provisions
of the Corporation's Charter (including the terms of the Series A Preferred
Shares) so as to adversely affect the voting powers, preferences or special
rights of the holders of a series of Preferred Stock of the Corporation;
provided that if such amendment shall not adversely affect all series of
Preferred Stock of the Corporation, such amendment need only be approved by at
least 67% of the holders of shares of all series of Preferred Stock adversely
affected thereby.
Section 6.6.6. Independent Directors.
(a) Number; Definition. As long as any Series A Preferred Shares are
outstanding, at least two directors on the Board of Directors shall be
Independent Directors. As used herein, "Independent Director" means any director
of the Corporation who is either (i) not a current officer or employee of the
Corporation or a current director, officer of employee of the Bank or any
affiliate of the Bank, or (ii) a Preferred Director.
(b) Approval of Independent Directors. As long as any Series A
Preferred Shares are outstanding, the Corporation may not take the following
actions without first obtaining the approval of a majority of the Independent
Directors: (i) the issuance of additional Preferred Stock ranking senior to, or
on a parity with, the Series A Preferred Shares, (ii) the modification of the
general distribution policy or the declaration of any distribution in respect of
Common Stock for any year if, after taking into account any such proposed
distribution, total distributions on the Series A Preferred Shares and the
Common Stock would exceed an amount equal to the sum of 105% of the
Corporation's "REIT taxable income" (excluding capital gains) for such year plus
not capital gains of the Corporation for that year, (iii) the acquisition of
real estate assets other than Mortgage Assets (as such term is hereinafter
defined), (iv) the redemption of any shares of Common Stock, (v) the termination
or modification of, or the election not to renew, the Advisory Agreement or the
Servicing Agreement or the subcontracting of any duties under the Servicing
Agreement or the Advisory Agreement to
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third parties unaffiliated with the Bank, (vi) any dissolution, liquidation or
termination of the Corporation prior to ________________, 2002, and (vii) the
determination to revoke the Corporation's REIT status. So long as the number of
Independent Directors is two, the foregoing actions must be approved by both of
the Independent Directors.
"Mortgage Assets" means obligations secured by real property, as well
as certain other assets eligible to be held by REITs, such as cash, cash
equivalents and securities, including shares of interests in other REITs.
(c) Determination by Independent Directors. In determining whether any
proposed action requiring their consent is in the best interests of the
Corporation, the Independent Directors shall consider the interests of holders
of both the Common Stock and the Preferred Stock, including, without limitation,
the holders of the Series A Preferred Shares. In considering the interests of
the holders of the Preferred Stock, including, without limitation, holders of
the Series A Preferred Shares, the Independent Directors shall owe the same
duties that the Independent Directors owe with respect to holders of shares of
Common Stock.
Section 6.6.7. No Conversion Rights. The holders of Series A
Preferred Shares shall not have any rights to convert such shares into shares of
any other class or series of stock or into any other securities of, or any
interest in, the Corporation.
Section 6.6.8. No Sinking Fund. No sinking fund shall be established
for the retirement or redemption of Series A Preferred Shares.
Section 6.6.9. Preemptive or Subscription Rights. No holder of Series
A Preferred Shares of the Corporation shall, as such holder, have any preemptive
right to purchase or subscribe for any additional shares of stock of the
Corporation or any other security of the Corporation which it may issue or sell.
Section 6.6.10. No Other Rights. The Series A Preferred Shares shall
not have any designations, preferences or relative, participating, optional or
other special rights except as set forth in the Charter or as otherwise required
by law.
Section 6.6.11. Compliance with Applicable Law. Declaration by the
Board of Directors and payment by the Corporation of dividends to holders of the
Series A Preferred Shares and repurchase, redemption or other acquisition by the
Corporation (or another entity as provided in subsection (a) of Section 6.6.3
hereof) of Series A Preferred Shares shall be subject in all respects to any and
all restrictions and limitations placed on dividends, redemptions or other
distributions by the Corporation (or any such other entity) under (i) laws,
regulations and regulatory conditions or limitations applicable to or regarding
the Corporation (or any such other entity) from time to time and (ii) agreements
with federal banking authorities with respect to the Corporation (or any such
other entity) from time to time in effect.
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Article VII
Restriction on Transfer and Ownership of Shares
Section 7.1. Definitions. For the purpose of this Article VII, the
following terms shall have the following meanings:
Beneficial Ownership. The term "Beneficial Ownership" shall mean
ownership of Capital Stock by a Person, whether the interest in the shares
of Capital Stock is held directly or indirectly (including by a nominee),
and shall include interests that would be treated as owned through the
application of Section 544 of the Code, as modified by Section 856(h)(1)(B)
of the Code. The terms "Beneficial Owner," "Beneficially Owns,"
"Beneficially Own" and "Beneficially Owned" shall have the correlative
meanings.
Business Day. The term "Business Day" shall mean any day, other than
a Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in New York City are authorized or required by law,
regulation or executive order to close.
Capital Stock. The term "Capital Stock" shall mean all classes or
series of stock of the Corporation, including, without limitation, Common
Stock and Preferred Stock.
Charitable Beneficiary. The term "Charitable Beneficiary" shall mean
one or more beneficiaries of the Trust as determined pursuant to Section
7.3.6, provided that each such organization must be described in Section
501(c)(3) of the Code and contributions to each such organization must be
eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522
of the Code.
Constructive Ownership. The term "Constructive Ownership" shall mean
ownership of Capital Stock by a Person, whether the interest in the shares
of Capital Stock is held directly or indirectly (including by a nominee),
and shall include interests that would be treated as owned through the
application of Section 318(a) of the Code, as modified by Section 856(d)(5)
of the Code. The terms "Constructive Owner," "Constructively Owns,"
Constructively Own" and "Constructively Owned" shall have the correlative
meanings.
Excepted Holder. The term "Excepted Holder" shall man a stockholder
of the corporation for whom an Excepted Holder Limit is created by the
Charter or by the Board of Directors pursuant to Section 7.2.7.
Excepted Holder Limit. The term "Excepted Holder Limit" shall mean,
provided that the affected Excepted Holder agrees to comply with the
requirements established by the Board of Directors pursuant to Section
7.2.7, and subject to adjustment pursuant to Section 7.2.8, the percentage
limit established by the Board of Directors pursuant to Section 7.2.7.
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Initial Date. The term "Initial Date" shall mean the date upon which
the Articles of Amendment and Restatement containing this Article VII are
filed with the SDAT.
Market Price. The term "Market Price" on any date shall mean, with
respect to any class or series of outstanding shares of Capital Stock, the
Closing Price for such Capital Stock on such date. The "Closing Price" on
any date shall mean the last sale price for such Capital Stock, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, for such Capital Stock, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the NYSE
or, if such Capital Stock is not listed or admitted to trading on the NYSE,
as reported on the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
on which such Capital Stock is listed or admitted to trading or, if such
Capital Stock is not listed or admitted to trading on any national
securities exchange, the last quoted price, or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter
market, as reported by the Nasdaq Stock Market or, if such system is no
longer in use, the principal other automated quotation system that may then
be in use or, if such Capital Stock is not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a
professional market maker making a market in such Capital Stock selected by
the Board of Directors of the Corporation or, in the event that no trading
price is available for such Capital Stock, the fair market value of the
Capital Stock, as determined in good faith by the Board of Directors of the
Corporation.
NYSE. The term "NYSE" shall mean the New York Stock Exchange, Inc.
Ownership Limit. The term "Ownership Limit" shall mean not more than
five percent in value of any issued and outstanding class or series of
Preferred Stock. The value of the outstanding shares of Preferred Stock
shall be determined by the Board of Directors of the Corporation in good
faith, which determination shall be conclusive for all purposes hereof.
Person. The term "Person" shall mean an individual, corporation,
partnership, estate, trust (including a trust qualified under Sections
401(a) or 501(c)(17) of the Code), a portion of a trust permanently set
aside for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning of
Section 509(a) of the Code, joint stock company or other entity and also
includes a group as that term is used for purposes of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended, and a group to which an
Excepted Holder Limit applies.
Prohibited Owner. The term "Prohibited Owner" shall mean, with respect
to any purported Transfer, any Person who, but for the provisions of
Section 7.2.1, would Beneficially Own or Constructively Own shares of
Capital Stock, and if appropriate in the context, shall also mean any
Person who would have been the record owner of the shares that the
Prohibited Owner would have so owned.
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REIT. The term "REIT" shall mean a real estate investment trust within
the meaning of Section 856 of the Code.
Restriction Termination Date. The term "Restriction Termination Date"
shall mean the first day after the Initial Date on which the Corporation
determines pursuant to Section 5.7 of the Charter that it is no longer in
the best interests of the Corporation to attempt to, or continue to,
qualify as a REIT or that compliance with the restrictions and limitations
on Beneficial Ownership, Constructive Ownership and Transfers of shares of
Capital Stock set forth herein is no longer required in order for the
Corporation to qualify as a REIT.
Transfer. The term "Transfer" shall mean any issuance, sale, transfer,
gift, assignment, devise or other disposition, as well as any other event
that causes any Person to acquire Beneficial Ownership or Constructive
Ownership, or any agreement to take any such actions or cause any such
events, of Preferred Stock or the right to vote or receive dividends on
Preferred Stock, including (a) the granting or exercise of any option (or
any disposition of any option), (b) any disposition of any securities or
rights convertible into or exchangeable for Preferred Stock or any interest
in Preferred Stock or any exercise of any such conversion or exchange right
and (c) Transfers of interests in other entities that result in changes in
Beneficial or Constructive Ownership of Preferred Stock; in each case,
whether voluntary or involuntary, whether owned of record, Constructively
Owned or Beneficially Owned and whether by operation of law or otherwise.
The terms "Transferring" and "Transferred" shall have the correlative
meanings.
Trust. The term "Trust" shall mean any trust provided for in Section
7.3.1.
Trustee. The term "Trustee" shall mean the Person unaffiliated with
the Corporation and a Prohibited Owner, that is appointed by the
Corporation to serve as trustee of the Trust.
Section 7.2. Capital Stock.
Section 7.2.1. Ownership Limitations. During the period commencing on
the Initial Date and prior to the Restriction Termination Date:
(a) Basic Restrictions.
(i) Except as otherwise provided in Section 7.2.7, (1) no
Person, other than an Excepted Holder, shall Beneficially Own or
Constructively Own shares of Preferred Stock in excess of the
Ownership Limit and (2) no Excepted Holder shall Beneficially own
or Constructively Own shares of Preferred Stock in excess of the
Excepted Holder Limit for such Excepted Holder.
(ii) No Person shall Beneficially or Constructively Own
shares of Capital Stock to the extent that such Beneficial or
Constructive Ownership of
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Capital Stock would result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code (without
regard to whether the ownership interest is held during the last
half of a taxable year), or otherwise failing to qualify as a
REIT (including, but not limited to, Beneficial or Constructive
Ownership that would result in the Corporation owning (actually
or Constructively) an interest in a tenant that is described in
Section 856(d)(2)(B) of the Code if the income derived by the
Corporation from such tenant would cause the Corporation to fail
to satisfy any of the gross income requirements of Section 856(c)
of the Code).
(iii) After December 31, 1997, notwithstanding any other
provisions contained herein (except Section 7.4), any Transfer of
shares of Capital Stock (whether or not such Transfer is the
result of a transaction entered into through the facilities of
the NYSE or any other national securities exchange or automated
inter-dealer quotation system) that, if effective, would result
in the Capital Stock being beneficially owned by less than 100
Persons (determined under the principles of Section 856(a)(5) of
the Code) shall be void ab initio, and the intended transferee
shall acquire no rights in such shares of Capital Stock.
(b) Transfer in Trust. If any Transfer of shares of Capital Stock
(whether or not such Transfer is the result of a transaction entered
into through the facilities of the NYSE or any other national
securities exchange or automated inter-dealer quotation system) occurs
which, if effective, would result in any Person Beneficially Owning or
Constructively Owning shares of Capital Stock in violation of Section
7.2.1(a)(i) or (ii),
(i) then that number of shares of the Capital Stock the
Beneficial Ownership or Constructive Ownership of which otherwise
would cause such Person to violate Section 7.2.1(a)(i) or (ii)
(rounded up to the nearest whole share) shall be automatically
transferred to a Trust for the benefit of a Charitable
Beneficiary, as described in Section 7.3, effective as of the
close of business on the Business Day prior to the date of such
Transfer, and such person shall acquire no rights in such shares;
or
(ii) if the transfer to the Trust described in clause (i) of
this sentence would not be effective for any reason to prevent
the violation of Section 7.2.1(a)(i) or (ii), then the Transfer
of that number of shares of Capital Stock that otherwise would
cause any Person to violate Section 7.2.1(a)(i) or (ii) shall be
void ab initio, and the intended transferee shall acquire no
rights in such shares of Capital Stock.
Section 7.2.2. Remedies for Breach. If the Board of Directors of the
Corporation or any duly authorized committee thereof shall at any time
determine in good faith that a Transfer or other event has taken place that
results in a violation of Section 7.2.1 or that a Person intends to acquire
or has attempted to acquire Beneficial Ownership or Constructive Ownership
of any shares of Capital Stock in violation of Section 7.2.1 (whether or
not such
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violation is intended), the Board of Directors or a committee thereof shall take
such action as it deems advisable to refuse to give effect to or to prevent such
Transfer or other event, including, without limitation, causing the Corporation
to redeem shares, refusing to give effect to such Transfer on the books of the
Corporation or instituting proceedings to enjoin such Transfer or other event;
provided, however, that any Transfer or attempted Transfer or other events in
violation of Section 7.2.1 shall automatically result in the transfer to the
Trust described above, and, where applicable, such Transfer (or other event)
shall be void ab initio as provided above irrespective of any action (or
nonaction) by the Board of Directors or a committee thereof.
Section 7.2.3. Notice of Restricted Transfer. Any Person who
acquires or attempts or intends to acquire Beneficial Ownership or Constructive
Ownership of shares of Capital Stock that will or may violate Section 7.2.1(a)
or any Person who would have owned shares of Capital Stock that resulted in a
transfer to the Trust pursuant to the provisions of Section 7.2.1(b) shall
immediately give written notice to the Corporation of such event, or in the case
of such a proposed or attempted transaction, give at least 15 days prior written
notice, and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer on the corporation's status as a REIT.
Section 7.2.4. Owners Recruited To Provide Information. From the
Initial Date and prior to the Restriction Termination Date:
(a) every owner of more than 0.5% (or such lower percentage as
required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding shares of any class or series of
Preferred Stock, within 30 days after June 30 and December 31 of each
year, shall give written notice to the Corporation stating the name
and address of such owner, the number of shares of Preferred Stock
Beneficially Owned and a description of the manner in which such
shares are held. Each such owner shall provide to the Corporation such
additional information as the Corporation may request in order to
determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT and to ensure compliance with the
Ownership Limit; and
(b) each Person who is a Beneficial Owner or Constructive Owner
of Capital Stock and each Person (including the stockholder of record)
who is holding Capital Stock for a Beneficial Owner or Constructive
Owner shall provide to the Corporation such information as the
Corporation may request, in good faith, in order to determine the
Corporation's status as a REIT and to comply with requirements of any
taxing authority or government authority or to determine such
compliance.
Section 7.2.5. Remedies Not Limited. Subject to Section 5.7 of the
Charter, nothing contained in this Section 7.2 shall limit the authority of the
Board of Directors of the Corporation to take such other action as it deems
necessary or advisable to protect the Corporation and the interests of its
stockholders in preserving the Corporation's status as a REIT.
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Section 7.2.6. Ambiguity. In the case of an ambiguity in the
application of any of the provisions of this Section 7.2, Section 7.3, or
any definition contained in Section 7.1, the Board of Directors of the
Corporation shall have the power to determine the application of the
provisions of this Section 7.2 or Section 7.3 with respect to any situation
based on the facts known to it. In the event Section 7.2 or 7.3 requires an
action by the Board of Directors and the Charter fails to provide specific
guidance with respect to such action, the Board of Directors shall have the
power to determine the action to be taken so long as such action is not
contrary to the provisions of Sections 7.1, 7.2 or 7.3.
Section 7.2.7. Exceptions. (a) Subject to Section 7.2.1(a)(ii), the
Board of Directors of the Corporation, in its sole discretion, may exempt a
Person from the Ownership Limit and may establish or increase an Excepted
Holder Limit for such Person if:
(i) the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain
that no individual's Beneficial Ownership or Constructive Ownership of
such shares of Capital Stock will violate Section 7.2.1(a)(ii);
(ii) such Person does not and represents that it will not own,
actually or Constructively, an interest in a tenant of the Corporation
(or a tenant of any entity owned or controlled by the Corporation)
that would cause the Corporation to own, actually or Constructively,
more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the
Code) in such tenant and the Board of Directors obtains such
representations and undertakings from such Person as are reasonably
necessary to ascertain this fact (for this purpose, a tenant from whom
the Corporation (or an entity owned or controlled by the Corporation)
derives (and is expected to continue to derive) a sufficiently small
amount of revenue such that, in the opinion of the Board of Directors
of the Corporation, rent from such tenant would not adversely affect
the Corporation's ability to qualify as a REIT, shall not be treated
as a tenant of the Corporation); and
(iii) such Person agrees that any violation or attempted
violation of such representations or undertakings (or other action
which is contrary to the restrictions contained in Sections 7.2.1
through 7.2.6) will result in such shares of Preferred Stock being
automatically transferred to a Trust in accordance with Section
7.2.1(b) and 7.3.
(b) Prior to granting any exception pursuant to Section 7.2.7(a), the
Board of Directors of the Corporation may require a ruling from the
Internal Revenue Service, or an opinion of counsel, in either case in form
and substance satisfactory to the Board of Directors in its sole
discretion, as it may deem necessary or advisable in order to determine or
ensure the Corporation's status as a REIT. Notwithstanding the receipt of
any ruling or opinion, the Board of Directors may impose such conditions or
restrictions as it deems appropriate in connection with granting such
exception.
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<PAGE>
(c) Subject to Section 7.2.1(a)(ii), an underwriter which participates
in a public offering or a private placement of Preferred Stock (or
securities convertible into or exchangeable for Preferred Stock) may
Beneficially Own or Constructively Own shares of Preferred Stock (or
securities convertible into or exchangeable for Preferred Stock) in excess
of the Ownership Limit, but only to the extent necessary to facilitate such
public offering or private placement.
(d) The Board of Directors may only reduce the Excepted Holder Limit
for an Excepted Holder: (1) with the written consent of such Excepted
Holder at any time, or (2) pursuant to the terms and conditions of the
agreements and undertakings entered into with such Excepted Holder in
connection with the establishment of the Excepted Holder Limit for that
Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage
that is less than the Ownership Limit.
Section 7.2.8. Increase in Aggregate Stock Ownership and Common Stock
Ownership Limits. The Board of Directors may from time to time increase the
Ownership Limit.
Section 7.2.9. Legend. Each certificate for shares of Preferred Stock
shall bear substantially the following legend:
The shares represented by this certificate are subject to
restrictions on Beneficial Ownership and Constructive Ownership and
Transfer for the purpose of the Corporation's maintenance of its
status as a Real Estate Investment Trust under the Internal Revenue
Code of 1986, as amended (the "Code"). Subject to certain further
restrictions and except as expressly provided in the Corporation's
Charter, (i) no Person may Beneficially Own or Constructively Own
shares of Preferred Stock of the Corporation in excess of five percent
of the value of any issued and outstanding class or series of
Preferred Stock of the Corporation, unless such Person is an Excepted
Holder (in which case the Excepted Holder Limit shall be applicable);
(ii) no Person may Beneficially Own or Constructively Own Capital
Stock that would result in the Corporation being "closely held" under
Section 856(h) of the Code or otherwise cause the Corporation to fail
to qualify as a REIT; and (iii) no Person may Transfer shares of
Capital Stock if such Transfer would result in the Preferred Stock of
the Corporation being owned by fewer than 100 Persons. Any Person who
Beneficially or Constructively Owns or attempts to Beneficially or
Constructively Own shares of Capital Stock which causes or will cause
a Person to Beneficially or Constructively Own shares of Capital Stock
in excess or in violation of the above limitations must immediately
notify the Corporation. If any of the restrictions on transfer or
ownership are violated, the shares of Capital Stock represented hereby
will be automatically transferred to a Trustee of a Trust for the
benefit of one or more Charitable Beneficiaries. In addition, upon
the occurrence of certain events, attempted Transfers in violation of
the restrictions described above may be void ab initio. All
capitalized terms in this legend have the meanings defined in the
charter of the Corporation, as the same may be amended from time to
time, a copy of which, including the restrictions on transfer and
ownership, will be furnished to each holder of Capital Stock of the
Corporation on request and without charge.
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Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
Section 7.3. Transfer of Capital Stock in Trust.
Section 7.3.1. Ownership in Trust. Upon any purported Transfer or
other event described in Section 7.2.1(b) that would result in a transfer
of shares of Capital Stock to a Trust, such shares of Capital Stock shall
be deemed to have been transferred to the Trustee as trustee of a Trust for
the exclusive benefit of one or more Chairtable Beneficiaries. Such
transfer to the Trustee shall be deemed to be effective as the close of
business on the Business Day prior to the purported Transfer or other event
that results in the transfer to the Trust pursuant to Section 7.2.1(b). The
Trustee shall be appointed by the Corporation and shall be a Person
unaffiliated with the Corporation any Prohibited Owner. Each Charitable
Beneficiary shall be designated by the Corporation as provided in Section
7.3.6.
Section 7.3.2. Status of Shares Held by the Trustee. Shares of Capital
Stock held by the Trustee shall be issued and outstanding shares of Capital
Stock of the Corporation. The Prohibited Owner shall have no rights in the
shares held by the Trustee. The Prohibited Owner shall not benefit
economically from ownership of any shares held in trust by the Trustee,
shall have no rights to dividends or other distributions and shall not
possess any rights to vote or other rights attributable to the shares held
in the Trust.
Section 7.3.3. Dividend and Voting Rights. The Trustee shall have all
voting rights and rights to dividends or other distributions with respect
to shares of Capital Stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any
dividend or other distribution paid prior to the discovery by the
Corporation that the shares of Capital Stock have been transferred to the
Trustee shall be paid by the recipient of such dividend or distribution to
the Trustee upon demand and any dividend or other distribution authorized
but unpaid shall be paid when due to the Trustee. Any dividend or
distribution so paid to the Trustee shall be held in trust for the
Charitable Beneficiary. The Prohibited Owner shall have no voting rights
with respect to shares held in the Trust and, subject to Maryland law,
effective as of the date that the shares of Capital Stock have been
transferred to the Trustee, the Trustee shall have the authority (at the
Trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Owner prior to the discovery by the Corporation that the shares
of Capital Stock have been transferred to the Trustee and (ii) to recast
such vote in accordance with the desires of the Trustee acting for the
benefit of the Charitable Beneficiary; provided, however, that if the
Corporation has already taken irreversible corporate action, then the
Trustee shall not have the authority to rescind and recast such vote.
Notwithstanding the provisions of this Article VII, until the Corporation
has received notification that shares of Capital Stock have been
transferred into a Trust, the Corporation shall be entitled to rely on its
share transfer and other stockholder records for purposes of preparing
lists of stockholders entitled to vote at meetings, determining the
validity and authority of proxies and otherwise conducting votes of
stockholders.
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Section 7.3.4. Sale of Shares by Trustee. Within 20 days of receiving
notice from the Corporation that shares of Capital Stock have been
transferred to the Trust, the Trustee of the Trust shall sell the shares
held in the Trust to a person, designated by the Trustee, whose ownership
of the shares will not violate the ownership limitations set forth in
Section 7.2.1(a). Upon such sale, the interest of the Charitable
Beneficiary in the shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Prohibited Owner and to the
Charitable Beneficiary as provided in this Section 7.3.4. The Prohibited
Owner shall receive the lesser of (1) the price paid by the Prohibited
owner for the shares or, if the Prohibited Owner did not give value for the
shares in connection with the event causing the shares to be held in the
Trust (e.g., in the case of a gift, devise or other such transaction), the
Market Price of the shares on the day of the event causing the shares to be
held in the Trust and (2) the price per share received by the Trustee from
the sale or other disposition of the shares held in the Trust. Any net
sales proceeds in excess of the amount payable to the Prohibited Owner
shall be immediately paid to the Charitable Beneficiary. If, prior to the
discovery by the Corporation that shares of Capital Stock have been
transferred to the Trustee, such shares are sold by a Prohibited Owner,
then (i) such shares shall be deemed to have been sold on behalf of the
Trust and (ii) to the extent that the Prohibited Owner received an amount
for such shares that exceeds the amount that such Prohibited Owner was
entitled to receive pursuant to this Section 7.3.4, such excess shall be
paid to the Trustee upon demand.
Section 7.3.5. Purchase Right in Stock Transferred to the Trustee.
Shares of Capital Stock transferred to the Trustee shall be deemed to have
been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction
that resulted in such transfer to the Trust (or, in the case of a devise or
gift, the Market Price at the time of such devise or gift) and (ii) the
Market Price on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such offer until the
Trustee has sold the shares held in the Trust pursuant to Section 7.3.4.
Upon such a sale to the Corporation, the interest of the Charitable
Beneficiary in the shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Prohibited Owner.
Section 7.3.6. Designation of Charitable Beneficiaries. By written
notice to the Trustee, the Corporation shall designate one or more
nonprofit organizations to be the Charitable Beneficiary of the interest in
the Trust such that (i) the shares of Capital Stock held in the Trust would
not violate the restrictions set forth in Section 7.2.1(a) in the hands of
such Charitable Beneficiary and (ii) each such organization must be
described in Section 501(c)(3) of the Code and contributions of each such
organization must be eligible for deduction under each of Sections
170(b)(1)(A), 2055 and 2522 of the Code.
Section 7.4. NYSE Transactions. Nothing in this Article VII shall
preclude the settlement of any transaction entered into through the
facilities of the NYSE or any other national securities exchange or
automated inter-dealer quotation system. The fact that the settlement of
any transaction is so permitted shall not negate the effect of any other
provision of this Article VII and any transferee in such a transaction
shall be subject to all of the provisions and limitations set forth in this
Article VII.
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Section 7.5. Enforcement. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
Section 7.6. Non-Waiver. No delay or failure on the part of the
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Article VII
Amendments
The Corporation reserves the right from time to time to make any amendment
to its Charter, now or hereafter authorized by law, including any amendment
altering the terms or contract rights, as expressly set forth in this Charter,
of any shares of outstanding stock. All rights and powers conferred by the
Charter on stockholders, directors and officers are granted subject to this
reservation. Subject to rights of the holders of shares of Series A Preferred
Stock set forth in Section 6.6, any amendment to the Charter shall be valid only
if approved by the affirmative vote of a majority of all the votes entitled to
be cast on the matter. Any amendment to Section 6.6 of the Charter shall be
valid only if approved as provided therein.
Article IX
Limitation of Liability
To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers of a corporation, 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 the Article
IX, nor the adoption or amendment of any other provision of the Charter or
Bylaws inconsistent with this Article IX, 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.
THIRD: the amendment to and restatement of the charter as hereinabove
set forth have been duly advised by the Board of Directors and approved by
the stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the
Corporation is as set forth in Article IV of the foregoing amendment and
restatement of the charter.
FIFTH: The name and address of the Corporation's current resident
agent is as set forth in Article IV of the foregoing amendment and
restatement of the charter.
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SIXTH: The number of directors of the Corporation and the names of those
currently in office are as set forth in Article V of the foregoing amendment
and restatement of the charter.
SEVENTH: The total number of shares of stock which the Corporation had
authority to issue immediately prior to this amendment and restatement was 1,000
shares, $1.00 par value per share, all of one class. The aggregate par value of
all shares of stock having par value was $1,000.
EIGHTH: The total number of shares of stock which the Corporation has
authority to issue pursuant to the foregoing amendment and restatement of the
charter is 20,001,000, consisting of 1,000 shares of Common Stock, $1.00 par
value per share, and 20,000,000 shares of Preferred Stock, $.01 par value per
share. The aggregate par value of all authorized shares of stock having par
value is $201,000.
NINTH: The amendment to and restatement of the charter as hereinabove set
forth shall be effective as of 9:00 a.m., Eastern time, on ___________________,
_______________, 1997.
TENTH: The undersigned [Vice President] acknowledges these Articles of
Amendment and Restatement to be the corporate act of the Corporation and as to
all matters or facts required to be verified under oath, the undersigned Vice
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
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In Witness Whereof, the Corporation has caused these Articles of Amendment
and Restatement to be signed in its name and on its behalf by its [Vice
President] and attested to by its [Secretary] on this ____ day of __________,
1997.
Attest: Harris Preferred Capital Corporation
By:
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EXHIBIT 3(B)
Harris 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 March 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.
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 preventing 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
<PAGE>
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 vice presidents in their order of
rank and seniority, or a chairman chosen by the 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.
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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 he 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.
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.
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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 12. 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.
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 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
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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
answerback 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, the Charter or these Bylaws.
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, even if 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. Directors shall not receive any stated salary for
their services as directors but, by resolution of the Board of Directors, may
receive compensation per year and/or per meeting and/or per visit to real
property or other facilities owned or
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leased by the Corporation and for any service or activity they performed or
engaged in as directors. Directors may be reimbursed for expenses of attendance,
if any, at each annual, regular or special meeting of the Board of Directors or
of any committee thereof and for their expenses, if any, in connection with each
property visit and any other service or activity they performed or engaged in as
directors; but nothing herein contained shall be construed to preclude any
directors from serving the Corporation in any other capacity and receiving
compensation therefor.
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.
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.
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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 [president, a secretary and a treasurer and may include a chairman of
the board, 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 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 except president and vice president may be held by the same
person. In its discretion, the Board of Directors may leave unfilled any
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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 chairman of the
board 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 or them 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.
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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 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 vice president
or as vice president for particular areas of responsibility.
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
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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 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.
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 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
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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.
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
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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 script, 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.
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Article VIII
Accounting Year
The Board of Directors shall fix the fiscal year end of the Corporation as
December 31 by a duly adopted resolution.
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.
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 adapt, 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.
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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 work
"(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 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 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 of the Corporation
and at the request of the Corporation, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or trustee
of such corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The 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 and to any employee or agent of 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.
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.
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Article XIV
Amendment of Bylaws
The Board of Directors shall have the exclusive power to adopt, alter or
repeal any provision of these Bylaws and to make new Bylaws.
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EXHIBIT 4
INCORPORATED UNDER THE LAWS OF THE STATE OF
Maryland
------------
NUMBER SHARES
*0* *0*
HARRIS PREFERRED CAPITAL CORPORATION
This Certifies that Jane Doe is the owner of
_____________________________________
Zero (o)------------------------------------
____________________________________________full paid and non-assessable
SHARES OF THE PREFERRED STOCK OF Harris Preferred Capital Corporation
transferable only on the books of the Corporation by the holder hereof
in person or by duly authorized Attorney upon the surrender of this
Certificate properly endorsed.
The corporation will furnish without charge to each stockholder who so
requests, the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and to be sealed with the Seal
of the Corporation, this___________________________day
of___________________A.D. 19__.
_______________________ ______________________
SECRETARY PRESIDENT
Thomas R. Sizer Paul R. Skubic
For Value Received, _____ hereby sell, assign and transfer
unto ______________________________________________________________
_______________________________________________________________ Shares
represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________
Attorney to transfer the said Shares on the books of the within named
Corporation with full power of substitution in the premisies
Dated______________ 19____
In presence of
_______________________________ __________________________________
<PAGE>
EXHIBIT 10(A)
Draft of October 31, 1997
Marked to Show Changes From
Draft of September 15, 1997
Chapman and Cutler
Draft 10/31/97
================================================================================
Servicing Agreement
between
Harris Trust and Savings Bank
and
Harris Preferred Capital Corporation
____________, 1997
================================================================================
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Section Heading Page
<S> <C> <C>
Section 1. Definitions.............................................. 1
Section 1.1. Definitions.............................................. 1
Section 2. Servicing................................................... 4
Section 2.1. Duties of Servicer....................................... 4
Section 2.2. Liquidation of Mortgage Loans............................ 6
Section 2.3. Collection of Mortgage Loan Payments..................... 7
Section 2.4. Establishment of and Deposits to Custodial Account....... 8
Section 2.5. Permitted Withdrawals from Custodial Account............. 8
Section 2.6. Establishment of and Deposits to Escrow Account.......... 9
Section 2.7. Permitted Withdrawals from Escrow Account................ 10
Section 2.8. Payment of Taxes, Insurance and Other Charges............ 10
Section 2.9. Protection of Accounts................................... 11
Section 2.10. Maintenance of Hazard Insurance.......................... 11
Section 2.11. Maintenance of Mortgage Impairment Insurance............. 12
Section 2.12. Maintenance of Fidelity Bond............................. 12
Section 2.13. Inspections.............................................. 13
Section 2.14. Restoration of Mortgaged Property........................ 13
Section 2.15. Title, Management and Disposition of REO Property........ 13
Section 2.16. Permitted Withdrawals with Respect to REO Property....... 15
Section 2.17. Real Estate Owned Reports................................ 15
Section 3. Payments to the Company..................................... 15
Section 3.1. Remittances.............................................. 15
Section 3.2. Statements to the Company................................ 16
Section 4. General Servicing Procedures................................ 16
Section 4.1. Transfers of Mortgaged Property.......................... 16
Section 4.2. Satisfaction of Mortgages and Release of Mortgage Files.. 17
Section 4.3. Servicing Compensation................................... 17
Section 4.4. Annual Statement as to Compliance........................ 17
Section 4.5. Annual Independent Chartered Accountants Servicing Report 17
Section 4.6. Right to Examine Servicer Records........................ 18
Section 5. Servicer to Cooperate....................................... 18
Section 5.1. Provision of Information................................. 18
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Section 6. Termination 18
Section 6.1. Agency Suspension.................................... 18
Section 6.2. Damages.............................................. 18
Section 6.3. Termination.......................................... 18
Section 6.4. Termination Without Cause............................ 19
Section 7. Books and Records...................................... 19
Section 7.1. Possession of Servicing Files........................ 19
Section 8. Indemnification and Assignment......................... 20
Section 8.1. Indemnification...................................... 20
Section 8.2. Limitation on Liability of Servicer and Others....... 20
Section 8.3. Limitation on Registration and Assignment by Servicer 21
Section 8.4. Assignment by Company................................ 21
Section 8.5. Merger or Consolidation of the Servicer.............. 22
Section 8.6. Successor to the Servicer............................ 22
Section 9. Representations, Warranties and Covenants of Company... 23
Section 9.1. Due Organization and Authority....................... 23
Section 9.2. No Conflicts......................................... 23
Section 9.3. Ability to Perform................................... 23
Section 9.4. No Litigation Pending................................ 23
Section 9.5. No Consent Require................................... 24
Section 10. Representations and Warranties of Servicer............. 24
Section 10.1. Due Organization and Authority....................... 24
Section 10.2. Ordinary Course of Business.......................... 24
Section 10.3. No Conflicts......................................... 24
Section 10.4. Ability to Service................................... 25
Section 10.5. Ability to Perform................................... 25
Section 10.6. No Litigation Pending................................ 25
Section 10.7. No Consent Required.................................. 25
Section 10.8. No Untrue Information................................ 25
Section 10.9. Reasonable Servicing Fee............................. 26
Section 10.10. Conflict of Interest................................. 26
Section 11. Default................................................ 26
Section 11.1. Events of Default.................................... 26
Section 11.2. Waiver of Defaults................................... 27
</TABLE>
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<TABLE>
<S> <C> <C>
Section 12. Miscellaneous Provisions................. 27
Section 12.1. Notices............................... 27
Section 12.2. Waivers............................... 28
Section 12.3. Entire Agreement Amendment............ 28
Section 12.4. Execution; Binding Effect............. 28
Section 12.5. Headings.............................. 28
Section 12.6. Governing Law......................... 28
Section 12.7. Relationship of Parties............... 29
Section 12.8. Severability of Provision............. 29
Section 12.9. Exhibits.............................. 29
</TABLE>
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Servicing Agreement
Servicing Agreement (the "Servicing Agreement" or the "Agreement") entered
into as of ____________, 1997 between Harris Trust and Savings Bank, an Illinois
banking corporation (the "Servicer") and Harris Preferred Capital Corporation, a
Maryland corporation (the "Company");
Whereas the Company and Harris Trust and Savings Bank, as assignor (the
"Assignor"), entered into an assignment of mortgage loans dated as of
____________, 1997 (the "Mortgage Loan Assignment Agreement") pursuant to which
the Assignor assigned to the Company certain first mortgage loans as set forth
on Exhibit A (the "Mortgage Loans");
Whereas the Company desires to have the Servicer service and administer the
Mortgage Loans, the Servicer desires to service and administer the Mortgage
Loans on behalf of the Company, and the parties desire to provide the terms and
conditions of such servicing and administration by the Servicer.
Now, Therefore, in consideration of the mutual agreements set forth herein
and for other good and valuable consideration, the receipt and the sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
Section 1. Definitions.
Section 1.1. Definitions. The following terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those normal mortgage servicing practices (i)established by the Company,
(ii)in the case of residential Mortgage Loans, with Fannie Mae and FHLMC
guidelines and procedures, (iii)of prudent mortgage lending institutions which
service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located to the extent such
normal mortgage servicing practices do not conflict with the practices
established by the Company and the Fannie Mae and FHLMC guidelines and
procedures, and (iv) in accordance with other applicable law.
"Ancillary Income" means all late payment charges, penalties and assumption
fees, non-sufficient funds fees ("NSF"), escrow account benefits, reinstatement
fees and other miscellaneous and similar types of fees arising from or in
connection with any Mortgage Loan to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of any applicable loan
documents contained in the related Mortgage Loan File.
"Closing Date" means ____________, 1997, or such other date as is mutually
agreed upon by the parties hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of
<PAGE>
eminent domain, expropriation or condemnation, to the extent not required to be
released to a Mortgagor in accordance with the terms of the related Mortgage
Loan File.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.4.
"Custodian" means the custodian under the custodial agreement dated
__________________, 1997, among Company, Servicer, and ________________________.
"Cut-off Date" means ___________, 1997.
"Determination Date" means one (1) Business Day prior to the related
Remittance Date.
"Due Period" means, with respect to each Remittance Date, the calendar
month preceding the Remittance Date.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.6.
"Escrow Payment" means, with respect to any Mortgage Loan, the amounts
constituting real estate tax payments and any other payments required to be
escrowed by the Mortgagor under the applicable documents contained in the
Mortgage Loan File.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section11.1.
"FDIC" means the Federal Deposit Insurance Corporation, or any successor
thereto.
"Fannie Mae" means the Federal National Mortgage Association.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Fidelity Bond" means a fidelity bond to be maintained by the Servicer
pursuant to Section 2.12.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale of such
Mortgage Loan, foreclosure sale or otherwise, or the sale of the related
Mortgaged Property if the Mortgaged Property is acquired in satisfaction of the
Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice to be
provided to the Company pursuant to Section 3.2.
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<PAGE>
"Mortgage Loan File" means, collectively, all of the agreements, deeds and
proceedings evidencing the Mortgage Loans and the Security, as well as any
architectural and engineering report, title report, survey, insurance policy and
other information and material with respect to the real property securing, the
Mortgage Loans and, with respect to each Mortgage Loan, all of the agreements,
deeds and proceedings evidencing such Mortgage Loan and the Security relating
thereto as well as any architectural and engineering report, title report,
survey, insurance policy and other information and material with respect to the
real property securing such Mortgage Loan.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Mortgage Loans" has the meaning set forth in the recitals.
"Mortgage Property" means, with respect to each Mortgage Loan, the real or
immovable property mortgaged, charged or hypothecated pursuant to such Mortgage
Loan, including all fixtures attached thereto.
"Mortgagor" means the mortgagor under the Mortgage Loans.
"Non-recoverable Advance" means any Servicing Advance previously made or
proposed to be made in respect of a Mortgage Loan which, in the good faith
judgment of the Servicer, will not or, in the case of a proposed Servicing
Advance, would not, be ultimately recoverable from related Insurance Proceeds,
Liquidation Proceeds or otherwise. The determination by the Servicer that it has
made a Non-recoverable Advance or that any proposed Servicing Advance, if made,
would constitute a Non-recoverable Advance, shall be evidenced by an Officer's
Certificate delivered to the Company.
"Officer's Certificate" means a certificate signed by the Senior Vice-
President of the Servicer, and delivered to the Company as required by this
Agreement.
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled maturity date,
including any prepayment penalty or premium thereon, and which is not
accompanied by an amount of interest representing scheduled interest due any
date or dates in any month or months subsequent to the month of payment.
"Purchase Agreement" has the meaning set forth in the recitals.
"Qualified Depository" means a depository the accounts of which are insured
by the FDIC.
"Qualified Insurer" means an insurance company duly qualified as such under
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided,
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<PAGE>
and approved by Fannie Mae and FHLMC as an insurer with respect to hazard
insurance and flood insurance.
"Remittance Date" means at the latest, the 15th day (or if such 15th day is
not a Business Day, the first Business Day immediately following) of any month,
beginning with the first Remittance Date on ____________ 15, 1997.
"REO Property" means a Mortgaged Property acquired by the Servicer on
behalf of the Company through foreclosure or by deed in lieu of foreclosure or
by taking in payment, as described in Section 2.15.
"Security" means collectively the security securing the Mortgage Loans and
set forth in the Mortgage Loan File, including, without limitation, any
mortgages and similar instruments securing the Mortgage Loans.
"Servicer Employees" has the meaning set forth in Section 2.12.
"Servicing Advances" means all customary, reasonable and necessary "out of
pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Servicer of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and liquidation
of the Mortgaged Property if the Mortgaged Property is acquired in satisfaction
of the Mortgage Loan and (d) compliance with the obligations under Section 2.8.
"Servicing Agreement" means this agreement between the Company and the
Servicer for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means the amount of the annual fee the Company shall pay to
the Servicer, which shall, for a period of one (1) full month, be equal to the
sum of (i) one-twelfth of the product of the Servicing Fee Rate and the
aggregate outstanding balance of the Mortgage Loans as of the last day of each
calendar month, and (ii) any amounts not required to be deposited in the
Custodial Account pursuant to Section 2.4. Such fee shall be payable quarterly,
computed on the basis of the same principal amount and period in respect of
which any related interest payment on a Mortgage Loan is computed and shall be
pro rated for any portion of a month during which the Mortgage Loan is serviced
by the Servicer under this Agreement.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, a rate of
0.25% per annum or such other rate to which the parties may mutually agree.
"Servicing File" means such duplicates or originals from the Mortgage Loan
File as are held by the Servicer.
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<PAGE>
Section 2. Servicing.
Section 2.1. Duties of Servicer. From and after the Closing Date, the
Servicer shall service and administer the Mortgage Loans and shall, subject to
prior approval of the Company, do all things in connection with such servicing
and administration which are consistent with the terms of this Agreement and
Accepted Servicing Practices. The Servicer shall service the Mortgage Loans in
strict compliance with the servicing provisions of the Fannie Mae and FHLMC
guidelines and procedures. In the event of any conflict, inconsistency or
discrepancy between any of the servicing provisions of this Agreement and any of
the servicing provisions of the Fannie Mae and FHLMC guidelines and procedures,
the provisions of the Fannie Mae and FHLMC guidelines and procedures shall
control and be binding upon the Servicer.
Consistent with the terms of this Agreement, but in strict compliance with
the Fannie Mae and FHLMC guidelines and procedures only, the Servicer may, if so
required by the Company, waive, modify or vary any term of any Mortgage Loan or
consent to the postponement of strict compliance with any such term or in any
manner grant any indulgence to any Mortgagor, provided, however, that unless the
Servicer has obtained the prior written consent of Fannie Mae or FHLMC, the
Servicer shall not permit any modification with respect to any Mortgage Loan
that would change the mortgage interest rate, defer or forgive the payment of
principal or interest, reduce or increase the outstanding principal balance
(except for actual payments of principal) or change the final maturity date on
such Mortgage Loan. Without limiting the generality of the foregoing, the
Servicer shall, if so required by the Company, execute and deliver on behalf of
itself and the Company, all instruments of satisfaction or cancellation, or of
partial or full release, discharge and all other comparable instruments, with
respect to the Mortgage Loans and with respect to the Mortgaged Properties.
In servicing and administering the Mortgage Loans, the Servicer shall
employ procedures (including collection procedures) and exercise the same care
that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices and the Company's reliance on the Servicer.
The Servicer shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Servicer shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof and the Fannie Mae
and FHLMC guidelines and procedures. For the purposes of this Agreement, the
Servicer shall be under no obligation to deal with any person with respect to
this Agreement or the Mortgage Loans unless the Servicer has been notified of
such transfers as provided in this Section 2.1. The Company may sell and
transfer, in whole or in part, the Mortgage Loans, provided that no such sale
and transfer shall be binding upon the Servicer unless such transferee shall
agree in writing to be bound by the terms of this Agreement, and an executed
copy of the same shall have been delivered to the Servicer. Upon receipt
thereof, the Servicer shall mark its books and records to reflect the ownership
of the Mortgage Loans by such assignee, and the Company shall be
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<PAGE>
recalled from its obligations hereunder. The Servicer shall be required to remit
all amounts required to be remitted to the Company hereunder to said transferee,
and said transferee shall succeed to all rights of the Company hereunder,
commencing with the first Remittance Date falling after receipt of said copy of
the related assignment and assumption agreement provided that the Servicer
receives said copy no later than fifteen (15) Business Days immediately prior to
the first day of the month of the related Remittance Date.
The Mortgage Loan File retained by the Servicer pursuant to this Agreement
shall be appropriately marked and identified to clearly reflect the assignment
of the related Mortgage Loan to the Company. The Servicer shall release from its
custody the contents of the Mortgage Loan File retained by it only in accordance
with this Agreement.
The Servicer must have an internal quality control program that is capable
of evaluating and monitoring the overall quality of its servicing activities.
The program is to ensure that the Mortgage Loans; are (i) serviced in accordance
with Accepted Servicing Practices and generally accepted accounting principles;
(ii) guard against dishonest, fraudulent or negligent acts; and (iii) guard
against errors and omissions by officers, employees or other authorized persons.
Section 2.2. Liquidation of Mortgage Loans. In the event that any payment
due under any Mortgage Loan and not postponed pursuant to Section 2.1 is not
paid when the same becomes due and payable, or in the event the Mortgagor fails
to perform any other covenant or obligation under the Mortgage Loan File and
such failure continues beyond any applicable grace period, the Servicer shall
take such administrative action as is directed by Company or as
2.2.1 the Servicer would take under similar circumstances with respect
to a similar mortgage loan held for its own account for investment,
2.2.2 shall be consistent with Accepted Servicing Practices, and
2.2.3 the Servicer shall determine prudently to be in the best
interest of the Company.
In the event that any payment due under any Mortgage Loan is not postponed
pursuant to Section 2.1 and remains delinquent beyond the expiration of any
grace or cure period (or such other period as is required by law in the
jurisdiction where the related Mortgaged Property is located), the Servicer
shall, if so required by the Company, commence foreclosure proceedings in
accordance with Accepted Servicing Practices, provided that, prior to commencing
foreclosure proceedings, the Servicer shall transmit to the Company copies of
the notices given to, and received from, Fannie Mae and FHLMC with respect
thereto. In such connection, the Servicer shall from its own funds make all
necessary and proper Servicing Advances, provided, however, that the Servicer
shall not be required to expend its own funds in connection with any foreclosure
or towards the restoration or preservation of any Mortgaged Property, unless its
shall determine:
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<PAGE>
(a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Company after
reimbursement to itself for such expenses, and
(b) that such expenses will be recoverable by it either through
Liquidation Proceeds (in respect of which it shall have priority for
purposes of withdrawals from the Custodial Account pursuant to Section 2.5)
or through Insurance Proceeds (in respect of which it shall have similar
priority.
Notwithstanding anything to the contrary contained herein, in connection with a
foreclosure, in the event the Servicer has reasonable cause to believe that a
Mortgaged Property is contaminated by hazardous or toxic substances or wastes,
or if Fannie Mae or FHLMC otherwise requests an environmental inspection or
review of such Mortgaged Property to be conducted by a qualified inspector, the
Servicer shall cause the Mortgaged Property to be so inspected at the expense of
the Company. Upon completion of the inspection, the Servicer shall, upon
request, promptly provide the Company with a written report of the environmental
inspection.
After reviewing the environmental inspection report, the Company, subject
to the rights of Fannie Mae and FHLMC, shall determine how the Servicer shall
proceed with respect to the Mortgaged Property. In the event:
(a) the environmental inspection report indicates that the Mortgaged
Property is contaminated by hazardous or toxic substances or wastes, and
(b) the Company and/or Fannie Mae or FHLMC directs the Servicer to
proceed with foreclosure or acceptance of a deed in lieu of foreclosure,
the Servicer shall be reimbursed for all reasonable costs associated with such
foreclosure or acceptance of a deed in lieu of foreclosure and any related
environmental clean up costs, as applicable, from the related Liquidation
Proceeds, or if the Liquidation Proceeds are insufficient to fully reimburse the
Servicer, the Servicer shall be entitled to be reimbursed from amounts in the
Custodial Account pursuant to Section 2.5 hereof and to the extent amounts in
the Custodial Account are insufficient to fully reimburse the Servicer, the
Servicer shall be entitled to be reimbursed by the Company for such deficiencies
(upon presentation of evidence of such deficiency). In the event the Company
and/or Fannie Mae or FHLMC directs the Servicer not to proceed with foreclosure
or acceptance of a deed in lieu of foreclosure, the Servicer shall be reimbursed
for all Servicing Advances made with respect to the related Mortgaged Property
from the Custodial Account pursuant to Section 2.5 hereof.
Section 2.3. Collection of Mortgage Loan Payments. Continuously from the
Closing Date, the Servicer shall proceed diligently to collect all payments due
under each of the Mortgage Loans when the same shall become due and payable and
shall take special care in ascertaining and estimating Escrow Payments and all
other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end
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<PAGE>
that the installments payable by the Mortgagors will be sufficient to pay such
charges if and when they become due and payable.
Section 2.4. Establishment of and Deposits to Custodial Account . The
Servicer shall segregate and hold the hereinafter mentioned funds collected and
received pursuant to the Mortgage Loans separate and apart from any of its own
funds and general assets and shall establish and maintain one or more Custodial
Accounts, in the form of term deposit or demand accounts, titled "Harris Trust
and Savings Bank in trust for Harris Preferred Capital Corporation" (or similar
designation with respect to any subsequent Company). The Custodial Account shall
be established with a Qualified Depository acceptable to the Company. If the
Custodial Account is held at a Qualified Depository the deposit accounts of
which are insured by the FDIC, any funds deposited in the Custodial Account
shall at all times be insured to the full extent permitted under applicable law.
Funds deposited in the Custodial Account may be drawn on by the Servicer in
accordance with Section 2.5. The creation of any Custodial Account shall be
evidenced by a certification in the form of Exhibit 2 hereto. A copy of such
certification shall be furnished to the Company and, upon request, to any
subsequent Company.
The Servicer shall deposit in the Custodial Account within one Business Day
of receipt, and retain therein, the following collections received by the
Servicer and payments made by the Servicer after the Cut-off Date, other than
payments of principal and interest due on or before the Cut-off Date, or
received by the Servicer prior to the Cut-off Date but allocable to a period
subsequent thereto:
2.4.1 all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
2.4.2 all payments on account of interest on the Mortgage Loans;
2.4.3 all Liquidation Proceeds and any amount received with respect to
REO Property;
2.4.4 all Insurance Proceeds including amounts required to be
deposited pursuant to Section 2.10 (other than proceeds to be held in the
Escrow Account and applied to the restoration or repair of the Mortgaged
Property or released to the Mortgagor in accordance with Section 2.14);
2.4.5 all Condemnation Proceeds which are not applied to the
restoration or repair of the Mortgaged Property or released to the
Mortgagor in accordance with Section 2.14; and
2.4.6 any amount required to be deposited in the Custodial Account
pursuant to Sections 2.15 or 3.1.
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<PAGE>
Section 2.5. Permitted Withdrawals from Custodial Account. Subject to
Section 2.15 hereof, the Servicer shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
2.5.1 to make payments to the Company in the amounts and in the
manner provided for in Section 3.1;
2.5.2 to reimburse itself for unreimbursed Servicing Advances (except
to the extent reimbursed pursuant to Section 2.7), any accrued but unpaid
Servicing Fee and for unreimbursed advances of Servicer funds made pursuant
to Section 2.15, the Servicer's right to reimburse itself pursuant to this
subparagraph 2.5.2 with respect to any Mortgage Loan being limited to
related Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds and
such other amounts as may be collected by the Servicer from the Mortgagor
or otherwise relating to the Mortgage Loan, it being understood that, in
the case of any such reimbursement, the Servicer's right thereto shall be
subordinate to the right of the Company;
2.5.3 to pay to the person entitled thereto any amounts deposited in
error; and
2.5.4 to clear and terminate the Custodial Account upon the
termination of this Agreement.
In that event that the Custodial Account is interest bearing, on each Remittance
Date, the Servicer shall withdraw all funds from the Custodial Account except
for those amounts which, pursuant to Section 3.1, the Servicer is not obligated
to remit on such Remittance Date. The Servicer may use such withdrawn funds only
for the purposes described in this Section 2.5.
Section 2.6. Establishment of and Deposits to Escrow Account. The
Servicer shall segregate and hold all funds collected and received pursuant to a
Mortgage Loan constituting Escrow Payments separate and apart from any of its
own funds and general assets and shall establish and maintain one or more Escrow
Accounts, in the form of term deposit or demand accounts. The Escrow Account or
Accounts shall be established with a Qualified Depository. If the Escrow Account
is held at a Qualified Depository the deposit accounts of which are insured by
the FDIC, any funds deposited in the Escrow Account shall at all times be
insured to the full extent permitted under applicable law. Funds deposited in
the Escrow Accounts may be drawn on by the Servicer in accordance with
Section 2.7. The creation of any Escrow Account shall be evidenced by a
certification in the form of Exhibit 4 hereto. A copy of such certification
shall be furnished to the Company and, upon request, to any subsequent Company.
The Servicer shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein all Escrow Payments collected on
account of the Mortgage Loans, for the purpose of effecting timely payment of
any such items as required under the terms of this Agreement. The Servicer shall
deposit in the Escrow Account or Accounts as soon as possible, but within a
maximum of five (5) Business Days of receipt, all amounts
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<PAGE>
representing Insurance Proceeds or Condemnation Proceeds which are to be applied
to the restoration or repair of any Mortgaged Property.
The Servicer shall make withdrawals from the Escrow Account only to effect
such payments as are required under this Agreement as set forth in Section 2.7.
The Servicer shall be entitled to retain any interest paid on, or other income
generated by and paid on, funds deposited in the Escrow Account by the
depository institution, other than interest on escrowed funds required by law of
the Mortgage Loan File to be paid to the Mortgagor. To the extent required by
law, the Servicer shall pay from its own funds interest on escrowed funds to the
Mortgagor notwithstanding that the Escrow Account may be non-interest bearing or
that interest paid thereon is insufficient for such purposes.
Section 2.7. Permitted Withdrawals from Escrow Account. Withdrawals from
each Escrow Account may be made by the Servicer only:
2.7.1 to effect timely payments of taxes, assessments, mortgage
insurance premiums, condominium charges or other items constituting Escrow
Payments for the related Mortgage Loan;
2.7.2 to reimburse the Servicer for any Servicing Advance made by the
Servicer pursuant to Section 2.8 with respect to a related Mortgage Loan,
but only from amounts received on the related Mortgage Loan which represent
late payments or collections of Escrow Payments thereunder;
2.7.3 to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the related Mortgage Loan
or applicable federal or state law or judicial or administrative ruling;
2.7.4 for transfer to the Custodial Account and application to reduce
the principal balance of the Mortgage Loan in accordance with the terms of
the related Mortgage Loan File;
2.7.5 for application to restoration or repair of the related
Mortgaged Property, in accordance with the procedures outlined in Section
2.14;
2.7.6 to pay to the Servicer, or any Mortgagor to the extent required
by law, any interest paid on the funds deposited in the Escrow Account;
2.7.7 to pay to the person entitled thereto any amounts deposited in
error; and
2.7.8 to clear and terminate the Escrow Account on the termination of
this Agreement.
Section 2.8. Payment of Taxes, Insurance and Other Charges. With respect
to each Mortgage Loan, the Servicer shall maintain accurate records reflecting
the status of ground rents, taxes, assessments, water rates, sewer rents, and
other charges, as applicable, which
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<PAGE>
are or may become a lien, legal hypothec or priority upon the Mortgaged Property
and fire and hazard insurance coverage and shall obtain, from time to time, all
bills for the payment of such charges (including renewal premiums) and shall
effect payment thereof prior to the applicable penalty, or termination date,
employing for such purpose deposits of the Mortgagor in the Escrow Account which
shall have been estimated and accumulated by the Servicer in amounts sufficient
for such purposes, as allowed under the terms of the Mortgage Loan File. To the
extent that a Mortgage Loan does not provide for Escrow Payments, the Servicer
shall determine that any such payments relating to taxes or maintaining
insurance policies are made by the Mortgagor at the time they first become due.
The Servicer assumes full responsibility for the timely payment of all such
bills to the extent it has or should have notice of such bills and shall effect
timely payment of all such charges irrespective of each Mortgagor's faithful
performance in the payment of same or the making of the Escrow Payments, and the
Servicer shall make advances from its own funds to effect such payments, such
advances to be reimbursable to the same extent as Servicing Advances.
Section 2.9. Protection of Accounts. The Servicer may transfer the
Custodial Account or the Escrow Account to a different Qualified Depository from
time to time. Such transfer shall be made only upon obtaining the consent of the
Company. The Servicer shall bear any expenses, losses or damages sustained by
the Company because the Custodial Account and/or the Escrow Account are not
demand deposit accounts.
Section 2.10. Maintenance of Hazard Insurance. The Servicer shall cause to
be maintained for each Mortgage Loan hazard insurance such that all buildings
upon the Mortgaged Property are insured against loss by fire, hazards of
extended coverage and such other hazards as are required to be insured pursuant
to Accepted Servicing Practices.
If at any time during the term of the Mortgage Loan, the Servicer
determines in accordance with applicable law and pursuant to the Fannie Mae and
FHLMC guidelines and procedures that a Mortgaged Property is located in a
special flood hazard area and is not covered by flood insurance satisfactory to
Fannie Mae and FHLMC, the Servicer shall notify the related Mortgagor (to the
extent permitted by the applicable Mortgage Loan File) that the Mortgagor must
obtain such flood insurance coverage, and if said Mortgagor fails to obtain the
required flood insurance coverage within forty-five (45) days after such
notification, the Servicer shall immediately purchase the required flood
insurance on the Mortgagor's behalf.
The Servicer shall cause to be maintained on each Mortgaged Property such
other or additional insurance as may be required pursuant to such applicable
laws and regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of the Fannie Mae and
FHLMC guidelines and procedures. All policies required hereunder shall name the
Servicer and its successors and assigns as mortgagee and shall provide for at
least thirty (30) days' prior written notice of any cancellation, reduction in
amount or material change in coverage.
The Servicer shall not interfere with the Mortgagee's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Servicer shall not accept
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any such insurance policies from insurance companies which do not meet or exceed
applicable requirements of the Fannie Mae and FHLMC guidelines and procedures.
The Servicer shall determine that such policies provide sufficient risk coverage
and amounts as required pursuant to the Fannie Mae and FHLMC guidelines and
procedures, that they insure the property owner, and that they properly describe
the property address. To the extent reasonably possible the Servicer shall
furnish to the Mortgagor a formal notice of expiration of any such insurance in
sufficient time for the Mortgagor to arrange for renewal cover age by the
expiration date; provided, however, that in the event that no such notice is
furnished by the Servicer, the Servicer shall ensure that replacement insurance
policies are in place in the required coverages and the Servicer shall be solely
liable for any losses in the event such coverage is not provided.
Pursuant to Section 2.4, any amounts collected by the Servicer under any
such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor as specified in Section 2.14) shall be deposited in the Custodial
Account subject to withdrawal pursuant to Section 2.5.
Section 2.11. Maintenance of Mortgage Impairment Insurance . In the event
that the Servicer shall obtain and maintain a blanket policy insuring against
losses arising from fire and hazards covered under extended coverage on all of
the Mortgage Loans, then, to the extent such policy provides coverage in an
amount equal to the amount required pursuant to Section 2.10 and otherwise
complies with all other requirements of Section 2.10, it shall conclusively be
deemed to have satisfied its obligations as set forth in Section 2.10. Any
amounts collected by the Servicer under any such policy relating to a Mortgage
Loan shall be deposited in the Custodial Account subject to withdrawal pursuant
to Section 2.5. Such policy may contain a deductible clause, in which case, in
the event that there shall not have been maintained on the related Mortgaged
Property a policy complying with Section 2.10, and there shall have been a loss
which would have been covered by such policy, the Servicer shall deposit in the
Custodial Account at the time of such loss the amount not otherwise payable
under the blanket policy because of such deductible clause, such amount to be
deposited from the Servicer's funds, without reimbursement therefor. Upon
request of the Company, the Servicer shall cause to be delivered to the Company
a certified true copy of such policy and a statement from the insurer thereunder
that such policy shall in no event be terminated or materially modified without
thirty (30) days' prior written notice to the Company.
Section 2.12. Maintenance of Fidelity Bond . The Servicer shall maintain
with responsible companies, at its own expense, a blanket Fidelity Bond and an
Errors and Omissions Insurance Policy, with broad coverage on all officers,
employees or other persons acting in any capacity requiring such persons to
handle funds, money, documents or papers relating to the Mortgage Loans
("Servicer Employees"). Any such Fidelity Bond and Errors and Omissions
Insurance Policy shall be in the form of the Mortgage Banker's Blanket Bond and
shall protect and insure the Servicer against losses, including forgery,
embezzlement, fraud, errors and omissions and negligent acts of such Servicer
Employees. Such Fidelity Bond and Errors and Omissions Insurance Policy also
shall protect and insure the Servicer
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against losses in connection with the release or satisfaction of a Mortgage Loan
without having obtained payment in full of the indebtedness secured thereby. No
provision of this Section 2.12 requiring such Fidelity Bond and Errors and
Omissions Insurance Policy shall diminish or relieve the Servicer from its
duties and obligations as set forth in this Agreement. The minimum coverage
under any such Fidelity Bond and Errors and Omissions Insurance Policy shall be
at least equal to the corresponding amounts required by Accepted Servicing
Practices. Upon the request of the Company, the Servicer shall cause to be
delivered to the Company a certified true copy of such Fidelity Bond and Errors
and Omissions Insurance Policy and a statement from the surety and the insurer
that such Fidelity Bond and Errors and Omissions Insurance Policy shall in no
event be terminated or materially modified without thirty (30) days' prior
written notice to the Company. In the event that the surety or insurer charges
the Servicer a fee for providing such evidence, the Company shall reimburse the
Servicer for the reasonable expense incurred by the Servicer in furnishing such
evidence.
Section 2.13. Inspections. The Servicer shall inspect the Mortgaged
Property as often as deemed necessary by the Servicer to assure itself that the
value of the Mortgaged Property is being preserved, the whole in accordance with
Accepted Servicing Practices. The Servicer shall keep a written report of each
such inspection.
Section 2.14. Restoration of Mortgaged Property. The Servicer need not
obtain the approval of the Company prior to releasing any Insurance Proceeds or
Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with the
applicable Mortgage Loan File and the Accepted Servicing Practices. At a
minimum, the Servicer shall comply with the following conditions in connection
with any such release of Insurance Proceeds or Condemnation Proceeds:
2.14.1 the Servicer shall receive satisfactory independent
verification of completion of repairs and issuance of any required
approvals with respect thereto;
2.14.2 the Servicer shall take all steps necessary to preserve the
priority of the lien securing the Mortgage Loan, including, but not limited
to, requiring waivers or releases with respect to mechanics' and
materialmen's liens in favor of the persons having taken part in the
renovation of the Mortgaged Property;
2.14.3 the Servicer shall verify that the Mortgage Loan is not in
default; and
2.14.4 pending repairs or restoration, the Servicer shall place the
Insurance Proceeds or Condemnation Proceeds in the Escrow Account.
If the Company is named as an additional mortgagee, the Servicer is hereby
empowered to endorse any loss draft issued in respect of such a claim in the
name of the Company.
Section 2.15. Title, Management and Disposition of REO Property. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure,
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the deed or certificate of sale shall be taken in the name of the Servicer as
nominee for the Company.
The Servicer shall manage, conserve, protect and operate each REO Property
for the Company solely for the purpose of its prompt disposition and sale
(unless otherwise directed by the Company). The Servicer, either itself or
through an agent selected by the Servicer and reasonably acceptable to the
Company, Fannie Mae and FHLMC, shall manage, conserve, protect and operate the
REO Property in the same manner that it manages, conserves, protects and
operates other foreclosed property for its own account, and in the same manner
that similar property in the same locality as the REO Property is managed.
The Servicer shall use its best efforts to dispose of the REO Property as
soon as possible and shall sell such REO Property in any event within one year
after title has been taken to such REO Property (unless otherwise directed by
the Company). If a period longer than one (1) year is permitted under the
foregoing sentence and is necessary to sell any REO Property, the Servicer shall
report monthly to the Company as to the progress being made in selling such REO
Property.
The Servicer shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available, flood insurance
in the amount required above.
The disposition of REO Property shall be carried out by the Servicer at
such price, and upon such terms and conditions, as the Servicer deems
appropriate (subject to approval by the Company). The proceeds of sale of the
REO Property shall be promptly deposited in the Custodial Account. As soon as
practical thereafter the expenses of such sale shall be paid and the Servicer
shall reimburse itself pursuant to Section 2.5.3 hereof, as applicable, for any
related unreimbursed Servicing Advances, unpaid Servicing Fees and unreimbursed
advances made pursuant to this Section, and on the Remittance Date immediately
following the Due Period in which such sale proceeds are received the net cash
proceeds of such sale remaining in the Custodial Account shall be distributed to
the Company; provided that such distribution shall, in any event, be made within
ninety (90) days from and after the closing of the sale of such REO Property.
In addition to the Servicer's obligations set forth in this Section 2.15,
the Servicer shall deliver to the Company whenever title to any Mortgaged
Property is acquired in foreclosure or by deed in lien of foreclosure copies of
all notices transmitted to, and received from, Fannie Mae or FHLMC with respect
thereto, together with a copy of the appraisal, if any, of the related Mortgaged
Property obtained by the Servicer on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Company may, at
the Company's sole option, terminate the Servicer as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Company gives the Servicer notice of such termination within ten
(10) Business Days of receipt of said copies of notices from the Servicer which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the
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Company and (ii) the Servicer shall on the date said termination takes effect be
reimbursed by Company for any unreimbursed advances of the Servicer's funds made
pursuant to Section 3.2 and any unreimbursed Servicing Advances in each case
relating to the Mortgage Loan underlying such REO Property. In the event of any
such termination, the provisions of Section 8.6 hereof shall apply to said
termination and the transfer of servicing responsibilities with respect to such
REO Property to the Company.
With respect to each REO Property, the Servicer shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Servicer shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
Section 2.16. Permitted Withdrawals with Respect to REO Property. For so
long as the Servicer is acting as servicer of any Mortgage Loan relating to any
REO Property, the Servicer shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Servicer. The Servicer shall make monthly
distributions on each Remittance Date to the Company of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described in Section 2.15 and of any reserves reasonably required
from time to time to be maintained to satisfy anticipated liabilities for such
expenses).
Section 2.17. Real Estate Owned Reports. For so long as the Servicer is
acting as servicer of any Mortgage Loan relating to any REO Property, the
Servicer shall submit to the Company all reports with respect to such Mortgaged
Property which it is obligated to submit to Fannie Mae or FHLMC pursuant to
Accepted Servicing Practices.
Section 3. Payments to the Company.
Section 3.1. Remittances. On each Remittance Date, the Servicer shall remit
by wire transfer of immediately available funds to the Company:
(a) all amounts deposited in the Custodial Account as of the close
of business on the Determination Date, minus
(b) any amounts payable to the Servicer under Article 2 of this
Agreement.
With respect to any remittance received by the Company after the fifth day
following the Business Day on which such payment was due, the Servicer shall pay
to the Company a "late charge" in an amount equal to 5% of such late payment.
Such late charge shall be deposited in the Custodial Account by the Servicer on
the date such late payment is made. Such late charge shall be remitted along
with the distribution payable on the next succeeding
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Remittance Date. The payment by the Servicer of any such late charge shall not
be deemed an extension of time for payment or a waiver of any Event of Default
by the Servicer.
Section 3.2. Statements to the Company. Not later than the fifteenth day
of each month, the Servicer shall furnish to the Company in a mutually-
acceptable format the reports required by the Company, together with a Monthly
Remittance Advice showing the scheduled payments of principal and interest, the
principal prepayments and the prepayment penalties.
In addition, the Servicer shall furnish to the Company an annual statement
in accordance with the requirements of applicable income tax laws as to the
aggregate of remittances for the applicable portion of such year. Such
obligation of the Servicer shall be deemed to have been satisfied to the extent
that substantially comparable information shall be provided by the Servicer
pursuant to any requirements of the governmental taxing authority as from time
to time are in force.
The Servicer shall prepare and file, with respect to each Mortgage Loan,
any and all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Company pursuant to any
applicable law with respect to the Mortgage Loans and the transactions
contemplated hereby. In addition, the Servicer shall provide the Company with
such information concerning the Mortgage Loans as is necessary for the Company
to prepare any applicable income tax returns as the Company may reasonably
request from time to time.
Section 4. General Servicing Procedures.
Section 4.1. Transfers of Mortgaged Property. The Servicer shall be
required, consistent with Accepted Servicing Practices, to enforce any "due-on-
sale" provision contained in any Mortgage Loan File and to deny assumption by
the person to whom the Mortgaged Property has been or is about to be sold
whether by absolute conveyance or by contract of sale, whether or not the
Mortgagor remains liable on the Mortgage Loan. When the Mortgaged Property has
been conveyed by the Mortgagor, the Servicer shall, to the extent it has
knowledge of such conveyance, exercise its rights to accelerate the maturity of
such Mortgage Loan under the "due-on-sale" clause applicable thereto, provided,
however, that the Servicer shall not exercise such rights if the Servicer
determines in good faith that it is prohibited by law from doing so or if the
exercise of such rights would impair or threaten to impair any recovery under
the related primary mortgage guaranty insurance policy issued with respect to
such Mortgage Loan, if any.
If the Servicer reasonably believes it is unable under applicable law to
enforce "due-on-sale" clause, the Servicer, in the Company's name, shall, to the
extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Loan and the
original Mortgagor remains liable thereon or (ii) in the event the Servicer is
unable under applicable law to require that the original Mortgagor remain liable
under the Mortgage Note and the Servicer has the prior consent of Fannie Mae and
FHLMC,
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a substitution of liability agreement with the Company of the Mortgaged
Property pursuant to which the original Mortgagor is released from liability and
the Company of the Mortgaged Property is substituted as Mortgagor and becomes
liable under the Mortgage Loan. In connection with any such assumption, neither
the mortgage interest rate borne by the related Mortgage Loan, the term of the
Mortgage Loan nor the outstanding principal amount of the Mortgage Loan shall be
changed.
To the extent that any Mortgage Loan is assumable, the Servicer shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by Fannie Mae and FHLMC guidelines and procedures with
respect to underwriting mortgage loans of the same type as the Mortgage Loans.
If the credit of the proposed transferee does not meet such underwriting
criteria, the Servicer diligently shall, to the extent permitted by the Mortgage
Loan File and by applicable law, accelerate the maturity of the Mortgage Loan.
Section 4.2. Satisfaction of Mortgages and Release of Mortgage Files. Upon
the payment in full of any Mortgage Loan, or the receipt by the Servicer of a
notification that payment in full will be escrowed in a manner customary for
such purposes, the Servicer shall notify the Company in the Monthly Remittance
Advice as provided in Section 3.2 and may request the release of any Mortgage
Loan File from the Company in accordance with this Section 4.2 hereof. The
Servicer shall obtain discharge of the related Mortgage Loan as of record within
any related time limit required by applicable law.
Section 4.3. Servicing Compensation. As consideration for servicing the
Mortgage Loans hereunder, the Servicer shall deduct the Servicing Fee with
respect to each Mortgage Loan from payments as received from Mortgagors and
shall remit the net balance into the Custodial Account.
Additional servicing compensation in the form of Ancillary Income shall be
retained by the Servicer as and when collected. The Servicer shall be required
to pay all expenses incurred by it in connection with its servicing activities
hereunder and shall not be entitled to reimbursement thereof except as
specifically provided for herein.
Section 4.4. Annual Statement as to Compliance. The Servicer shall deliver
to the Company, on or before March 1st of each year beginning March 1, 1998 an
Officer's Certificate, stating that (i) a review of the activities of the
Servicer during its preceding fiscal year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Servicer
has complied in all material respects with the provisions of Article 2 and
Article 3, and (iii) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.
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Section 4.5. Annual Independent Certified Public Accountants Servicing
Report. On or before March 1 of each year, beginning with March 1, 1998, the
Servicer at its expense shall cause a firm of independent certified public
accountants (who may also render other services to the Servicer or any affiliate
thereof) to furnish a statement to the Company to the effect that such firm has,
as part of their examination of the financial statements of the Servicer,
performed tests embracing the records and documents relating to mortgage loans
serviced by the Servicer in accordance with the requirements of generally
accepted accounting principles and that their examination disclosed no
exceptions that, in their opinion, were material, relating to mortgage loans
serviced by the Servicer.
Section 4.6. Right to Examine Servicer Records. The Company, upon
reasonable written notice, shall have the right to examine and audit any and all
of the books, records, or other information of the Servicer, whether held by the
Servicer or by another on its behalf, with respect to or concerning this
Agreement or the Mortgage Loans, during business hours or at such other times as
may be reasonable under applicable circumstances, upon reasonable advance
notice.
Section 5. Servicer to Cooperate.
Section 5.1. Provision of Information. During the term of this Agreement,
the Servicer shall furnish to the Company such periodic, special, or other
reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Company or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Company may give. The Servicer shall execute and deliver all such instruments
and take all such action as the Company may reasonably request from time to
time, in order to effectuate the purposes and to carry out the terms of this
Agreement.
Section 6. Termination.
Section 6.1. Agency Suspension. Should the Servicer at any time during the
term of this Agreement have its right to service temporarily or permanently
suspended by Fannie Mae or FHLMC or otherwise cease to be an approved servicer
of conventional residential mortgage loans for Fannie Mae or FHLMC, then the
Company may immediately terminate this Agreement without assessment of any
termination fee.
Section 6.2. Damages. The Company shall have the right at any time to seek
and recover from the Servicer any damages or losses suffered by it as a result
of any failure by the Servicer to observe or perform any duties, obligations,
covenants or agreements herein contained, or as a result of the Servicer's
failure to remain an approved Fannie Mae or FHLMC mortgage servicer.
Section 6.3. Termination. The respective obligations and responsibilities
of the Servicer shall terminate upon:
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6.3.1 the earlier of the final payment or other liquidation (or any
advance with respect thereto) of the last Mortgage Loan
serviced by the Servicer, the remittance of all funds due
hereunder or the first anniversary of this Agreement; or
6.3.2 by mutual consent of the Servicer and the Company in writing,
unless earlier terminated pursuant to this Agreement.
Section 6.4. Termination Without Cause. The Company, may, at its sole
option, upon not less than sixty (60) days' prior written notice to the Servicer
terminate any rights the Servicer may have hereunder with respect to any or all
of the Mortgage Loans, without cause, upon written notice, provided that the
Servicer shall have an additional period of not more than sixty (60) days from
and after the date of said notice from the Company within which to effect the
related transfer of servicing. Any such notice of termination shall be in
writing and delivered to the Servicer as provided in Section 12.1 of this
Agreement. In the event of such termination, the Servicer shall be entitled to a
termination fee, equal to the product of 0.0002% of the then current aggregate
unpaid principal balance of the related Mortgage Loans and the number of months
remaining until the first anniversary of this Agreement, provided, however, that
the successor servicer is not an affiliate of the Servicer.
Section 7. Books and Records.
Section 7.1. Possession of Servicing Files. The contents of each Servicing
File are and shall be held by the Servicer for the benefit of the Company as the
assignee thereof. The Servicer shall maintain in the Servicing File a copy
(which may be in microfiche form) of the contents of each Mortgage Loan File.
Servicer shall request the original (and duplicate originals, if any) of any
Mortgage Loan only for the purpose of initiating any claim for reimbursement
with respect to the Mortgage Loan or in connection with the payment in full or
liquidation of the Mortgage Loan and shall promptly return such originals to the
possession of the Custodian or otherwise properly dispose of such originals, but
in no case shall Servicer maintain possession of such originals for any period
exceeding twenty-one days. The possession of the Servicing File by the Servicer
is at the will of the Company for the sole purpose of servicing the related
Mortgage Loan, pursuant to this Agreement, and such retention and possession by
the Servicer is in its capacity as Servicer only and at the election of the
Company. The Servicer shall release its custody of the contents of any Servicing
File only in accordance with written instructions from the Company or other
termination of the Servicer with respect to the related Mortgage Loans, unless
such release is required as incidental to the Servicer's servicing of the
Mortgage Loans pursuant to this Agreement.
The Servicer shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the assignment of each Mortgage Loan to the Company. In
particular, the Servicer shall maintain in its possession, available for
inspection by the Company during normal business hours, and shall deliver to the
Company upon reasonable notice, evidence of compliance with all federal, state
and local laws, rules, and regulations, and requirements of Fannie Mae and
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FHLMC guidelines and procedures, documentation evidencing insurance coverage and
eligibility of any condominium project for approval by Fannie Mae and FHLMC and
periodic inspection reports as required by Section 2.13 and Accepted Servicing
Practices.
To the extent that original documents are not required for purposes of
realization of Liquidation Proceeds or Insurance Proceeds, documents maintained
by the Servicer may be in the form of microfilm or microfiche so long as the
Servicer complies with the requirements of Accepted Servicing Practices.
The Servicer shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Servicer shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof. For the purposes of
this Agreement, the Servicer shall be under no obligation to deal with any
person with respect to this Agreement or the Mortgage Loans unless the books and
records show such person as the owner of the Mortgage Loan. The Company may,
subject to the terms of this Agreement, sell or transfer one or more of the
Mortgaged Loan. The Company also shall advise the Servicer of the transfer. Upon
receipt of notice of the transfer, the Servicer shall mark its books and records
to reflect the ownership of the Mortgage Loans of such assignee, and shall
release the Company from its obligations hereunder with respect to the Mortgage
Loans sold or transferred.
Section 8. Indemnification and Assignment.
Section 8.1. Indemnification. The Servicer agrees to indemnify and hold the
Company harmless from any liability, claim, loss or damage (including, without
limitation, any reasonable legal fees, judgments or expenses relating to such
liability, claim, loss or damage) to the Company directly or indirectly
resulting from the Servicer's failure to observe and perform any or all of
Servicer's duties, obligations, covenants, agreements, warranties or
representations contained in this Agreement or the Servicer's failure to comply
with all applicable requirements with respect to the transfer of servicing
rights as set forth herein.
The Servicer shall notify the Company as soon as reasonably possible if a
claim is made by a third party with respect to this Agreement.
Section 8.2. Limitation on Liability of Servicer and Others. Neither the
Servicer nor any of the directors, officers, employees or agents of the Servicer
shall be under any liability to the Company for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Servicer or any such person against any breach of
warranties or representations made herein, or failure to perform its obligations
in material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Servicer and any director, officer,
employee or agent of the Servicer may rely in good faith on any document of any
kind prima facie properly executed and submitted by any person with respect to
any matter arising hereunder. The Servicer shall not be under
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any obligation to appear in, prosecute or defend any legal action which is not
incidental to its duties to service the Mortgage Loans in accordance with this
Agreement and which in its opinion may involve it in any expense or liability,
provided, however, that the Servicer may, with the prior written consent of the
Company, undertake any such action which it may deem necessary or desirable in
respect to this Agreement and the rights and duties of the parties hereto. In
such event, the Servicer shall be entitled to reimbursement from the Company of
the reasonable legal expenses and costs of such action. Notwithstanding the
foregoing, in the event that the Servicer fails to perform its duties under the
Servicing Agreement in accordance with the terms thereof and, as a result, the
Company becomes liable for tax on the amounts it receives from Harris Trust and
Savings Bank on the Loan (as this expression is defined in that certain Loan
Agreement entered into between Harris Trust and Savings Bank and Harris
Preferred Capital Corporation on this day), the Servicer shall indemnify and
hold harmless Harris Preferred Capital Corporation for such tax.
Section 8.3. Limitation on Registration and Assignment by Servicer. The
Company has entered into this Agreement with the Servicer in reliance upon the
representations as to the adequacy of its servicing facilities, plant,
personnel, records and procedures, its integrity, reputation and financial
standing, and the continuance thereof. Therefore, the Servicer shall not (i)
assign this Agreement or the servicing hereunder or (ii) delegate any
substantial part of its rights or duties hereunder without the prior written
consent of the Company, which consent shall not be unreasonably withheld or
conditioned provided that (a) any delegation of such rights or duties shall not
release the Servicer from its obligations hereunder and the Servicer shall
remain responsible hereunder for all acts and omissions of any delegee as if
such acts or omissions were those of the Servicer and (b) any such assignee or
designee shall satisfy the requirements for a successor or surviving person set
forth in Section 8.5 and Section 8.6 hereof. The Servicer shall notify the
Company in writing at least 30 days prior to selling or otherwise disposing of
all or substantially all of its assets and receipt of such notice shall entitle
the Company to terminate this Agreement, without payment of any termination fee,
except as set forth in Section 8.5 hereof.
Servicer shall not resign from the obligations and duties hereby imposed on
it except by mutual consent of the Servicer and the Company or upon the
determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. Any such
determination permitting the resignation of the Servicer shall be evidenced by
an opinion of counsel of the Servicer to such effect delivered to the Company
which opinion of counsel shall be in form and substance acceptable to the
Company. No such resignation shall become effective until a successor approved
by Fannie Mae and FHLMC shall have assumed the Servicer's responsibilities and
obligations hereunder in the manner provided in Section 8.6.
Without in any way limiting the generality of this Section 8.3, in the
event that the Servicer either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without (i) satisfying the requirements set forth herein or (ii) the
prior written consent of the Company, then the Company shall have the right to
terminate this Agreement as set forth in Section 6.4, without any payment of any
penalty or damages and without any liability whatsoever to the Servicer (other
than
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<PAGE>
with respect to accrued but unpaid Servicing Fees and Servicing Advances
remaining unpaid) or any third party.
Section 8.4. Assignment by Company. The Company shall have the right,
without the consent of the Servicer, to assign, in whole or in part, its
interest under this Agreement with respect to some or all of the Mortgage Loans
and designate any person to exercise any rights of the Company hereunder, by
executing an assignment and assumption agreement and the assignee or designee
shall accede to the rights and obligations hereunder of the Company with respect
to such Mortgage Loans. All references to the Company in this Agreement shall be
deemed to include its assignee or designee.
Section 8.5. Merger or Consolidation of the Servicer. The Servicer will
keep in full effect its existence and rights as a bank under the laws of its
jurisdiction of incorporation except as permitted herein.
Any person into which the Servicer may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any person succeeding to the business of the
Servicer, shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving person shall be (i) obligated to
service the Mortgage Loans in accordance with this Agreement and Accepted
Servicing Practices, (ii) an institution whose deposits are insured by FDIC or a
company whose business includes the origination and servicing of mortgage loans
and (iii) a Fannie Mae and FHLMC-approved servicer in good standing.
Section 8.6. Successor to the Servicer. Prior to termination of Servicer's
responsibilities and duties under this Agreement pursuant to Sections 2.15, 6.1,
6.4, 8.3 or 11.1, the Company shall appoint a successor which shall succeed to
all rights and assume all of the responsibilities, duties and liabilities of the
Servicer under this Agreement. In connection with such appointment and
assumption, the Company may make such arrangements for the compensation of such
successor out of payments on Mortgage Loans as it and such successor shall
agree. In the event that the Servicer's duties, responsibilities and liabilities
under this Agreement should be terminated pursuant to the aforementioned
sections, the Servicer shall discharge such duties and responsibilities during
the period from the date it acquires knowledge of such termination until the
effective date thereof with the same degree of diligence and prudence which it
is obligated to exercise under this Agreement, and shall take no action
whatsoever that might impair or prejudice the rights or financial condition of
its successor. The resignation or removal of Servicer pursuant to the
aforementioned Sections shall not become effective until a successor shall be
appointed pursuant to this Section 8.6 and shall in no event relieve the
Servicer of the representations, warranties and covenants made pursuant to and
the remedies available to the Company with respect thereto, it being understood
and agreed that the provisions of Article 10 shall be applicable to the Servicer
notwithstanding any such resignation or termination of the Servicer, or the
termination of this Agreement.
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<PAGE>
Any successor appointed as provided herein shall execute, acknowledge and
deliver to the Servicer and to the Company, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Servicer, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Sections 2.15, 6.1, 6.4, 8.3 or
11.1 shall not affect any claims that the Company may have against the Servicer
arising prior to any such termination or resignation.
The Servicer shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Loan Files and related
documents and statements held by it hereunder and the Servicer shall account for
all funds. The Servicer shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Servicer. The successor shall make
arrangements as it may deem appropriate to reimburse the Servicer for amounts
the Servicer actually expended pursuant to this Agreement which the successor is
entitled to retain hereunder and which would otherwise have been recovered by
the Servicer pursuant to this Agreement but for the appointment of the successor
servicer.
Upon a successor's acceptance of appointment as such, the Servicer shall
notify by mail the Company of such appointment.
Section 9. Representations, Warranties and Covenants of Company.
As of the Closing Date, the Company warrants and represents to, and
covenants and agrees with, the Servicer as follows:
Section 9.1. Due Organization and Authority. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Maryland. The Company has the full corporate power and authority to
execute and deliver this Agreement and to perform in accordance therewith; the
execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby have been duly and validly
authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Company; and all requisite corporation action has been taken
by the Company to make this Agreement valid and binding upon the Company in
accordance with its terms.
Section 9.2. No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Company's articles of incorporation or by-laws
or any legal restrictions or any agreement or instrument to which the Company is
now a party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any law,
rule, regulation, order, judgment or decree to which the Company or its property
is subject.
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<PAGE>
Section 9.3. Ability to Perform. The Company does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and every
covenant made by it in this Agreement.
Section 9.4. No Litigation Pending. There is no action, suit proceeding or
investigation pending or threatened against the Company, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Company, or in any
material impairment of the right or ability of the Company to carry on its
business substantially as now conducted, or in any material liability on the
part of the Company, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Company contemplated herein.
Section 9.5. No Consent Required. No consent, approval, authorization or
order of any court, or governmental agency or regulatory authority, banking or
otherwise, or body is required for the execution, delivery and performance by
the Company of, or compliance by the Company with, this Agreement as evidenced
by the consummation of the transactions contemplated by this Agreement, or if
required, such approval has been obtained prior to the Closing Date.
Section 10. Representations and Warranties of Servicer.
As of the Closing Date, the Servicer warrants and represents to, and
covenants and agrees with, the Company as follows:
Section 10.1. Due Organization and Authority. The Servicer is an Illinois
banking corporation duly organized, validly existing and in good standing under
the laws of Illinois, and is licensed, qualified and in good standing in each
jurisdiction where a Mortgaged Property is located if applicable laws require
licensing or qualification in order to conduct business of the type conducted by
the Servicer, and in any event the Servicer is in compliance with the laws of
any such jurisdiction to the extent necessary to ensure the enforceability of
the related Mortgage Loan in accordance with the terms of this Agreement; the
Servicer has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Servicer and the consummation of
the transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, legal, binding and enforceable obligation of the
Servicer subject to receivership laws and other similar laws of general
application affecting rights of creditors, including those respecting the
availability of specific performance, none of which will materially interfere
with the realization of the benefits provided thereunder, and all requisite
corporate action has been taken by the Servicer to make this Agreement valid and
binding upon the Servicer in accordance with its terms.
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<PAGE>
Section 10.2. Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Servicer.
Section 10.3. No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Servicer's charter or by-laws or any legal
restriction or any agreement or instrument to which the Servicer is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Servicer or its property is
subject, or impair the ability of the Company to realize on the Mortgage Loans,
impair the value of the Mortgage Loans, or impair the ability of the Company to
realize the full amount of any mortgage insurance benefits accruing pursuant to
this Agreement.
Section 10.4. Ability to Service. The Servicer is an approved servicer of
residential mortgage loans in accordance with the Fannie Mae, FHLMC and all
other applicable guidelines and procedures, with the facilities, procedures and
experienced personnel necessary for the sound servicing of mortgage loans of the
same type as the Mortgage Loans. The Servicer is duly qualified, licensed,
registered and otherwise authorized under all applicable federal, state and
municipal laws, regulations and by-laws, if applicable, and is in good standing
to enforce, originate, sell mortgage loans to, and service mortgage loans in the
jurisdictions wherein the Mortgaged Properties are located and no event has
occurred, including but not limited to a change in insurance coverage, which
would make the Servicer unable to comply with either eligibility requirements or
which would require notification to Fannie Mae or FHLMC.
Section 10.5. Ability to Perform. The Servicer does not believe, nor does
it have any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement.
Section 10.6. No Litigation Pending. There is no action, suit, proceeding
or investigation pending or threatened against the Servicer, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Servicer, or in any
material impairment of the right or ability of the Servicer to carry on its
business substantially as now conducted, or in any material liability on the
part of the Servicer, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Servicer contemplated herein, or which
would be likely to impair materially the ability of the Servicer to perform
under the terms of this Agreement.
Section 10.7. No Consent Required. No consent, approval, authorization or
order of any court, or governmental agency or regulatory authority, banking or
otherwise, or body is required for the execution, delivery and performance by
the Servicer of or compliance by
25
<PAGE>
the Servicer with this Agreement or the servicing of the Mortgage Loans as
evidenced by the consummation of the transactions contemplated by this
Agreement, or if required, such approval has been obtained prior to the Closing
Date.
Section 10.8. No Untrue Information. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
Section 10.9. Reasonable Servicing Fee. The Servicer acknowledges and
agrees that the Servicing Fee represents reasonable compensation for performing
such services and that the entire Servicing Fee shall be treated by the
Servicer, for accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
Section 10.10. Conflict of Interest. The Servicer agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Company, and without regard to the interests of the Servicer or its
affiliates.
Section 11. Default.
Section 11.1. Events of Default. The following shall constitute an Event of
Default under this Agreement on the part of the Servicer:
11.1.1 any failure by the Servicer to remit to the Company any payment
required to be made under the terms of this Agreement which continues
unremedied for a period of five (5) Business Days after the date upon which
written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the Company; or
11.1.2 the failure by the Servicer to duly observe or perform in any
material respect any other of the covenants or agreements on the part of
the Servicer set forth in this Agreement which continues unremedied for a
period of thirty (30) days (except that such number of days shall be
fifteen (15) in the case of a failure to pay any premium for any insurance
policy required to be maintained under this Agreement) after the date on
which written notice of such failure, requiring the same to be remedied,
shall have been given to the Servicer by the Company; or
11.1.3 a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a receiver or liquidator in any
insolvency, receivership, similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Servicer
and such decree or order shall have remained in force undischarged or
unstayed for a period of sixty (60) days; or
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<PAGE>
11.1.4 the Servicer shall consent to the appointment of a receiver
or liquidator in any insolvency, receivership, or similar proceedings of or
relating to the Servicer of or relating to all or substantially all of its
property; or
11.1.5 the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment of its
obligations; or
11.1.6 the Servicer loses temporarily or permanently its qualification
as an approved lender under the Fannie Mae and FHLMC guidelines and
procedures.
11.1.7 the Servicer, without the consent of the Company (other than as
permitted by Sections 8.3 or 8.5 hereof), attempts to assign this Agreement
or the servicing responsibilities hereunder or to delegate any substantial
part of its duties hereunder or any portion thereof; or
11.1.8 the Servicer fails to maintain its license to do business or
service residential mortgage loans in any jurisdiction where the Mortgaged
Properties are located and such failure results in a material adverse
effect on the Mortgage Loans, the servicing of the Mortgage Loans, or the
Company's rights with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not have
been remedied, in addition to whatsoever rights the Company may have at law or
equity to damages, including injunctive relief and specific performance, the
Company, by notice in writing to the Servicer, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Servicer of such written notice, all authority and
power of the Servicer under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the successor appointed
pursuant to Section 8.6. Upon written request from the Company, the Servicer
shall prepare, execute and deliver any and all documents and other instruments
reasonably requested by the Company, place in such successor's possession all
Mortgage Loan Files (to the extent not properly delivered to the Company by the
Servicer previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Servicer's sole expense. The Servicer
agrees to reasonably cooperate with the Company and such successor in effecting
the termination of the Servicer's responsibilities and rights hereunder,
including, without limitation, the transfer to such successor for administration
by it of all cash amounts which shall at the time be credited by the Servicer to
the Custodial Account or Escrow Account or thereafter received with respect to
the Mortgage Loans.
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<PAGE>
Section 11.2. Waiver of Defaults. The Company may waive any default by the
Servicer in the performance of its obligations hereunder and its consequences.
Upon any such waiver of a past default, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any subsequent
or other default or impair any right consequent thereon except to the extent
expressly so waived.
Section 12. Miscellaneous Provisions.
Section 12.1. Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or certified
mail, return receipt requested:
12.1.1 If to Company to:
Harris Preferred Capital Corporation
---------------------
---------------------
---------------------
12.1.2 If to the Servicer to:
Harris Trust and Savings Bank
---------------------
---------------------
---------------------
Section 12.2. Waivers. Either the Servicer or the Company may upon consent
of all parties, by written notice to the others:
12.2.1 waive compliance with any of the terms, conditions or covenants
required to be complied with by the others hereunder; and
12.2.2 waive or modify performance of any of the obligations of the
others hereunder.
The waiver by any party hereto of a breach of any provisions of this
Agreement shall not operate or be construed as a waiver of any other subsequent
breach.
Section 12.3. Entire Agreement; Amendment. This Agreement constitutes the
entire agreement between the parties with respect to servicing of the Mortgage
Loans. This Agreement may be amended and any provision hereof waived but only in
writing signed by the party against whom such enforcement is sought.
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<PAGE>
Section 12.4. Execution; Binding Effect. This Agreement may be executed in
one or more counterparts and by different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.3 and 8.4, this Agreement shall inure to the
benefit of and be binding upon the Servicer and the Company and their respective
successors and assigns.
Section 12.5. Headings. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
Section 12.6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois and the
obligations, rights and remedies hereunder shall be determined in accordance
with the substantive laws of the State of Illinois.
Each of the parties hereto irrevocably and unconditionally submits, for
itself and its property, to the non-exclusive jurisdiction of any court sitting
in Illinois, and any appellate court thereof, in any action or proceeding
arising out of or relating to this Agreement, or for recognition or enforcement
of any judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that any party may otherwise have to bring any action or proceeding
relating to this Agreement in the courts of any jurisdiction. Each of the
parties hereto irrevocably and unconditionally waives, to the fullest extent it
may legally and effectively do so, any objection they may now or hereafter have
to the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in the courts of Illinois. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court. The parties hereto hereby agree that the final judgment in any such
action or proceeding shall be conclusive and may be in force in any other
jurisdiction by suit on the judgment or in any other manner provided by law.
Section 12.7. Relationship of Parties. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Servicer shall be rendered by it
as a provider of services and not as a general purpose agent of the Company. The
Servicer shall have full control of all of its acts, doings, proceedings,
relating to or requisite in connection with the discharge of its duties and
responsibilities under this Agreement.
Section 12.8. Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
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<PAGE>
Section 12.9. Exhibits. The exhibits to this Agreement are hereby
incorporated and made a part hereon and are integral parts of this Agreement.
In Witness Whereof, the parties have executed this Agreement as of the date
first written above.
Harris Preferred Capital Corporation
By:
---------------------------------
Harris Trust and Savings Bank
By:
---------------------------------
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EXHIBIT 1
CUSTODIAL ACCOUNT CERTIFICATION
______________________, 1997
Harris Trust and Savings Bank hereby certified that it has established the
account described below as a Custodial Account pursuant to Section 2.4 of the
Servicing Agreement, dated as of _______________, 1997.
Title of Account: Harris Trust and Savings Bank, in trust for
[named Company], and various
Mortgagors
Address of office or branch of the Servicer at which the Account is maintained:
________________________________________________________________________________
________________________________________________________________________________
HARRIS TRUST AND SAVINGS BANK
By _______________________________________
Name:
Title:
<PAGE>
EXHIBIT 2
CUSTODIAL ACCOUNT LETTER AGREEMENT
__________________________, 1997
To:______________________________________ (the "Depository")
As Servicer under the Servicing Agreement dated as of ________________,
1997 (the "Agreement"), we hereby authorize and request you to establish an
account, as a Custodial Account pursuant to Section 2.4 of the Agreement, to be
designated as "Harris Trust and Savings Bank, in trust for [named Company] and
various Mortgagors." All deposits in the account shall be subject to withdrawal
therefrom by order signed by Harris Trust and Savings Bank. This letter is
submitted to you in duplicate. Please execute and return one original to us.
HARRIS TRUST AND SAVINGS BANK
By_________________________________________
Name:
Title:
The undersigned, as Depository, hereby certified that the above described
account has been established under Account Number ____________________________,
at the office of the Depository indicated above, and agrees to honor withdrawals
on such account as provided above.
DEPOSITORY
By_________________________________________
Name:
Title:
<PAGE>
EXHIBIT 3
ESCROW ACCOUNT CERTIFICATION
______________________, 1997
Harris Trust and Savings Bank hereby certified that it has established the
account described below as a Escrow Account pursuant to Section 2.6 of the
Servicing Agreement, dated as of _______________, 1997.
Title of Account: Harris Trust and Savings Bank, in trust for
[named Company], and various
Mortgagors
Account Number: ____________________________________________
Address of office or branch of the Servicer at which the Account is maintained:
_______________________________________________________________________________
_______________________________________________________________________________
HARRIS TRUST AND SAVINGS BANK
By_________________________________________
Name:
Title:
<PAGE>
EXHIBIT 4
ESCROW ACCOUNT LETTER AGREEMENT
__________________________, 1997
To: ___________________________________ (the "Depository")
As Servicer under the Servicing Agreement dated as of ____________, 1997
(the "Agreement"), we hereby authorize and request you to establish an account,
as an Escrow Account pursuant to Section 2.6 of the Agreement, to be designated
as "Harris Trust and Savings Bank, in trust for [named Company] and various
Mortgagors." All deposits in the account shall be subject to withdrawal
therefrom by order signed by Harris Trust and Savings Bank. This letter is
submitted to you in duplicate. Please execute and return one original to us.
HARRIS TRUST AND SAVINGS BANK
By_________________________________________
Name:
Title:
The undersigned, as Depository, hereby certified that the above described
account has been established under Account Number ____________________________,
at the office of the Depository indicated above, and agrees to honor withdrawals
on such account as provided above.
DEPOSITORY
By_________________________________________
Name:
Title:
<PAGE>
EXHIBIT 10(B)
Draft of October 31, 1997
Marked to Show Changes From
Draft of September 15, 1997
Chapman and Cutler
Draft of 10/31/97
================================================================================
Advisory Agreement
between
Harris Preferred Capital Corporation
and
Harris Trust and Savings Bank
__________________
___________________, 1997
__________________
================================================================================
r
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Article 1 Definitions..................................... 1
Section 1.1. Definitions.................................. 1
Article 2 Duties of the Advisor........................... 2
Article 3 Compensation of the Advisor..................... 4
Article 4 Expenses of the Advisor......................... 4
Article 5 Records......................................... 4
Article 6 REIT Qualification and Compliance............... 4
Article 7 Term: Termination............................... 5
Article 8 Other Activities of the Advisor................. 5
Article 9 Binding Effect: Assignment...................... 5
Article 10 Subcontracting.................................. 6
Article 11 Liability and Indemnity of the Advisor.......... 6
Article 12 Action upon Notice of Non-Renewal or Termination 7
Article 13 No Joint Venture or Partnership................. 7
Article 14 Notices......................................... 7
Article 15 Severability.................................... 8
Article 16 Governing Law................................... 8
Article 17 Amendments...................................... 9
Article 18 Headings........................................ 9
Signature Page..................................................... 10
</TABLE>
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<PAGE>
Advisory Agreement
Advisory Agreement (the "Agreement") entered into as of ______________,
1997 between Harris Preferred Capital Corporation, a Maryland corporation (the
"Company") and Harris Trust and Savings Bank, an Illinois banking corporation
(the "Advisor").
Whereas the Company intends to qualify as a "real estate investment trust"
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code");
And Whereas the Company desires to avail itself of the experience and
assistance of the Advisor and to have the Advisor undertake, on the Company's
behalf, the duties and responsibilities hereinafter set forth, subject to the
control and supervision of the Board of Directors of the Company (the "Board of
Directors") as provided for herein;
And Whereas the Advisor desires to render such services to the Company
subject to the control and supervision of the Board of Directors, on the terms
and conditions hereinafter set forth.
Now, Therefore, the parties hereto hereby agree as follows:
Article 1
Definitions
Section 1.1. Definitions. As used herein, the following terms shall have
the respective meanings set forth below:
"Advisor" has the meaning set forth in the forepart of this Agreement.
"Advisor Termination Date" means the date on which this Agreement
terminates.
"Agreement" means this Advisory Agreement, as amended, modified and
supplemented from time to time.
"Board of Directors" has the meaning set forth in the forepart of this
Agreement.
"Company" has the meaning set forth in the forepart of this Agreement.
"Independent Directors" means the members of the Board of Directors
who are not current officers or employees of the Company or current directors,
employees or officers of the Advisor or any affiliate of the Advisor.
<PAGE>
"Operating Expenses" for any period means all of the operating
expenses of the Company (with the exception of those expenses to be borne by the
Advisor in accordance with Article 4 hereof).
"Person" means and includes individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
limited liability companies, joint ventures, associations, consortia, companies,
trusts, banks, trust companies, land trusts, common laws trusts, business trusts
or other entities, governments and agencies and political subdivisions thereof.
"REIT" has the meaning set forth in the forepart of this Agreement.
Article 2
Duties of the Advisor
The Advisor shall consult with the Board of Directors and the officers of
the Company and shall, at the request of the Board of Directors and/or the
officers of the Company, furnish advice and recommendations with respect to all
aspects of the business and affairs of the Company. Subject to the control and
discretion and at the request of the Board of Directors, the Advisor shall:
(a) administer the day-to-day operations and affairs of the Company,
including, without limitation, the performance or supervision of the
functions described in this Article 2;
(b) monitor the credit quality of the real estate mortgage assets
held by the Company;
(c) advise the Company with respect to the acquisition, management,
financing and disposition of the Company's real estate mortgage assets;
(d) represent the Company in its day-to-day dealings with Persons
with whom the Company interacts, including, without limitation,
stockholders of the Company, the transfer agent of the Company,
consultants, accountants, attorneys, servicers of the Company's mortgage
loans, custodians, insurers and banks;
(e) establish and provide necessary services for the Company,
including executive, administrative, accounting, stockholder relations,
secretarial, recordkeeping, copying, telephone, mailing and distribution
facilities;
(f) maintain communications and relations with the stockholders of
the Company, including, but not limited to, responding to inquiries, proxy
solicitations, providing reports to stockholders and arranging and
coordinating all meetings of stockholders;
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<PAGE>
(g) monitor and supervise the performance of all parties who have
contracts to perform services for the Company, provided that the Advisor
shall have no duty to assume the obligations or guarantee the performance
of such parties under such contracts;
(h) arrange for the execution and delivery of such documents and
instruments by the officers of the Company as may be required in order to
perform the functions herein described and to take any other required
action contemplated by the terms of this Agreement;
(i) maintain proper books and records of the Company's affairs and
furnish or cause to be furnished to the Board of Directors such periodic
reports and accounting information as may be required from time to time by
the Board of Directors, including, but not limited to, quarterly reports of
all income, expenses and distributions of the Company;
(j) consult and work with legal counsel for the Company in
implementing Company decisions and undertaking measures consistent with all
pertinent federal, state, provincial and local laws and rules or
regulations of governmental or quasi-governmental agencies, including, but
not limited to, federal and state securities laws and tax laws, as it
relates to the Company's qualification as a REIT, and the regulations
promulgated under each of the foregoing;
(k) consult and work with accountants for the Company in connection
with the preparation of financial statements, annual reports and tax
returns;
(l) prepare and distribute, in consultation with the accountants for
the Company, annual reports to stockholders which will contain audited
financial statements;
(m) furnish reports to the Board of Directors and provide research,
economical and statistical data in connection with the Company's
investments;
(n) as reasonably requested by the Company, make reports to the
Company of its performance of the foregoing services and furnish advice and
recommendations with respect to other aspects of the business of the
Company; and
(o) take any other action necessary to allow the Company to continue
to qualify as a REIT for federal income tax purposes.
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<PAGE>
Article 3
Compensation of the Advisor
The Company shall pay to the Advisor, for services rendered by the Advisor
hereunder, an advisory fee equal to Twenty-Five Thousand Dollars ($25,000) per
year, payable in equal quarterly installments.
Article 4
Expenses of the Advisor
(a) Without regard to the compensation received pursuant to Article 3
hereof, the Advisor shall bear the following expenses:
(i) employment expenses of the personnel employed by the Advisor,
including, without limitation, salaries, wages, payroll taxes and the cost
of employee benefit plans; and
(ii) rent, telephone equipment, utilities, office furniture and
equipment and machinery and other office expenses of the Advisor incurred
in connection with the maintenance of any office facility of the Advisor.
(b) The Company shall reimburse the Advisor within 30 days of a written
request by the Advisor for any Operating Expenses paid or incurred by the
Advisor on behalf of the Company.
Article 5
Records
The Advisor shall maintain appropriate books of account and records
relating to services performed hereunder, and such books of account and records
shall be accessible for inspection by the Board of Directors and representatives
of the Company at all times.
Article 6
REIT Qualification and Compliance
The Advisor shall consult and work with the Company's legal counsel in
maintaining the Company's qualification as a REIT. Notwithstanding any other
provisions of this Agreement to the contrary, the Advisor shall refrain from any
action which, in its reasonable judgment or in the judgment of the Board of
Directors (of which the Advisor has received written notice), may
adversely affect the qualification of the Company as a REIT or
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<PAGE>
which would violate any laws, rule or regulation of any governmental body or
agency having jurisdiction over the Company or its securities, or which would
otherwise not be permitted by the articles of incorporation or by-laws of the
Company. Furthermore, the Advisor shall take any action which, in its judgment
or the judgment of the Board of Directors (of which the Advisor has received
written notice), may be necessary to maintain the qualification of the Company
as a REIT or prevent the violation of any law or regulation of any governmental
body or agency having jurisdiction over the Company or its securities.
Article 7
Term: Termination
This Agreement shall be in full force and effect for a term beginning on
the date hereof with an initial term of one year, and may be renewed for
additional one-year periods at the election of the Company. Notwithstanding the
foregoing, at any time after the initial term, the Company may terminate this
Agreement at any time upon 60 days' prior written notice; provided, however,
that as long as any shares of the Company's _____% Noncumulative Exchangeable
Preferred Stock, Series A, par value $.01 per share, remain outstanding, any
decision by the Company to renew, terminate or modify this Agreement must be
approved by a majority of the Board of Directors, as well as by a majority of
the Independent Directors.
Article 8
Other Activities of the Advisor
(a) Nothing herein contained shall prevent the Advisor, an affiliate of
the Advisor or an officer, director, employee or stockholder of the Advisor from
engaging in any activity, including, without limitation, originating, purchasing
and managing real estate mortgage assets, rendering of services and investment
advice with respect to real estate investment opportunities to any other Person
(including other REITs) and managing other investments (including the
investments of the Advisor and its affiliates).
(b) Officers, directors, employees, stockholders and agents of the Advisor
or of any affiliate of the Advisor may serve as officers, directors, employee or
agents of the Company, but shall receive no compensation (other than
reimbursement for expenses) from the Company for such service.
Article 9
Binding Effect: Assignment
This Agreement shall inure to the benefit of and shall be binding upon the
parties hereto and their respective successors and assigns. Neither party may
assign this Agreement
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<PAGE>
or any of its respective rights hereunder (other than an assignment to a
successor organization which acquires substantially all of the property of such
party or, in the case of the Advisor, to an affiliate of the Advisor) without
the prior written consent of the other party to this Agreement.
Article 10
Subcontracting
The Advisor may at any time subcontract all or a portion of its obligations
under this Agreement to one or more affiliates of the Advisor that are involved
in the business of managing real estate mortgage assets without the consent of
the Company. If no affiliate of the Advisor is engaged in the business of
managing real estate 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 this Agreement
to unrelated third parties. Notwithstanding the foregoing, the Advisor will
not, in connection with subcontracting any of its obligations under this
Agreement, be discharged or relieved in any respect from its obligations under
this Agreement.
Article 11
Liability and Indemnity of the Advisor
The Advisor assumes no responsibilities under this Agreement other than to
perform the services called for hereunder in good faith. Neither the Advisor
nor any of its affiliates, stockholders, directors, officers or employees will
have any liability to the Company, stockholders of the Company or others except
by reason of acts or omissions constituting gross negligence or willful breach
of any of the Advisor's material obligations under this Agreement. The Company
shall indemnify and reimburse (if necessary) the Advisor, its stockholders,
directors, officers, employees and agents for any and all expenses (including,
without limitation, attorneys' fees and expenses), losses, damages, liabilities,
demands and charges of any nature whatsoever in respect of or arising from any
acts or omissions by the Advisor pursuant to this Agreement, provided that the
conduct against which the claim is made was determined by such Person, in good
faith, to be in the best interests of the Company and was not the result of
gross negligence by such Person or willful breach of any of such Person's
material obligations by such Person. The Advisor agrees that any such
indemnification is recoverable only from the assets of the Company and not from
the stockholders.
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<PAGE>
Article 12
Action upon Notice of Non-Renewal or Termination
Forthwith upon giving of notice of non-renewal of this Agreement by the
Company or of termination of this Agreement by the Company, the Advisor shall
not be entitled to compensation after the Advisor Termination Date for further
services under this Agreement, but shall be paid all compensation accruing to
the Advisor Termination Date and shall be reimbursed for all expenses of the
Company paid or incurred by the Advisor as of the Advisor Termination Date which
are reimbursable by the Company under this Agreement. The Advisor shall promptly
after the Advisor Termination Date:
(a) deliver to the Company all assets and documents of the Company
then in the custody of the Advisor; and
(b) cooperate with the Company and take all reasonable steps
requested to assist the Board of Directors in making an orderly transfer of
the administrative functions of the Company.
Article 13
No Joint Venture or Partnership
Nothing in this Agreement shall be deemed to create a joint venture or
partnership between the parties, whether for purposes of taxation or otherwise.
Furthermore, nothing in this Agreement conveys to, or otherwise grants, the
Advisor the authority to conclude contracts in the name of the Company.
Article 14
Notices
Unless expressly provided otherwise herein, all notices, requests, demands
and other communications required or permitted under this Agreement shall be in
writing and shall be made by hand delivery, certified mail, overnight courier
service, telex or telecopier. Any notice shall be duly addressed to the parties
as follows:
(a) If to the Company: Harris Preferred Capital Corporation
_______________________________
_______________________________
(b) If to the Advisor: Harris Trust and Savings Bank
_______________________________
_______________________________
_______________________________
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<PAGE>
Either party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Article 14 for the giving of notice.
Article 15
Severability
If any term or provision of this Agreement or the application thereof with
respect to any Person or circumstance shall, to any extent, be invalid or
unenforceable (other than Article 13), the remainder of this Agreement, or the
application of that term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement shall be valid and be
enforced to the fullest extent permitted by law.
Article 16
Governing Law
Each of the parties hereto irrevocably and unconditionally submits, for
itself and its property, to the non-exclusive jurisdiction of any court sitting
in Illinois, and any appellate court thereof, in any action or proceeding
arising out of or relating to this Agreement, or for recognition or enforcement
of any judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that any party may otherwise have to bring any action or proceeding
relating to this Agreement in the courts of any jurisdiction. Each of the
parties hereto irrevocably and unconditionally waives, to the fullest extent it
may legally and effectively do so, any objection they may now or hereafter have
to the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in the courts of Illinois. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court. The parties hereto hereby agree that the final judgment in any such
action or proceeding shall be conclusive and may be in force in any other
jurisdiction by suit on the judgment or in any other manner provided by law.
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<PAGE>
Article 17
Amendments
This Agreement shall not be amended, changed, modified, terminated or
discharged in whole or in part except by an instrument in writing signed by both
parties hereto or their respective successors or assigns, or otherwise as
provided herein.
Article 18
Headings
The article headings herein have been inserted for convenience of reference
only and shall not be construed to affect the meaning, construction or effect of
this Agreement.
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<PAGE>
In Witness Whereof, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the date first
written above.
Harris Preferred Capital Corporation
By
_________________________________
Harris Trust and Savings Bank
By
_________________________________
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<PAGE>
EXHIBIT 10(C)
Draft of October 31, 1997
Marked to Show Changes From
Draft of September 15, 1997
Chapman and Cutler
Draft of 10/31/97
================================================================================
Bank Loan Agreement
Dated as of ______________, 1997
Between
Harris Trust and Savings Bank
as Borrower,
and
Harris Preferred Capital Corporation
as Lender
================================================================================
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Section Page
<S> <C>
Parties.................................................................... 1
Article I Definitions and Accounting Terms......................... 1
Section 1.01. Certain Defined Terms.................................. 1
Section 1.02. Computation of Time Periods............................ 5
Section 1.03. Accounting Terms....................................... 5
Article II Amount and Terms of the Loans............................ 5
Section 2.01. The Loans.............................................. 5
Section 2.02. Use of Proceeds........................................ 6
Section 2.03. Repayment of Principal................................. 6
Section 2.04. Prepayment............................................. 6
Section 2.05. Interest............................................... 7
Section 2.06. Payments and Computations.............................. 7
Section 2.07. Security for the Loan.................................. 7
Section 2.08. Late Charge............................................ 8
Section 2.09. Taxes.................................................. 8
Section 2.10. Loan to Principal Ratio................................ 8
Article III Conditions of Lending.................................... 9
Section 3.01. Conditions Precedent to Closing........................ 9
Article IV Representations and Warrantees........................... 10
Section 4.01. Representations and Warranties of Borrower............. 10
Article V Covenants of Borrower.................................... 12
Section 5.01. Affirmative Covenants.................................. 12
Section 5.02. Negative Covenants..................................... 13
Section 5.03. Reporting Requirements................................. 13
Article VI Events of Default......................................... 14
Article VII Miscellaneous............................................ 16
Section 7.01. Amendments, Etc........................................ 16
Section 7.02. Notices, Etc........................................... 16
Section 7.03. No Waiver; Remedies.................................... 16
</TABLE>
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<TABLE>
<S> <C>
Section 7.04. Costs, Expenses, Indemnity............................. 16
Section 7.05. Binding Effect......................................... 18
Section 7.06. Non Recourse........................................... 18
Section 7.07. Execution in Counterparts.............................. 18
Section 7.08. Jurisdiction, Etc...................................... 18
Section 7.09. Governing Law.......................................... 19
Section 7.10. Waiver of Jury Trial................................... 19
Section 7.11. Compliance with Usury Laws............................. 19
Section 7.12. Exhibits............................................... 19
Section 7.13. Further Assurances..................................... 19
</TABLE>
Exhibits
Exhibit A The Loan
Exhibit B Form Note
Exhibit C Mortgage Loans
Exhibit D Form of Mortgage Loan Assignment Agreement
Exhibit E Mortgage Loan Balances
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<PAGE>
Bank Loan Agreement
Bank Loan Agreement (this "Agreement") dated as of ____________, 1997
between Harris Trust and Savings Bank, an Illinois banking corporation
("Borrower"), and Harris Preferred Capital Corporation, a Maryland corporation
(the "Lender").
All capitalized terms used herein shall have the respective meanings set
forth in Section 1.01 hereof.
Witnesseth:
Whereas, Borrower has requested that Lender lend to Borrower an aggregate
amount of $________________.
Whereas, Lender has indicated its willingness to lend such amount on the
terms and conditions of this Agreement.
Now, Therefore, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto hereby agree as
follows:
Article I
Definitions and Accounting Terms
Section 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, controls, is controlled by or is under common control with
such Person or is a director or officer of such Person; provided, however,
that the Company shall not be considered an Affiliate of any Person. For
purposes of this definition, the term "control" (including the terms
"controlling," "controlled by" and "under common control with") of a
Person means the possession, direct or indirect, of the power to vote 10%
or more of the Voting Stock of such Person or to direct or cause the
direction of the management and policies of such Person, whether through
the ownership of Voting Stock, by contract or otherwise; provided, however,
that the Company should not be considered an Affiliate of any Person.
"Agreement" has the meaning specified in the first paragraph of this
Agreement.
"Borrower" has the meaning specified in the first paragraph of this
Agreement.
<PAGE>
"Business Day" means a day of the year on which banks are not required
or authorized by law to close in Illinois and New York.
"Collateral" means all property referred to as "Collateral" in the
Collateral Documents and all other property that is or is intended to be
subject to any Lien in favor of Lender.
"Collateral Documents" means the Mortgage Loan Assignment Agreement,
and any other agreement that creates or purports to create a Lien in favor
of Lender to secure the Loan and, collectively, all such agreements for the
Loan.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given
or time elapse or both.
"Environmental Action" means any action, suit, demand, demand letter,
claim, notice of noncompliance or violation, notice of liability or
potential liability, investigation, proceeding, consent order or consent
agreement relating in any way to any Environmental Law, any Environmental
Permit or Hazardous Material or arising from alleged injury or threat to
health, safety or the environment, including, without limitation, (a) by
any governmental or regulatory authority for enforcement, cleanup, removal,
response, remedial or other actions or damages and (b) by any governmental
or regulatory authority or third party for damages, contribution,
indemnification, cost, recovery, compensation or injunctive relief.
"Environmental Law" means any federal, state, local or foreign
statute, law, ordinance, rule, regulation, code, order, writ, judgment,
injunction, decree or judicial or agency interpretation, policy or guidance
relating to pollution or protection of the environment, health, safety or
natural resources, including, without limitation, those relating to the
use, handling, transportation, treatment, storage, disposal, release or
discharge of Hazardous Materials.
"Environmental Permit" means any permit, approval, identification
number, license or other authorization required under any Environmental
Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"Events of Default" has the meaning specified in Section 6.01.
"Excess Loan Amount" has the meaning specified in Section 2.10.
"Fiscal Year" means a fiscal year of Borrower ending on December 31 in
any calendar year or such other fiscal year as Borrower may select from
time to time in accordance with the terms of this Agreement.
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<PAGE>
"GAAP" means generally accepted accounting principles consistently
applied and consistent with those applied in the preparation of the
financial statements referred to in Section 5.03.
"Hazardous Materials" means (a) refined petroleum products, by-
products or breakdown products, radioactive materials, asbestos-containing
materials, polychlorinated biphenyls and radon gas and (b) any other
chemicals, materials or substances designated, classified or regulated as
hazardous or toxic or as a pollutant or contaminant under any Environmental
Law.
"Indemnified Party" has the meaning specified in Section 7.04(b).
"Interest Payment Date" means, with respect to the Loan and with
respect to each Interest Period, the fifteenth (15th) day of the calendar
month immediately following such Interest Period; provided, however, that
if such Interest Payment Date is not a Business Day, such Interest Payment
Date shall be the immediately succeeding Business Day.
"Interest Period" means each calendar month or portion thereof during
the term of the Loan or, in the case of the initial Interest Period, the
Closing Date through the last day of the calendar month in which the
Closing Date occurs.
"Interest Rate" has the meaning specified in Section 2.05(b).
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated thereunder.
"Laws" means all present and future applicable laws, statutes, codes,
ordinances, orders, judgments, decrees, injunctions, rules, regulations,
determinations, awards and court orders of any federal, state, local or
foreign government, governmental authority, regulatory agency or authority.
"Lender" has the meaning specified in the first paragraph of this
Agreement.
"Lien" means any lien, security interest, mortgage, deed of trust,
priority, negative pledge, charge, conditional sale, title retention
agreement, financial lease or other encumbrance or similar right of others,
or any agreement to give any of the foregoing.
"Loan" means the loan in the original principal amount as set forth on
Exhibit A to be made by Lender to Borrower pursuant to this Agreement
evidenced by the Note and secured by the Mortgage Loans (including the
interest of the Borrower in the real property securing such Mortgage Loans)
as more particularly
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<PAGE>
described in the Mortgage Loan Assignment Agreement and the other Loan
Documents.
"Loan Documents" means (i) this Agreement, (ii) the Note, (iii) the
Mortgage Loan Assignment Agreement, (iv) the Collateral Documents, (v) the
Power of Attorney dated the date hereof by Borrower appointing Lender as
its attorney-in-fact and (vi) any other written agreement, document or
instrument evidencing, securing or otherwise related to the Loan, and,
collectively, means all of the Loan Documents, in each case as amended or
otherwise modified from time to time.
"Margin Stock" has the meaning specified in Regulation U.
"Material Adverse Change" means a change which results in a Material
Adverse Effect.
"Material Adverse Effect" means a material adverse effect on (a) the
rights and remedies of Lender under any Loan Document or (b) the ability of
Borrower to perform its obligations under any Loan Document to which it is
or is to be a party.
"Maturity Date" means the date set forth on Exhibit A, or such earlier
date on which the final payment of principal of the Note becomes due and
payable whether by declaration, acceleration, or otherwise.
"Mortgage Loans" means the Mortgage Loans set forth on Exhibit C
hereof.
"Mortgage Loan Assignment Agreement" means that certain mortgage loan
assignment agreement substantially in the form of Exhibit D, dated as of
the date hereof, executed and delivered by Borrower assigning the Mortgage
Loans listed on Exhibit C, including Borrower's interest in the real
property securing those Mortgage Loans, to Lender as security for the Loan
made to Borrower, as the same may be amended, replaced, restated,
supplemented or otherwise modified from time to time.
"Mortgage Loan File" means, with respect to each Mortgage Loan, the
loan documents pertaining to such Mortgage Loan and any appraisal,
architectural and engineering report, title report, survey, insurance
policy and other information and materials with respect to the real
property securing such Mortgage Loan.
"Note" means a promissory note of Borrower payable to the order of
Lender, in substantially the form attached hereto as Exhibit B evidencing
the indebtedness of Borrower to Lender resulting from the Loan made by
Lender, as the same may be amended, replaced, restated, supplemented or
otherwise modified from time to time.
"Person" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated
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<PAGE>
association, joint venture or other entity, or a government or any
political subdivision or agency thereof.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Subsidiary" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which)
more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the Board of Directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency), (b) the interest in the capital or
profits of such partnership, joint venture or limited liability company or
(c) the beneficial interest in such trust or estate is at the time directly
or indirectly owned or controlled by such Person, by such Person and one or
more of its other Subsidiaries or by one or more of such Person's other
Subsidiaries; provided, however, that the Company shall not be considered a
Subsidiary of any Person.
"Taxes" has the meaning specified in Section 2.09(a).
"Voting Stock" means the share capital or capital stock issued by a
corporation, or equivalent interests in any other Person, the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for
the election of directors (or persons performing similar functions) of such
Person, even if the right so to vote has been suspended by the happening of
such a contingency.
Section 1.02. Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding."
Section 1.03. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP.
Article II
AMOUNT AND TERMS OF THE LOANS
Section 2.01. The Loans. (a) Subject to the terms and conditions set
forth in this Agreement, Lender hereby agrees to make the Loan to Borrower on
the Closing Date, which Loan is in the original principal amount set forth on
Exhibit A and shall mature on the Maturity Date as set forth on Exhibit A.
Borrower hereby agrees to accept the Loan on the Closing Date, subject to and
upon the terms and conditions set forth in this Agreement.
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<PAGE>
(b) The Loan shall be recourse only to the Mortgage Loans securing the
Loan as provided in Section 7.06.
(c) Borrower may request and receive only one borrowing hereunder with
respect to the Loan and any amount borrowed and repaid or prepaid hereunder in
respect of the Loan may not be reborrowed.
(d) Borrower's obligation to pay the principal of and interest on the Loan
shall be evidenced by the Note, duly executed and delivered by Borrower on the
Closing Date in the original principal amount of the Loan and shall mature on
the Maturity Date. The Note shall be payable as to principal, interest and all
other amounts due under the Loan Documents, as specified in this Agreement, the
Note, and the other Loan Documents.
Section 2.02. Use of Proceeds. Borrower shall use the proceeds of the Loan
disbursed to it pursuant to Section 2.01 for general banking purposes.
Section 2.03. Repayment of Principal. Subject to the provisions of
Section 2.04, Borrower shall repay to Lender the outstanding principal amount on
the Loan in full on the Maturity Date.
Section 2.04. Prepayment.
(a) Voluntary. Other than the mandatory prepayments of principal in
accordance with Section 2.04(b), Borrower shall not have the right to prepay (in
whole or in part) the Loan.
(b) Mandatory. (A) In the event of a payment of all or any portion of
principal on any Mortgage Loan (both scheduled payments or unscheduled mandatory
or voluntary prepayments), Borrower shall prepay, on the Interest Payment Date
immediately following the date of such repayment or prepayment, without premium,
a portion of the principal balance of the Loan in an amount equal to the amount
repaid or prepaid, multiplied by eighty percent (80%).
(B) Upon an event of default under any Mortgage Loan, Borrower shall
prepay, without premium, a portion of the principal balance of the Loan in an
amount equal to the outstanding principal balance of such defaulted Mortgage
Loan, multiplied by eighty percent (80%).
(C) Borrower shall prepay, without premium, the Excess Loan Amount (if
any), in accordance with Section 1(e) of the Mortgage Loan Assignment Agreement.
(D) On or prior to _____________, 1997, Borrower shall prepay, without
premium, the Loan in an amount equal to the amount by which the outstanding
principal balance of the Loan, as of the Closing Date, exceeded eighty percent
(80%) of the
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<PAGE>
aggregate outstanding principal balances of the Mortgage Loans securing the Loan
as of the Closing Date.
Section 2.05. Interest.
(a) Scheduled Interest. Subject to the provisions of Section 2.05(c),
Borrower shall pay interest at the Interest Rate on the unpaid principal amount
of the Loan from the Closing Date until payment in full of the principal amount
of the Loan. Except as expressly provided herein, all interest on the Loan shall
be paid in arrears on the Interest Payment Date for the relevant Interest
Period.
(b) Interest Rate. The interest rate applicable to the Loan from the
Closing Date and for each Interest Period thereafter shall be a rate per annum
(the "Interest Rate") equal to the lesser of (i) the maximum non-usurious rate
permitted by applicable Law and (ii) the rate set forth opposite the Loan on
Exhibit A hereto.
(c) Default Interest. If Borrower shall default in any payment of principal
or interest in respect of the Loan, or any other amount owed by Borrower under
this Agreement, Borrower shall pay interest on the defaulted amount, payable in
arrears on each Interest Payment Date and on demand, at a rate per annum equal
at all times to the lesser of (x) the maximum non-usurious rate permitted by
applicable Law or (y) three percent (3%) per annum above the Interest Rate until
such defaulted amount has been paid by Borrower, together with interest thereon
at the Default Rate. Payment or acceptance of the increased rate as provided in
this Section is not a permitted alternative for timely payment and shall not
constitute a waiver of a Default or an Event of Default or an amendment to this
Agreement or any other Loan Document and shall not otherwise prejudice or limit
any rights or remedies of Lender.
Section 2.06. Payments and Computations. (a) Borrower shall make each
payment hereunder and under the Note, irrespective of any right of counterclaim
or set-off, not later than 11:00 a.m. (Eastern Standard time) on each Interest
Payment Date in United States dollars to Lender at an account or accounts Lender
may designate from time to time in same day funds.
(b) All computations of interest shall be made by Lender (or any Person
designated by Lender) on the basis of a year of 360 days consisting of twelve
(12) months of thirty (30) days each. Each determination by Lender (or any
Person designated by Lender) of interest hereunder shall be conclusive and
binding for all purposes, absent manifest error.
(c) Whenever any payment hereunder or under the Note shall be stated to be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
Section 2.07. Security for the Loan. The Loan shall be secured by (a) the
Mortgage Loans including the Borrower's interest in the real property securing
such Mortgage Loans
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as more particularly described in the Mortgage Loan Assignment Agreement, (b)
the other Collateral Documents and (c) the security interests and Liens granted
in this Agreement and in the other Loan Documents.
Section 2.08. Late Charge. Subject to Section 7.11, in the event that any
installment of interest or principal with respect to the Loan shall become
overdue for a period in excess of five (5) days, a "late charge" in an amount
equal to five percent (5%) of the amount so overdue may be charged to Borrower
by Lender for the purpose of defraying the expenses incident to handling such
delinquent payments. Subject to Section 7.11, such late charge shall be in
addition to, and not in lieu of, any other remedy Lender may have and is in
addition to Lender's right to collect reasonable fees and charges of any agents
or attorneys which Lender may employ in connection with any Default.
Section 2.09. Taxes. (a) Any and all payments by Borrower under the Note
shall be made in accordance with Section 2.06 and the terms of the Note, free
and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings imposed by the federal
government, any state government or any political subdivision or taxing
authority thereof or therein, and all liabilities with respect thereto (all such
taxes, levies, imposts, deductions, charges, withholdings and liabilities in
respect of payments hereunder or under the Note being hereinafter referred to as
"Taxes"). If Borrower shall be required by law to deduct any Taxes from or in
respect of any sum payable under the Note to Lender (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.09) Lender receives an amount equal to the sum it would have received had no
such deductions been made, (ii) Borrower shall make such deductions and (iii)
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
(b) Borrower shall indemnify Lender for and hold it harmless against the
full amount of Taxes, and for the full amount of taxes of any kind imposed by
any jurisdiction on amounts payable under this Section 2.09, imposed on or paid
by Lender and any liability (including penalties, additions to tax, interest and
expenses) arising therefrom or with respect thereto. This indemnification shall
be made within thirty (30) days from the date Lender makes written demand
therefor.
(c) Within thirty (30) days after the date of any payment of Taxes,
Borrower shall furnish to Lender, at its address referred to in Section 7.02,
the original or a certified copy of a receipt evidencing such payment.
Section 2.10. Loan to Principal Ratio. On January 31 and July 31 of each
year in which any portion of the Loan is outstanding, Lender may determine with
respect to the Loan the ratio, expressed as a percentage, the numerator of which
is the amount of the outstanding principal balance of the Loan as of such
determination date and the denominator of which is the aggregate outstanding
principal balances of the Mortgage Loans securing the Loan as of such
determination date. In the event the ratio with respect to the
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Loan exceeds eighty percent (80%), Lender may determine the amount by which the
outstanding principal balance of the Loan as of the determination date exceeds
eighty percent (80%) of the aggregate outstanding principal balances of the
Mortgage Loans securing the Loan as of the determination date (the "Excess Loan
Amount") and Borrower shall prepay such amount in accordance with Section
2.04(b).
ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Closing. The obligations of Lender
under this Agreement, including the obligation to make the Loan hereunder, are
subject to the fulfillment by Borrower of the following conditions precedent no
later than the Closing Date:
(a) Lender shall have completed a due diligence investigation of
Borrower and the Mortgage Loans and determined, in its sole discretion, but
without limitation of Borrower's representations and warranties hereunder,
that Borrower and the Mortgage Loans meet Lender's underwriting standards,
which due diligence investigation may include, without limitation, review
of the Mortgage Loan File for each Mortgage Loan.
(b) Lender shall have received the following, each in form and
substance satisfactory to Lender (unless otherwise specified):
(i) The Note to the order of Lender, duly executed by
Borrower,
(ii) The Mortgage Loan Assignment Agreement duly executed by
Borrower sufficient to grant Lender a valid security interest in the
Mortgage Loans;
(iii) An opinion of Chapman and Cutler, counsel for Borrower,
as to the enforceability of this Agreement and the Loan Documents,
subject to customary conditions and limitations and otherwise in form
and substance reasonably satisfactory to Lender;
(iv) Certified copies of the resolutions of the Board of
Directors of Borrower approving and authorizing the execution and
delivery and performance of all Loan Documents required to be executed
and delivered by Borrower with respect to this Agreement and the other
Loan Documents;
(v) A copy of the organizational documents of Borrower
together with each amendment thereto, and, where applicable, certified
by the Illinois Commissioner of Banks and Trust Companies as being a
true and correct copy thereof;
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(vi) A Good Standing Certificate in respect of Borrower issued by
the Illinois Commissioner of Banks and Trust Companies dated
reasonably near to the Closing Date; and
(vii) A certificate of the Secretary or an Assistant Secretary of
Borrower certifying the names and true signatures of the officers of
Borrower authorized to sign this Agreement and each other Loan
Document to which Borrower is or is to be a party and the other
documents to be delivered hereunder and thereunder.
(c) The representations and warranties of Borrower contained in each
Loan Document shall be true and correct on and as of the Closing Date,
before and after giving effect to the making of the Loan by Lender and to
the application of the proceeds therefrom, as though made on and as of such
date.
(d) No event shall have occurred and be continuing, or would result
from the making of the Loan by Lender or from the application of the
proceeds therefrom, that constitutes a Default.
Article IV
Representations and Warranties
Section 4.01. Representations and Warrant of Borrower. Borrower
represents and warrants as follows:
(a) Borrower (i) is a bank duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, (ii)
is duly qualified and in good standing in each other jurisdiction in which
the conduct of its business requires it to so qualify or be licensed except
where the failure to so qualify or be licensed would not have a Material
Adverse Effect and (iii) has all requisite power and authority (including,
without limitation, all governmental licenses, permits and other approvals)
to own the Mortgage Loans and to carry on its business as now conducted and
as proposed to be conducted.
(b) The execution, delivery and performance by Borrower of this
Agreement and each other Loan Document to which it is or is to be a party,
and the consummation of the transactions contemplated hereby, are within
Borrower's corporate powers, have been duly authorized by all necessary
corporate action, and do not (i) contravene Borrower's charter or by-laws,
(ii) violate any applicable Law or governmental regulation or permit
applicable to Borrower, (iii) conflict with or result in the breach of, or
constitute a default under, any contract, loan agreement, indenture,
mortgage, deed of trust, lease or other instrument binding on or affecting
Borrower, or (iv) except for the Liens created under the Loan Documents,
result in or require the creation or imposition of any Lien upon or with
respect to any of the properties of Borrower. Borrower is not in violation
of any such law, rule,
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regulation, order, writ, judgment, injunction, decree, determination or
award or in breach of any such contract, loan agreement, indenture,
mortgage, deed of trust, lease or other instrument, the violation or breach
of which is reasonably likely to have a Material Adverse Effect.
(c) No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body or any
other third party is required for (i) the due execution, delivery,
recordation, filing or performance by Borrower of this Agreement or any
other Loan Document to which it is or is to be a party, or for the
consummation of the transactions contemplated hereby, (ii) the grant by
Borrower of the Liens granted by it pursuant to the Collateral Documents,
(iii) the perfection or maintenance of the Liens created by the Collateral
Documents (including the first priority nature thereof), or (iv) the
exercise by Lender of its rights under the Loan Documents or the remedies
in respect of the Collateral pursuant to the Collateral Documents.
(d) This Agreement and each other Loan Document has been duly
executed and delivered by Borrower. This Agreement and each other Loan
Document to which Borrower is a party is the legal, valid and binding
obligation of Borrower, enforceable against Borrower in accordance with its
terms except as enforcement may, be limited by bankruptcy, insolvency or
other similar laws affecting the rights of creditors generally and by
principals of equity.
(e) There is no action, suit, investigation, litigation or
proceeding affecting Borrower or any of its Subsidiaries, including any
Environmental Action, pending or threatened before any court, governmental
agency or arbitrator that (i) would be reasonably likely to have a Material
Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Agreement or any other Loan Document or the
consummation of the transactions contemplated hereby.
(h) No proceeds of the Loan will be used to acquire any equity
security of a class that is registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
(i) Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying Margin Stock, and no proceeds of the
Loan will be used to purchase or carry any Margin Stock or to extend credit
to others for the purpose of purchasing or carrying any Margin Stock.
(j) Borrower is not (i) an "investment company" or a company
"controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended, (ii) a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of either a
"holding company" or a "subsidiary company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended, or (iii) subject to
any other Law that purports to restrict or regulate its ability to borrow
money.
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(k) Borrower and each of its Subsidiaries and Affiliates has filed,
has caused to be filed or has been included in all material tax returns
(federal, state, local and foreign) required to be filed and has paid all
taxes shown thereon to be due, together with applicable interest and
penalties.
(l) No proceeds of the Loan will be used to acquire any security in
any transaction which is subject to Sections 13 and 14 of the Securities
Exchange Act of 1934, as amended.
(m) Borrower (i) is the sole owner of the Mortgage Loans and such
ownership is free and clear of any lien, security interest or other
encumbrance, (ii) has not granted, and will not grant, any participation or
other interest or assignment, other option or rights to the Mortgage Loans,
other than pursuant to this Agreement and the other Loan Documents, and
(iii) has not pledged, collaterally assigned or otherwise hypothecated any
interest therein, and will at no time do so or agree to do so, other than
pursuant to this Agreement and the other Loan Documents.
(n) Attached hereto as Exhibit C is a complete list of all Mortgage
Loans, duly executed originals of which have previously been delivered to
______, as custodian for Lender, and (i) the Mortgage Loans have not been
amended or modified and are in full force and effect, (ii) to the knowledge
of Borrower, there has not occurred an event which, if uncured or
uncorrected, constitutes or would constitute, with the giving of notice,
passage of time or both, a material default by the mortgagor under any such
Mortgage Loan, (iii) there has not occurred an event which, if uncured or
uncorrected, constitutes or would constitute, with the giving of notice,
passage of time or both, a material default by the Borrower under any such
Mortgage Loan, and (iv) there are no provisions in the Mortgage Loans
restricting the assignability of the lender's rights thereunder.
Article V
Covenants of Borrower
Section 5.01. Affirmative Covenants. So long as any portion of the Loan
shall remain unpaid, Borrower will:
(a) Payment of Taxes, Etc. Pay and discharge, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges or
levies imposed upon it or upon its property and (ii) all lawful claims
that, if unpaid, might by law become a Lien upon any of its property
provided, however, that Borrower shall not be required to pay or discharge
any such tax, assessment, charge or claim that is being contested in good
faith and by proper proceedings and as to which appropriate reserves are
being maintained, unless and until any Lien resulting therefrom attaches to
its property and becomes enforceable against its other creditors;
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(b) Preservation of Existence, Etc. Preserve and maintain its
existence, legal structure, legal name, rights (charter and statutory),
permits, licenses, approvals, privileges and franchises; provided, however,
that Borrower shall not be required to preserve any legal name, right,
permit, license, approval, privilege or franchise if the Board of Directors
of Borrower shall determine that the preservation thereof is no longer
desirable in the conduct of the business of Borrower, as the case may be,
and that the loss thereof is not disadvantageous in any material respect to
Borrower or Lender;
(c) Keeping of Books. Keep proper books of record and account with
regard to the Mortgage Loans, in which full and correct entries shall be
made of all financial transactions and the assets and business of Borrower
in accordance with generally accepted accounting principles in effect from
time to time;
(d) Performance by Borrower. Observe, perform and satisfy, in a
timely manner, all the terms, provisions, covenants and conditions of, and
pay when due all costs, fees and expenses to the extent required under the
Loan Documents and delivered by, or applicable to Borrower; and
(e) Assistance. Render any assistance that Lender may reasonably
request to perfect Lender's security interest in, and enforce Lender's
rights under, any Mortgage Loan or to otherwise enable Lender to qualify as
a real estate investment trust under the Internal Revenue Code.
Section 5.02. Negative Covenants. So long as any portion of the Loan
shall remain unpaid, Borrower will not, at any time:
(a) Diminish Value of Mortgage Loans. Take any affirmative action,
or expressly consent to any action which would have the effect of impairing
or diminishing the value of the Mortgage Loans or the priority of the Liens
or security interest in the collateral securing such Mortgage Loans;
(b) Sale of Mortgage Loans. Sell or enter into an agreement to sell
all or a portion of the Mortgage Loans or interest therein, other than
pursuant to the Loan Documents, or release any borrower or guarantor or any
portion of the collateral, except as expressly provided in the Mortgage
Loans, or pledge, collaterally assign or otherwise hypothecate any interest
in the Mortgage Loan, other than pursuant to the Loan Documents;
(c) Change in Nature of Business. Make any material change in the
nature of its business as carried on at the date hereof;
(d) ERISA. Engage in any transaction which would cause any
obligation, or action taken or to be taken, hereunder (or the exercise by
Lender of any of its rights under this Agreement and the Loan Documents) to
be a nonexempt (under a statutory or administrative class exemption)
prohibited transaction under ERISA; or
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(e) Domicile. Take any action to change its place of incorporation,
residence or domicile (other than with the prior written consent of
Lender).
Section 5.03. Reporting Requirements. So long as any portion of the Loan
shall remain unpaid, Borrower will furnish to Lender:
(a) Default Notice. As soon as possible and in any event within
five days after the occurrence of each Default or any event, development or
occurrence reasonably likely to have a Material Adverse Effect continuing
on the date of such statement, a statement of Borrower setting forth
details of such Default and the action that Borrower has taken and proposes
to take with respect thereto;
(b) Annual Financial. As soon as available and in any event within
120 days after the end of each Fiscal Year, a balance sheet of Borrower as
of the end of such Fiscal Year and a statement of income and a statement of
cash flows of Borrower for such Fiscal Year, in each case accompanied by an
opinion acceptable to Lender of independent public accountants of
recognized standing acceptable to Lender, and a certificate of the chief
financial officer of Borrower stating that no Default has occurred and is
continuing or, if a Default has occurred and is continuing, a statement as
to the nature thereof and the action that Borrower has taken and proposes
to take with respect thereto;
(c) Litigation. Promptly after the commencement thereof, notice of
all actions, suits, investigations, litigation and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which either individually or in the
aggregate is likely to have a Material Adverse Effect on Borrower, and
promptly after the occurrence thereof, notice of any adverse change in the
status or the financial effect on Borrower; and
(d) Other Information. Such other information respecting the
business. condition (financial or otherwise), operations, performance,
properties or prospects of Borrower as Lender may from time to time
reasonably request.
Article VI
Events of Default
Section 6.01. Events of Default. With respect to the Loan, if any of the
following events ("Events of Default") shall occur and be continuing:
(a) Borrower shall fail to make any payment of principal of or
interest on the Loan when the same shall become due and payable; or
(b) Borrower fails to pay all or any portion of any other amount
payable by Borrower pursuant to this Agreement; or
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(c) any representation or warranty made by Borrower under or in
connection with any Loan Document shall prove to have been incorrect in any
material respect when made; or
(d) any provision of the organizational documents affecting the
purpose for which Borrower is formed is amended or modified in any manner
which is reasonably likely to result in a Material Adverse Effect, or if
Borrower fails to perform or enforce the provisions of the organizational
documents in a manner that is reasonably likely to result in a Material
Adverse Effect or attempt to dissolve Borrower; or
(e) Borrower shall violate or fail to comply with any of the
provisions of Section 5.02; or
(f) Borrower shall fail to perform any other term, covenant or
agreement contained in any Loan Document on its part to be performed or
observed if such failure shall remain unremedied for 30 days after the
earlier of the date on which (A) Borrower becomes aware of such failure or
(B) written notice thereof shall have been given to such Borrower by
Lender; or
(g) Borrower shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors;
or any proceeding shall be instituted by or against Borrower seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry, of an order for
relief or the appointment of a receiver, trustee or other similar official
for it or for any substantial part of its property and, in the case of any
such proceeding instituted against it (but not instituted by it) that is
being diligently contested by it in good faith, either such proceeding
shall remain undismissed or unstayed for a period of sixty (60) days or any
of the actions sought in such proceeding (including, without limitation,
the entry of an order for relief against, or the appointment of a receiver,
trustee, custodian or other similar official for, it or any substantial
part of its property) shall occur; or Borrower shall take any corporate
action to authorize any of the actions set forth above in this
subsection (g); or
(h) any material provision of any Loan Document after delivery
thereof shall for any reason cease to be valid and binding on or
enforceable against Borrower, or Borrower shall so state in writing; or
(i) any Collateral Document after delivery thereof shall for any
reason (other than pursuant to the terms thereof) cease to create a valid
and perfected first priority lien on and security interest in the
Collateral purported to be covered thereby,
then, and in any such event (other than an Event of Default described in
subsection (g) above) and at any time, Lender may, in addition to any other
rights or remedies available to
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it pursuant to this Agreement and the other Loan Documents, or at law or in
equity, take such action, without notice or demand, that Lender deems advisable
to protect and enforce its rights against Borrower and in any of the Collateral,
including, without limitation, by notice to Borrower, declare the Note, all
interest thereon and all other amounts payable with respect to the Note under
this Agreement and the other Loan Documents with respect to the Note to be
forthwith due and payable, whereupon the Note, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by Borrower, and may enforce or avail itself of any or all rights or
remedies provided in the Loan Documents against the Borrower and/or the
Collateral (including selling the Mortgage Loans); and upon an Event of Default
described in subsection (g) above, the Note, all such interest and all such
amounts shall automatically become and be due and payable, without presentment,
demand, protest or any notice of any kind, all of which are hereby expressly
waived by Borrower.
Article VII
Section 7.01. Amendments, Etc. No amendment or waiver of any provision of
this Agreement, the Note or any other Loan Document, nor consent to any
departure by Borrower therefrom, shall in any event be effective unless the same
shall be in writing and signed by Lender, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
Section 7.02. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telegraphic, telecopy or
telex communication) and mailed, telegraphed, telecopied, telexed or delivered,
if to Borrower, at its address at Harris Trust and Savings Bank,
______________________________; and if to Lender, at its address at Harris
Preferred Capital Corporation, _____________ ___________________________ or at
such other address as shall be designated by such parties in a written notice to
Borrower and Lender. All such notices and communications shall, when mailed,
telegraphed, telecopied or telexed, be effective when deposited in the mails,
delivered to the telegraph company, transmitted by telecopier or confirmed by
telex answerback, respectively, except that notices and communications to Lender
pursuant to Article II or III shall not be effective until received by Lender.
Delivery by telecopier of an executed counterpart of any amendment or waiver of
any provision of this Agreement, the Note or any Exhibit hereto to be executed
and delivered hereunder shall be effective as delivery of a manually executed
counterpart thereof.
Section 7.03. No Waiver; Remedies. No failure on the part of Lender to
exercise, and no delay in exercising, any right hereunder or under the Note or
any other Loan Documents shall operate as a waiver thereof; nor shall any single
or partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right.
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The remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
Section 7.04. Costs, Expenses, Indemnity. (a) Borrower agrees to pay on
demand (i) all reasonable costs and expenses of Lender in connection with the
preparation, execution, delivery, administration, modification and amendment of
the Loan Documents (including, without limitation, (A) all due diligence,
collateral review, transportation, computer, duplication, appraisal, Lender
audit, insurance, consultant, search, filing and recording fees and expenses and
(B) the reasonable fees and expenses of counsel for Lender with respect to
advising Lender as to its rights and responsibilities, or the perfection,
protection or preservation of rights or interests, under the Loan Documents,
with respect to negotiations with Borrower or with other creditors of Borrower
or any of its Subsidiaries arising out of any Default or any events or
circumstances that may give rise to a Default and with respect to presenting
claims in or otherwise participating in or monitoring any bankruptcy, insolvency
or other similar proceeding involving creditors' rights generally and any
proceeding ancillary thereto) and (ii) all costs and expenses of Lender in
connection with the enforcement of the Loan Documents, whether in any action,
suit or litigation, and bankruptcy, insolvency or other similar proceeding
affecting creditors' rights generally (including, without limitation, the
reasonable fees and expenses of counsel for Lender).
(b) Borrower agrees to indemnify and hold harmless Lender and its
Affiliates and their officers, directors, employees, agents and advisors (each,
an "Indemnified Party") from and against any and all claims, damages, losses,
liabilities and expenses (including, without limitation, reasonable fees and
expenses of counsel) that may be incurred by or asserted or awarded against any
Indemnified Party, in each case arising out of or in connection with or by
reason of (including, without limitation, in connection with any investigation,
litigation or proceeding or preparation of a defense in connection therewith)
the Loan, the actual or proposed use of the proceeds of the Loan, the Loan
Documents or any of the transactions contemplated thereby, except to the extent
such claim, damage, loss, liability or expense is found in a final, non-
appealable judgment by a court of competent jurisdiction to have resulted from
such Indemnified Party's gross negligence or willful misconduct. In the case of
an investigation, litigation or other proceeding to which the indemnity in this
Section 7.04(b) applies, such indemnity shall be effective whether or not such
investigation, litigation or proceeding is brought by Borrower, its directors,
shareholders or creditors or an Indemnified Party or any Indemnified Party is
otherwise a party thereto and whether or not the transactions contemplated
hereby are consummated. Borrower also agrees not to assert any claim against
Lender or any of its Affiliates, or any of their respective officers, directors,
employees, attorneys and agents, on any theory of liability, for special,
indirect, consequential or punitive damages arising out of or otherwise relating
to the Loan, the actual or proposed use of the proceeds of the Loan, the Loan
Documents or any of the transactions contemplated thereby. The foregoing
indemnity and agreement not to assert claims expressly applies, without
limitation, to the negligence (but not gross negligence or willful misconduct)
of the Indemnified Parties.
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(c) If Borrower fails to pay when due any costs, expenses or other
amounts payable by it under any Loan Document, including, without limitation,
fees and expenses of counsel and indemnities, such amount may be paid on behalf
of such Borrower by Lender, in its sole discretion.
(d) Without prejudice to the survival of any other agreement of Borrower
hereunder or under any other Loan Document, the agreements and obligations of
Borrower contained in Sections 2.08 and 2.09 and this Section 7.04 shall survive
the payment in full of principal, interest and all other amounts payable
hereunder and under any of the other Loan Documents.
Section 7.05. Binding Effect. This Agreement shall become effective when
it shall have been executed by Borrower and Lender and thereafter shall be
binding upon and inure to the benefit of Borrower and Lender and their
respective successors and assigns, except that Borrower shall not have the right
to assign its rights hereunder or any interest herein without the prior written
consent of Lender.
Section 7.06. Non Recourse. Except as otherwise provided herein and in
the other Loan Documents, Lender shall not enforce the liability and obligation
of Borrower to perform and observe the obligations contained herein and in the
other Loan Documents by any action or proceeding wherein a money judgment shall
be sought against Borrower, except that Lender may bring an action or proceeding
to enable Lender to enforce and realize upon this Agreement and the other Loan
Documents, its security interest in the Mortgage Loans given to Lender created
by this Agreement or the other Loan Documents, provided, however, that any
judgment in any action or proceeding shall be enforceable against Borrower only
to the extent of Borrower's interest in the Mortgage Loans given to Lender. The
provisions of this Section shall not, however, (i) constitute a waiver, release
or impairment of any obligation evidenced or secured by the Note or the other
Loan Documents, (ii) affect the validity or enforceability of any indemnity made
in connection with this Agreement or the other Loan Documents, or (iii) impair
the enforcement of the Mortgage Loan Assignment Agreement.
Section 7.07. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement. Any delivery of a counterpart signature by telecopier shall,
however, be promptly followed by delivery of a manually executed counterpart.
Section 7.08. Jurisdiction, Etc. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its property, to
the nonexclusive jurisdiction of any court sitting in Illinois, and any
appellate court thereof, in any action or proceeding arising out of or relating
to this Agreement or any of the other Loan Documents to which it is a party, or
for recognition or enforcement of any judgment, and each of the parties hereto
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hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such Illinois
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement or any of the
other Loan Documents in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any of the other Loan
Documents to which it is a party in any Illinois court. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.
Section 7.09. Governing Law. This Agreement and the other Loan Documents
shall be governed by, and construed in accordance with, the laws of Illinois.
Section 7.10. Waiver of Jury Trial. To the maximum extent permitted by
law, Borrower and Lender irrevocably waive all right to trial by jury in any
action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to any of the Loan Documents, the Loan or
the actions of Lender in the negotiation, administration, performance or
enforcement thereof.
Section 7.11. Compliance with Usury Laws. It is expressly stipulated and
agreed to be the intent of Borrower and Lender that the Loan comply with the
applicable usury and other laws relating to the Loan Documents now or hereafter
in effect. If any such applicable laws render usurious any amount called for
under any of the Loan Documents, or contracted for, charged or received with
respect to the Loan, or if the acceleration of the maturity of the Loan or if
any prepayment by Borrower results in Borrower having paid any interest in
excess of that permitted by law, then it is the express intent of the parties
that all excess amounts theretofore collected by Lender be refunded to Borrower,
and the provisions of the Loan Documents immediately be deemed reformed and the
amounts thereafter collected under such Loan Documents reduced, without the
necessity of the execution of any new document, so as to comply with the then
applicable law, but so as to permit the recovery of the fullest amount otherwise
called for under the Loan Documents.
Section 7.12. Exhibits. The Exhibits attached hereto are hereby
incorporated herein as a part of this Agreement with the same effect as if set
forth in the body hereof.
Section 7.13. Further Assurances. The Borrower shall, at its sole expense
and without expense to Lender, do such further acts and execute and deliver such
further documents as Lender from time to time may reasonably require for the
purpose of assuring and confirming unto Lender the rights hereby created or
intended now or hereafter so to be, or for carrying out the intention or
facilitating the performance of the terms of any Loan
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<PAGE>
Document, or for assuring the validity of any security interest or Lien under
any Collateral Document.
* * *
[Signatures on Next Page]
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<PAGE>
In Witness Whereof, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
Borrower:
Harris Trust and Savings Bank
By
---------------------------------------
Lender:
Harris Preferred Capital Corporation
By
---------------------------------------
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<PAGE>
EXHIBIT A
THE LOAN
Outstanding Amount Maturity Date Interest Rate*
Loan $ 15-Jan-20__ %
___________________
* All rates are quoted on a semi-annual basis.
A-1
<PAGE>
EXHIBIT B
FORM OF NOTE
B-1
<PAGE>
EXHIBIT C
MORTGAGE LOANS
C-16-1
<PAGE>
EXHIBIT D
FORM OF MORTGAGE LOAN ASSIGNMENT AGREEMENT
D-1
<PAGE>
EXHIBIT E
MORTGAGE LOAN BALANCE
Outstanding Amount
Mortgage Loan $
E-1
<PAGE>
EXHIBIT 10(D)
Chapman and Cutler
Draft of 10/31/97
Mortgage Loan Assignment Agreement
This Mortgage Loan Assignment Agreement (this "Assignment") made as of the
______ day of __________, 1997, constitutes an assignment from Harris Trust and
Savings Bank, an Illinois banking corporation (the "Assignor"), to Harris
Preferred Capital Corporation, a Maryland corporation (the "Assignee").
Witnesseth:
Whereas, Assignor has entered into a certain bank loan agreement, of even
date herewith, by and between Assignor and Assignee (such bank loan agreement,
as it may be amended or modified from time to time, the "Loan Agreement"),
pursuant to which Assignee has agreed, subject to the terms and conditions
thereof, to lend, with respect to the Loan (as defined in the Loan Agreement), a
principal amount of $______________ to Assignor on the date hereof.
Whereas, Assignee has entered into a certain servicing agreement of even
date herewith (the "Servicing Agreement") by and between Assignee and Assignor,
as servicer (Assignor, and any subsequent servicer under the Servicing Agreement
being the "Servicer") and Assignee has entered into a certain custodial
agreement of even date herewith (the "Custodial Agreement") by and between
Assignee and _________, as custodian (_________, and any subsequent custodian
under the Custodial Agreement, being the "Custodian").
Whereas, to evidence and secure its obligations with respect to the Loan
under the Loan Agreement, Assignor shall execute and deliver as of the date
hereof, certain Loan Documents (as defined in the Loan Agreement).
Whereas, Assignee has required and Assignor has agreed that Assignor shall
assign all of its right, title and interest in, to and under the mortgage loans
listed on Exhibit A attached hereto (the "Mortgage Loans"), each such Mortgage
Loan evidenced by certain agreements, deeds and proceedings (the "Mortgage Loan
Documents") to Assignee and permit Assignee or its agents, to administer,
perform and enforce the Mortgage Loans upon the terms and conditions hereinafter
set forth.
Now, Therefore, in consideration of the transactions hereinabove described,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
<PAGE>
1. Assignment. (a) "Assignor as beneficial owner hereby assigns, charges
and sets over to Assignee, and its successors and assigns, without recourse to
or representation by the Assignor, except as set forth herein or in the Loan
Documents, all of Assignor's right, title and interest now or hereafter acquired
in, to and under the Mortgage Loans and all of the real property (together with
any proceeds (including, but not limited to, any insurance, casualty and
mortgage insurance proceeds), products, substitutions, additions or replacements
of any collateral mortgaged, assigned or pledged under the Mortgage Loans)
described therein (collectively, the "Collateral").
(b) Assignee hereby accepts the foregoing assignment, on behalf of itself
and its respective successors and assigns.
(c) Assignor hereby appoints Assignee the true and lawful attorney-in-fact
of Assignor, with full power of substitution, in its own name, both before
and/or after any Event of Default (as defined in the Loan Agreement), to take
any action under or in connection with the Mortgage Loans. This power shall be
deemed to be coupled with an interest and shall be irrevocable.
(d) Assignor agrees that the assignment herein provided is absolute and
from and after the date hereof, subject to Section 16, Assignee shall obtain
legal title to the Mortgage Loans and Assignor shall not have, and shall not
exercise, any rights in and to the Collateral, including, without limitation,
any rights as payee, mortgagee or assignee under any of the Mortgage Loan
Documents, or any rights to receive any payments or to exercise or omit to
exercise, waive, compromise or make any other actions or determinations or give
or receive any notices under or in respect of the Mortgage Loan Documents,
except such as Assignee may direct in order to better effectuate the rights,
remedies and security herein provided or contemplated.
(e) Assignee, as payee under the Mortgage Loans, shall have the right,
both before and after an Event of Default (as defined in the Loan Agreement) to
collect and receive all payments of principal and interest and any other amounts
due and payable under the Mortgage Loan Documents. On each Interest Payment Date
(as defined in the Loan Agreement), Assignee shall apply the funds collected
under the Mortgage Loan Documents (i) first, to the payment of any interest due
and payable under the Loan Documents, (ii) second, to the payment of any
scheduled or unscheduled principal payments due and payable under the Loan
Documents, (iii) third, to the payment of any Excess Loan Amount (as defined in
the Loan Agreement), and (iv) fourth, to any other amounts due and payable under
the Loan Documents and shall, to the extent available after payment of the
amounts in clauses (i), (ii), (iii) and (iv) above, remit the balance of any
collections or payments to Assignor.
-2-
<PAGE>
2. Representations and Warranties of Assignor. Assignor represents
and warrants as follows:
(a) Assignor (i) is the sole owner of the Mortgage Loans and such
ownership is free and clear of any lien, security interest or other
encumbrance, (ii) has not granted any participation or other interest or
assignment, other option or rights to the Mortgage Loans, other than to
Assignee, and (iii) has not pledged, collaterally assigned or otherwise
hypothecated any interest therein or agreed to do so, other than to
Assignee.
(b) The registered office and principal place of business of the
Assignor is located in Chicago, Illinois.
(c) The execution, delivery and performance of this Assignment by
Assignor are within Assignor's power and authority, have been duly
authorized by all necessary action and do not and will not (i) require any
authorization which has not been obtained, (ii) contravene the charter or
by-laws of the Assignor, any applicable laws or any agreement or
restriction binding on or affecting Assignor or its property, or (iii)
result in or require the creation or imposition of any lien or right of
others upon or with respect to any property now or in the future owned by
Assignor (other than liens created in favor of Assignee hereunder). No
authorization which has not been obtained is required for the assignment
hereunder or the enforcement by Assignee of its remedies under this
Assignment. This Assignment, when executed and delivered, will constitute
the legal, valid and binding obligation of Assignor enforceable against
Assignor in accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency or other similar laws affecting the rights of
creditors generally.
(d) The originals (including duplicate originals, if any) of all the
Mortgage Loan Documents, have been endorsed in blank and simultaneously
herewith delivered to the Custodian as custodian for Assignee (except for
any loan documents which have been or will be submitted to public officials
for filing or recording and policies of title or other insurance which have
not yet been received by Assignor, which in either case will be delivered
to the Custodian as and when received by the Assignor).
3. Servicing. Until the satisfaction in full of all obligations of
Assignor under the Loan Agreement shall have occurred:
(a) Assignee or its agents, shall have the sole power and authority
to do or refrain from doing any act under or in connection with the
Mortgage Loan Documents and the property described therein and/or this
Assignment, including, without limitation, the sole power and authority in
its sole discretion,
-3-
<PAGE>
to (i) advance funds thereunder, (ii) determine that all conditions to the
advance of funds thereunder have been satisfied (or to waive some or all of
the conditions to advance thereunder), and (iii) determine that a default
or event of default has occurred thereunder and to give any notice, demand
or protest in respect thereof;
(b) Assignor acknowledges that (i) the Servicer, as agent of
Assignee, shall be named as mortgagee and loss payee on all fire, extended
coverage and other hazard insurance policies required under the Mortgage
Loan Documents, to the extent set forth therein, and (ii) Assignor and any
mortgagor and all other parties obligated to Assignor under the Mortgage
Loan Documents shall deal solely with the Servicer, acting on behalf of
Assignee, under the Mortgage Loan Documents and this Assignment, Assignor
and all other parties so obligated shall be entitled to rely on their
actions so taken with respect to the Servicer and upon the action taken by
the Servicer, acting on behalf of Assignee, with respect to them until the
satisfaction in full of all obligations of Assignor under the Loan
Agreement or until Assignee shall appoint another person to act on its
behalf (or otherwise revoke the Servicer's authority to act on behalf of
Assignee); and
(c) Assignor agrees that Assignee or it agents shall have the full
power and authority, in its discretion, to take, or defer from taking, any
and all actions with respect to the administration and enforcement of the
Loan Documents, in order to effectuate the purposes contemplated herein and
therein, including the right, power and authority to exercise any and all
of the rights, remedies and options reserved to Assignee or its agents in,
or given by law or equity to Assignee or it agents as holder of the
Mortgage Loan Documents, to enforce the Mortgage Loan Documents, and to
take such other actions for the protection and preservation of the lien of
the Mortgages, and protect and preserve all property described therein
should Assignee or its agents become the owner thereof by foreclosure or
otherwise as may be necessary and/or appropriate.
4. Event of Default; Remedies. If an event of default shall occur under
any Mortgage Loan (an "Event of Default"), Assignee or its agents shall have all
the rights and remedies which would be available to Assignor (but for this
Assignment) under the Mortgage Loan Documents as set forth therein and as
permitted thereunder or otherwise available to Assignor (but for this
Assignment) in law or in equity, including, without limitation but in each
instance to the extent provided in and as conditioned by the Mortgage Loan
Documents, the right:
(a) To accelerate the maturity of such Mortgage Loan and all other
amounts due under the applicable Mortgage Loan Documents and to declare the
same to be or become immediately due and payable and enforce payment
thereof upon the happening of any Event of Default by the mortgagor under
such Mortgage Loan, as permitted therein, after the giving of such
applicable
-4-
<PAGE>
notice and/or the passage of such time as may be provided for in such
Mortgage Loan;
(b) To take such steps, institute and prosecute such actions and
proceedings and do or omit such acts which, in its judgment, are advisable
in order to enforce payment of all amounts due under the Mortgage Loan
Documents and realize upon the security provided therefor, including,
without limitation, (i) to select any of the remedies available under the
Mortgage Loan Documents or otherwise available at law or in equity, (ii) to
enter into or consent to any amendment, modification and/or extension of
the Mortgage Loan Documents, (iii) to enter into or consent to any release,
substitution or exchange of all or any part of any security for such
Mortgage Loan, (iv) to waive any claim against the mortgagor or any person
or entity obligated under the Mortgage Loans and (v) to defer, extend,
increase or decrease any payment, installment or other sum required or on
account of such Mortgage Loan and/or the applicable Mortgage Loan
Documents;
(c) To discontinue any such action or proceeding commenced as
provided in subsection 4(b) above or to stay, delay, defer, discontinue or
withdraw the same;
(d) To enter or cause to be entered a bid at any foreclosure sale of
the property mortgaged securing such Mortgage Loan pursuant to the
applicable Mortgage Loan Documents (each such property a "Mortgaged
Property") or any portion thereof;
(e) To acquire title in and to any Mortgaged Property or any portion
thereof in any foreclosure proceeding in its name or the name of its
nominee or designee;
(f) To accept a deed to any Mortgaged Property or any portion thereof
in lieu of foreclosure and to release the mortgagor from its obligations
under the Mortgage in consideration of such deed in lieu of foreclosure;
(g) To operate, manage and/or develop, or hire agents to operate,
manage and/or develop, any foreclosed or acquired Mortgaged Property and to
lease all or any portion thereof upon such terms and conditions as it deems
to be in the best interests of Assignee;
(h) To sell any foreclosed or acquired Mortgaged Property or any
portion thereof, upon such terms as it may deem to be in the best interests
of Assignee, including, without limitation, the right to take back one or
more purchase money notes and mortgages;
(i) To make advances for the payment for taxes, assessments, water,
sewer and vault charges, and all interest and penalties thereon, insurance
-5-
<PAGE>
premiums and other similar or dissimilar items relating to any Mortgaged
Property, to the extent permitted by the applicable Mortgage Loan
Documents;
(j) To make advances for the account of the mortgagor under such
Mortgage Loan, to the extent permitted by the applicable Mortgage Loan
Documents;
(k) To collect, sue for, receive and, subject to applicable
provisions of law, settle or compromise any claims for loss or damage
covered by insurance and/or condemnation of all or any portion of any
Mortgaged Property and to exercise its discretion in the proper application
and disposition of the net proceeds of such insurance and/or condemnation
award;
(l) To sell the Mortgage Loan at a fair market value; and
(m) Generally to do and take any and all actions which, but for this
Assignment, the Assignor would be entitled to do and take under or with
respect to the applicable Mortgage Loan Documents; it being understood and
agreed that this Assignment does not confer upon the Assignee any greater
rights with respect to the Mortgage Loan Documents than granted to Assignor
or expand or extend such rights, the purpose of this Assignment being,
inter alia, to assign, transfer and allocate such rights and not to create
new rights against any mortgagor under the applicable Mortgage Loan, or to
limit the rights or expand the obligations of any such mortgagor, and in
the event of any conflict between the provisions of this Assignment and the
provisions of the Mortgage Loan Documents, the provisions of the Mortgage
Loan Documents, shall control.
5. Possession of Mortgage Loan Documents. From and after the date of this
Assignment, to the extent that the Assignor holds duly executed originals of the
Mortgage Loan Documents in its capacity as Servicer, the Assignor shall no
longer hold such documents on its own behalf, but shall hold the same as
custodian for Assignee.
6. Further Assurances. (a) Assignor agrees that at any time and from
time to time, at the expense of Assignor, Assignor will promptly execute and
deliver all further instruments and documents, and take all further action, that
may be necessary or desirable, or that Assignee may reasonably request, to
effectuate the purpose or provisions of this Assignment or to confirm or perfect
any transaction described or contemplated herein or to enable Assignee or its
agents to exercise and enforce its rights and remedies hereunder with respect to
any Mortgage Loan Document. Assignor and Assignee agree that Borrower shall
reasonably cooperate (i) in preparing, executing, delivering or having prepared,
delivered and executed by January 1, 1998 such documents or instruments which
are necessary or desirable to register legal title to each Mortgage Loan in the
name of Assignee in the appropriate land registry or other office of public
record, and (ii) in registering legal title to each Mortgage Loan in the name of
Assignee in the event the credit rating of Assignor (or
-6-
<PAGE>
such other agent as may hold the Mortgage Loans on behalf of Assignee) will fall
below either "BBB-" by Standard & Poor"s Rating Services or "Baa" by Moody's
Investor Service, Inc.
(b) Assignor hereby authorizes Assignee or its agents to file and record
one or more financing or continuation statements and amendments thereto,
relative to all or any part of the Loan Documents without the signature of
Assignor where permitted by law.
7. Assignment. This Assignment shall be binding upon and shall inure to
the benefit of the parties and their respective successors and assigns.
8. Notices. All notices and other communications provided for hereunder
shall be in writing (including telegraphic, telecopy or telex communication) and
mailed, telegraphed, telecopied, telexed or delivered, if to Assignor, at its
address at Harris Trust and Savings Bank, ___________________________________;
if to the Assignee, at its address at Harris Preferred Capital Corporation,
______________________________________; or at such other address as shall be
designated by such parties in a written notice. All such notice and
communications shall, when mailed, telegraphed, telecopied or telexed, be
effective when deposited in the mails, delivered to the telegraph company,
transmitted by telecopier or confirmed by telex answerback, respectively.
9. Governing Law. This Assignment and Agreement shall be governed by and
construed in accordance with the laws of Illinois.
10. Jurisdiction. (a) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any court sitting in Illinois, and any appellate court thereof,
in any action or proceeding arising out of or relating to this Assignment, or
for recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such Illinois
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Assignment shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Assignment in the courts
of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Assignment in any court sitting in
Illinois. Each of the parties hereto hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
-7-
<PAGE>
11. Counterparts. This Assignment may be executed in one or more
counterparts, each of which shall be considered an original. Delivery of an
executed counterpart of a signature page to this Assignment by telecopier shall
be effective as delivery of a manually executed counterpart of this Assignment.
Any delivery of a counterpart signature by telecopier shall, however, be
promptly followed by delivery of a manually executed counterpart.
12. Change and Modifications. This Assignment may not be changed,
terminated or modified orally or in any manner other than by an agreement in
writing signed by the party sought to be charged therewith.
13. No Waiver. No waiver by any party of any provision of this Assignment
or any right, remedy or option hereunder shall be controlling, nor shall it
prevent or estop such party from thereafter enforcing such provision, right,
remedy or option, and the failure or refusal of any party hereto to insist in
any one or more instances upon the strict performance of any of the terms or
provisions of this Assignment by any other party hereto shall not be construed
as a waiver or relinquishment for the future of an such term or provision, but
the same shall continue in full force and effect; it being understood and agreed
that the rights, remedies and options of Assignee hereunder are and shall be
cumulative and in addition to all other rights, remedies and options of Assignee
in law or in equity or under any other agreement.
14. Recitals. All of the recitals hereinabove set forth are incorporated
in this Assignment by reference.
15. Paragraph Headings, etc. The headings of paragraphs contained in this
Assignment are provided for convenience only. They form no part of this
Assignment and shall not affect its construction or interpretation. All
references to paragraphs or subparagraphs of this Assignment refer to the
corresponding paragraphs and subparagraphs of this Assignment. All words used
herein shall be construed to be of such gender or number as the circumstances
require. This "Assignment" shall each mean this Assignment as a whole and as the
same may from time to time hereafter be amended or modified. The words "herein,"
"hereby," "hereof," "hereto," "hereinabove" and "hereinbelow," and words of
similar import, refer to this Assignment as a whole and not to any particular
paragraph, similar import, refer to this Assignment as a whole and not to any
particular paragraph, clause or other subdivision hereof, unless otherwise
specifically noted.
16. Termination. Upon satisfaction in full of all obligations of Assignor
under the Loan Documents, this Assignment shall terminate and be of no further
force and effect and Assignee shall execute documents evidencing the assignment
of any outstanding Mortgage Loans to Assignor (without recourse), provided
however, that in the event an Event of Default under any Mortgage Loan occurs,
Assignee's obligation to assign such defaulted Mortgage Loan back to Assignor as
provided in this Section shall terminate, provided, further, however, that any
amounts collected by
-8-
<PAGE>
Assignee with respect to such defaulted Mortgage Loan shall be applied as
provided in the Loan Agreement.
17. Partial Invalidity. In case any provision in this Assignment shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
-9-
<PAGE>
In Witness Whereof, the Assignor and the Assignee have each duly executed
this Mortgage Loan Assignment Agreement as of the ______ day of __________,
1997.
ASSIGNOR
HARRIS TRUST AND SAVINGS BANK
By
-----------------------------------
ASSIGNEE
HARRIS PREFERRED CAPITAL CORPORATION
By
-----------------------------------
-10-
<PAGE>
Exhibit A
Mortgage Loans
<PAGE>
EXHIBIT 23(B)
Exhibit 23(b)
The Board of Directors
Harris Trust and Savings Bank and
Harris Preferred Capital Corporation:
We consent to the inclusion in this prospectus of our report dated January 31,
1997 on our audit of the consolidated financial statements of Harris Trust and
Savings Bank and Subsidiaries and to the reference to our firms under the
caption "Experts".
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
November 12, 1997
