As filed with the Securities and Exchange Commission on February 17, 1998
Registration Statement No.333-41009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
-------------------------------
Amendment No. 2 to Form F-9/Amendment No. 3 to Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
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Amendment No. 2 to Form F-9 Amendment No. 3 to Form S-4
National Bank of Canada (Exact Name of Registrant as Specified in its Charter) NB Capital Corporation
Canada (Province or Other Jurisdiction of Incorporation or Organization) Maryland
6021 (Primary Standard Industrial Classification Code Number) 6798
Not Applicable (I.R.S. Employer Identification No. if Applicable) 52-2063921
National Bank Tower 125 West 55th Street
600 de La Gauchetiere Street West New York, New York 10019
Montreal, Quebec, Canada H3B 4L2 (212) 632-8500
(514) 394-6080
(Address, including postal code and telephone number, including area
code, of Registrant's principal executive offices)
<CAPTION>
<S> <C>
NB Capital Corporation NB Capital Corporation
Francois Bourassa Francois Bourassa
Vice-President Legal and Secretary Vice-President Legal and Secretary
125 West 55th Street 125 West 55th Street
New York, New York 10019 New York, New York 10019
(212) 632-8693 (212) 632-8693
(Name, Address (Including Zip Code) and Telephone Number (Including Area Code) of Agent for Services in the United States)
Copies to:
<CAPTION>
<S> <C> <C>
Jean Dagenais
Vice-President
and Chief Accounting Officer Michel Roy Robert Evans III
National Bank of Canada Desjardins Ducharme Stein Monast Shearman & Sterling
National Bank Tower 600 de La Gauchetiere Street West 599 Lexington Avenue
600 de La Gauchetiere Street West Suite 2400 New York, New York 10022
Montreal, Quebec H3B 4L2 Montreal, Quebec, Canada H3B 4L8 (212) 848-4000
(514) 394-6233 (514) 878-9411
</TABLE>
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
<PAGE>
<TABLE>
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Amendment No. 2 to Amendment No. 3 to
Form F-9 Form S-4
<S> <C>
(Principal jurisdiction regulating this If the securities being registered on
Form F-9 offering (if applicable) It is this Form are being offered in
proposed that this filing shall become connection with the formation of a
effective (check appropriate box): holding company and there is compliance
with General Instruction G, check the
following box. |_|
A. |_| upon filing with the If this Form is filed to register
Commission, pursuant to Rule 467(a) additional securities for an offering
(if in connection with an offering pursuant to Rule 462(b) under the
being made contemporaneously in the Securities Act, check the following box
United States and Canada). and list the Securities Act registration
statement number of the earlier
effective registration statement for the
same offering. |_|
B. |x| at some future date (check the If this Form is a post-effective
appropriate box below
1. |_| pursuant to Rule 467(a) on amendment filed pursuant to Rule 462(d)
( ) at ( ) (designate a time under the Securities Act, check the
not sooner than 7 calendar following box and list the Securities
days after filing). Act registration statement number on the
earlier effective registration statement
2. |_| pursuant to Rule 467(b) on for the same offering. |_|
( ) at ( ) (designate a time 7
calendar days or sooner after
filing) because the securities
regulatory authority in the
review jurisdiction has issued
a receipt or notification of
clearance on ( ).
3. |x| pursuant to Rule 467(b) as
soon as practicable after
notification of the Commission
by the Registrant or the
Canadian securities regulatory
authority of the review
jurisdiction that a receipt or
notification of clearance has
been issued with respect
hereto.
4. |_| after the filing of the
next amendment to this Form
(if preliminary material is
being filed).
If any of the securities being
registered on this Form are to be
offered on a delayed or continuous basis
pursuant to the home jurisdiction's
shelf prospectus offering procedures,
check the following box. |_|
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<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
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===========================================================================================================================
Proposed Proposed
Title of Each Class of Maximum Maximum
Securities to be Amount to be Offering Price Aggregate Offering Amount of
Registered Registered Per Security Price Registration Fee
<S> <C> <C> <C> <C>
8.35% Noncumulative U.S.$238,400,000 U.S.$1,000 U.S.$238,400,000 N/A (1)
Exchangeable Preferred
Stock, Series A
8.45% Noncumulative U.S.$300,000,000 U.S.$1,000 U.S.$300,000,000 N/A (1)
First Preferred Shares,
Series Z
===========================================================================================================================
(1) Pursuant to Rule 457(f)(2) under the Securities Act, U.S.$90,910 was
paid on November 25, 1997 by NB Capital Corporation in connection with
its filing of a Registration Statement on Form S-4 related to 300,000
shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series
A ("Preferred Shares"). Pursuant to this Amendment No. 3 to Form
S-4/Amendment No. 2 to Form F-9, the number of Preferred Shares
registered hereunder has been reduced to 238,400 (i.e., a reduction of
61,600 Preferred Shares). The 61,600 Preferred Shares are being
registered pursuant to an Amendment No. 1 to Form S-1/Amendment No. 2
to Form F-9 that has been separately filed on the date hereof.
Each share of 8.35% Noncumulative Exchangeable Preferred Stock, Series
A, is convertible into one 8.45% Noncumulative First Preferred Share,
Series Z, of National Bank of Canada. Accordingly, pursuant to Rule
457(i) under the Securities Act, no registration fee is due with
respect to the registration of the 8.45% Noncumulative First Preferred
Shares, Series Z of National Bank of Canada.
* The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registration Statement
shall become effective as provided in Rule 467 under the Securities Act of 1933
or on such date as the Commission, acting pursuant to Section 8(a) of the Act,
may determine.
** The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until this Registration
Statement shall become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
===========================================================================================================================
* Solely with respect to Amendment No. 2 to Form F-9.
** Solely with respect to Amendment No. 3 to Form S-4.
===========================================================================================================================
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<PAGE>
EXPLANATORY NOTE
On November 25, 1997, NB Capital Corporation (the "Company")
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-4 (the "Form S-4") pertaining to the
registration of 300,000 shares of its 8.35% Noncumulative Exchangeable Preferred
Stock, Series A (the "New Preferred Shares"). As indicated therein and herein,
the New Preferred Shares will be offered in exchange (the "Exchange Offer") for
up to 300,000 shares of its 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, currently outstanding (the "Old Preferred Shares" and together with
the New Preferred Shares, the "Preferred Shares"). The New Preferred Shares are
identical in all respects to the Old Preferred, except that (i) the New
Preferred Shares will be registered under the Securities Act, and therefore,
will not bear legends restricting their transfer and (ii) holders of New
Preferred Shares will not be entitled to registration rights available to
holders of Old Preferred Shares under the Registration Rights Agreement, dated
September 3, 1997, among the Company, the National Bank of Canada, the direct
parent of the Company (the "Bank") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Initial Purchaser"), which rights with respect to the Old
Preferred Shares will terminate upon consummation of the Exchange Offer.
As more fully described in the Form S-4 and herein, upon the
occurrence of certain events, including events related to the Bank's financial
condition (each, an "Exchange Event"), each Preferred Share will be
automatically exchanged for one newly issued 8.45% Noncumulative First Preferred
Share, Series Z (the "Bank Preferred Shares") of the Bank. The Bank Preferred
Shares were registered in Canada pursuant to a short-form prospectus filed by
the Bank with the Quebec Securities Commission on December 4, 1997. On December
11, 1997, the Quebec Securities Commission approved the registration of the Bank
Preferred Shares. On December 19, 1997, the Company and the Bank, pursuant to
the multi-jurisdictional disclosure system, filed Amendment No. 1 to
Registration Statement on Form S-4/Registration Statement on Form F-9
("Amendment No.1 to Form S-4/Form F-9") in order to register the Bank Preferred
Shares in the United States. The Bank and the Company intend for the
registration of the New Preferred Shares and the Bank Preferred Shares to become
effective at approximately the same time. Accordingly, the Bank will delay
filing the notice of effectiveness issued by the Quebec Securities Commission
until such time as the Commission indicates that the registration of the New
Preferred Shares will be declared effective.
On January 27, 1998, the Bank and the Company filed with the
Commission Amendment No. 2 to Registration Statement on Form S-4/Amendment No. 1
to Registration Statement on Form F-9/Registration Statement on Form S-1
("Amendment No. 2 to Form S-4/Amendment No. 1 to Form F-9/Form S-1") to (i)
respond to the comment letter (the "First Comment Letter") received by the Bank
and the Company from the staff of the Commission (the "Staff") with respect to
Amendment No. 1 to Form S-4/Form F-9 and (ii) permit the resale of 61,600 Old
Preferred Shares currently held by the Initial Purchaser as an unsold allotment.
On February 10, 1998, the Bank and the Company received from
the Staff a second comment letter (the "Second Comment Letter") with respect to
Amendment No. 2 to Form S-4/Amendment No. 1 to Form F-9/Form S-1. In response to
a comment of the Staff included in the Second Comment Letter, Registration
Statement on Form S-1/Registration Statement on Form F-9 has been filed
separately. Accordingly, the Company and the Bank are filing this Amendment No.
3 to Registration Statement Form S-4/Amendment No. 2 to Registration Statement
Form F-9 to respond to the Second Comment Letter.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY __, 1998
PRELIMINARY PROSPECTUS
NB Capital Corporation
Offer to Exchange
8.35% Noncumulative Exchangeable Preferred Stock, Series A
for up to 238,400 shares of
8.35% Noncumulative Exchangeable Preferred Stock, Series A
NB Capital Corporation (the "Company"), a wholly owned
subsidiary of National Bank of Canada (the "Bank"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and in the accompanying Letter of Transmittal (which together with
the Prospectus constitute the "Exchange Offer"), to exchange up to 238,400
shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "New Preferred Shares") for up to 238,400 shares of
its outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "Old Preferred Shares" and together with the New
Preferred Shares, the "Preferred Shares") at the rate of one New Preferred Share
for each Old Preferred Share.
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 real estate investment trust
("REIT") assets ("Mortgage Assets"). The Mortgage Assets of the Company
currently consist of sixteen "hypothecation" loans (the "Initial Mortgage
Assets") issued to the Company by NB Finance, Ltd., a wholly owned subsidiary of
the Bank ("NB Finance"), that are recourse only to the "Initial Mortgage Loans."
Hypothecation loans are loans secured by the pledge of mortgages as security
therefor. The Initial Mortgage Loans consist of sixteen pools of, at December
31, 1997, 11,701 "Mortgage Loans." Mortgage Loans consist of residential first
mortgages insured by Canada Mortgage and Housing Corporation, an agency of the
Government of Canada ("CMHC"), that are secured by real property located in
Canada.
See "Risk Factors" commencing on page 15 for a discussion of
certain factors that should be considered by potential holders of New Preferred
Shares, including the following:
o The Company's income consists principally of payments of interest and,
therefore, is heavily dependent upon prevailing interest rates.
Additionally, the Company's income is denominated in Canadian dollars.
Consequently, a significant decline in interest rates or in the value of the
Canadian dollar may have an adverse effect on the Company, its assets and
its ability to make dividend payments with respect to the New Preferred
Shares.
o The Company's operations may be affected by prevailing real estate market
conditions. Consequently, there can be no assurance that prevailing real
estate market conditions will not adversely affect the Company's ability to
pay dividends.
o All of the residential real properties securing the Initial Mortgage Assets
issued by NB Finance are, and in the future are expected to be, located
outside the United States, primarily in Quebec. Consequently, the Company
will be subject to the laws of a foreign jurisdiction with respect to any
actions taken and may be subject to a greater risk of default than
investments in comparable U.S. real property.
o The Initial Mortgage Assets issued by NB Finance are recourse only to the
Initial Mortgage Loans. Consequently, in the event of default on the Initial
Mortgage Assets issued by NB Finance, the Company's only recourse will
principally be foreclosure on the real property securing the Initial
Mortgage Assets, and in certain circumstances, CMHC insurance may not be
available or receipt of payment thereof may be delayed.
o Dividends on the New Preferred Shares are not cumulative. Consequently, if
the Board of Directors of the Company (the "Board of Directors") does not
authorize and declare a dividend on the New Preferred Shares for any
particular quarterly dividend period, the holders of the New Preferred
Shares would not be entitled to recover such dividend even if funds are, or
subsequently become, available for payment thereof.
o As a subsidiary of the Bank, Canadian banking authorities could, under
certain circumstances, impose certain restrictions on the operations of the
Company. Consequently, under such circumstances, such restrictions could
cause the Company to fail to qualify as a REIT as well as affect its ability
to pay dividends.
o The Company may not qualify as a REIT for United States federal income tax
purposes. Consequently, the Company may be subject to United States federal
income tax at normal corporate tax rates.
o The Board of Directors may amend or revise the Company's policies and
strategies in the future without a vote of stockholders, including holders
of the New Preferred Shares. Consequently, the holders of New Preferred
Shares cannot preclude the Board of Directors from making such amendments or
revisions even though the ultimate effect to the holders of New Preferred
Shares may be negative.
v
<PAGE>
o The assets of the Company consist of obligations that do not provide for
complete amortization of principal over their term to maturity and,
therefore, require a balloon payment. Consequently, holders of New Preferred
Shares may be accepting a greater degree of risk relative to an investment
with underlying assets that are comprised of fully amortizing obligations.
o The Company has not obtained a third party valuation of its assets for the
purposes of the Exchange Offer. Consequently, there can be no assurance that
the fair market value of such assets does not differ from the purchase price
thereof.
o Under certain circumstances, including when the Bank is experiencing
financial difficulties or its financial condition is deteriorating, the New
Preferred Shares could be exchanged automatically for the Bank's 8.45%
Noncumulative First Preferred Shares, Series Z (the "Bank Preferred
Shares"). Consequently, the Bank Preferred Shares would represent an
investment in the Bank and not in the Company at a time when the Bank is
experiencing such financial difficulties or such deterioration of financial
condition.
o The Company is dependent upon the Bank and its affiliates in virtually every
phase of its operations. However, the interests of the Company and the Bank
may not be identical. Consequently, because of the relationship between the
Company and the Bank and its affiliates, conflicts of interest may arise
between the Company and the Bank.
o Holders of Old Preferred Shares who fail to exchange their Old Preferred
Shares for New Preferred Shares pursuant to the Exchange Offer will continue
to hold Old Preferred Shares that continue to be subject to the transfer
restrictions set forth in the legends thereon. Consequently, holders of the
Old Preferred Shares may not be offered or sold, unless registered under the
Securities Act of 1933, as amended (the "Securities Act"), except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act
and applicable securities laws of states and other jurisdictions.
o The Company is under no obligation, and currently has no intention, to list
the New Preferred Shares on a national exchange. Addtionally, there is no
existing market for the New Preferred Shares and there can be no assurance
as to the liquidity of any market that may develop or the ability of holders
to sell their New Preferred Shares or the sale price thereof. Consequently,
holders of New Preferred Shares may find it difficult to sell their New
Preferred shares or to sell their New Preferred Shares at a price equivalent
to the purchase price thereof.
The form and terms of the New Preferred Shares are identical
in all material respects to the form and terms of the Old Preferred Shares,
except that (i) the New Preferred Shares have been registered under the
Securities Act, and, therefore, will not bear legends restricting their transfer
and (ii) holders of the New Preferred Shares will not be entitled to the
registration rights available to holders of the Old Preferred Shares under the
Registration Rights Agreement (the "Registration Rights Agreement") dated
September 3, 1997, among the Company, the Bank and Merrill Lynch, Pierce, Fenner
& Smith Incorporated (the "Initial Purchaser") which registration rights with
respect to the Old Preferred Shares will terminate upon completion of the
Exchange Offer. See "Description of the New Preferred Shares."
The Old Preferred Shares were issued on September 3, 1997 (the
"Issue Date") in a transaction not registered under the Securities Act in
reliance upon an exemption from the registration requirements thereof. The New
Preferred Shares are being offered hereby to satisfy certain obligations of the
Company contained in the Registration Rights Agreement. Based on interpretations
by the staff of the Securities and Exchange Commission (the "Commission") set
forth in no-action letters issued to third parties, the Company believes that
the New Preferred Shares issued pursuant to the Exchange Offer in exchange for
Old Preferred Shares may be offered for resale, resold or otherwise transferred
by any holder thereof (other than any holder that is a broker-dealer or an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Preferred Shares are
acquired in the ordinary course of such holder's business, such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Preferred Shares and neither such holder nor any such other person
is engaging in or intends to engage in a distribution of New Preferred Shares.
The Company has not sought, and does not intend to seek, its own no-action
letter, and there can be no assurance that the Commission or its staff would
make a similar determination with respect to the Exchange Offer. Notwithstanding
the foregoing, each broker-dealer that receives New Preferred Shares for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Preferred Shares. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
that, for a period of six months after the date of this Prospectus, it will make
this Prospectus, as it may be amended or supplemented, available to any
broker-dealer for use in connection with any such resale and will update this
Prospectus, as required, during such six-month period.
The Exchange Offer is not conditioned upon any minimum
aggregate number of Old Preferred Shares being tendered for exchange. The
Company will accept for exchange any and all validly tendered Old Preferred
Shares not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless
the Company, in its sole discretion,
vi
<PAGE>
extends the period of time during which the Exchange Offer is open (the
"Expiration Date"). The Company does not currently intend to extend the
Expiration Date. The date of acceptance and exchange of the Old Preferred Shares
will be the _____ business day following the Expiration Date. Tenders of Old
Preferred Shares may be withdrawn at any time prior to the Expiration Date. The
Company will not receive any proceeds from the Exchange Offer. The Company will
pay certain expenses incident to the Exchange Offer.
--------------------
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Prospectus is February __, 1998.
vii
<PAGE>
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting
and other informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As a result of the Exchange Offer, the Company
will be required to file reports and other information with the Commission
pursuant to the informational requirements of the Exchange Act.
This Prospectus constitutes a part of a Registration Statement
on Form S-4/Form F-9/Form S-1 (the "Registration Statement") filed by the
Company with the Commission under the Securities Act. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules thereto, and reference is hereby made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the New Preferred Shares. Statements contained herein concerning
the provisions of any documents filed as an exhibit to the Registration
Statement or otherwise filed with the Commission are not necessarily complete,
and in each instance reference is made to the copy of such document so filed.
Each such statement is qualified in its entirety by such reference.
The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices, located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can be
obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates and may also be
accessed electronically by means of the Commission's website at
http://www.sec.gov.
viii
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.............................................................................................. 1
The Company............................................................................................ 1
The Bank .............................................................................................. 2
Business and Strategy.................................................................................. 5
Tax Status of the Company.............................................................................. 7
The Exchange Offer..................................................................................... 7
The New Preferred Shares............................................................................... 10
Selected Financial Data................................................................................ 14
RISK FACTORS.................................................................................................... 15
Interest Rate Risk and Maturity of Initial Mortgage Loans.............................................. 15
Currency Exchange Rate Risk............................................................................ 15
Real Estate Market Conditions.......................................................................... 15
Geographic Concentration of the Real Property Securing the Initial Mortgage Assets..................... 16
Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC Insurance...................... 16
Tax Risks.............................................................................................. 16
Dividends Not Cumulative............................................................................... 16
Dividend and Other Regulatory Restrictions on Operations of the Company................................ 19
Risk of Future Revisions in Policies and Strategies by Board of Directors.............................. 19
Balloon Payments....................................................................................... 16
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiation with Affiliates........... 19
Relationship with the Bank and Its Affiliates; Conflicts of Interest................................... 20
Dependence upon the Bank............................................................................... 20
Consequences of Failure to Exchange Old Preferred Shares............................................... 20
Absence of Public Market............................................................................... 21
Risks Associated with the Bank......................................................................... 21
Canadian Legal Considerations.......................................................................... 22
THE COMPANY..................................................................................................... 24
USE OF PROCEEDS................................................................................................. 24
CAPITALIZATION.................................................................................................. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES.............................................................................. 25
THE EXCHANGE OFFER.............................................................................................. 26
General .............................................................................................. 26
Purpose of the Exchange Offer.......................................................................... 26
Terms of the Exchange.................................................................................. 27
Expiration Date; Extension; Termination; Amendment..................................................... 28
Procedures for Tendering Old Preferred Shares.......................................................... 30
Terms and Conditions of the Letter of Transmittal...................................................... 30
Withdrawal Rights...................................................................................... 31
Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred Shares...................... 32
Certain Conditions to the Exchange Offer............................................................... 32
Exchange Agent......................................................................................... 34
Solicitation of Tenders; Fees and Expenses............................................................. 35
Transfer Taxes......................................................................................... 35
</TABLE>
ix
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<TABLE>
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<S> <C>
Accounting Treatment................................................................................... 35
Consequences of Failure to Exchange.................................................................... 36
Resale of New Preferred Shares......................................................................... 36
BUSINESS AND STRATEGY........................................................................................... 37
General .............................................................................................. 37
Description of Dividend Policy......................................................................... 37
Description of the Company's Investment Policy......................................................... 38
Description of the Company's Management Policies....................................................... 41
Description of the Initial Mortgage Assets............................................................. 44
Description of the Initial Mortgage Loans.............................................................. 46
Effect of Interest Rate Fluctuation on Assets and Earnings............................................. 48
Servicing.............................................................................................. 49
Employees.............................................................................................. 50
Competition............................................................................................ 50
Legal Proceedings...................................................................................... 50
MANAGEMENT...................................................................................................... 51
Directors and Executive Officers....................................................................... 51
Compensation of Executive Officers..................................................................... 52
Options/SARs Exercised and Year-End Option/SAR Holdings................................................ 53
Pension Plan........................................................................................... 54
Independent Directors.................................................................................. 54
Audit Committee........................................................................................ 54
Compensation of Directors and Officers................................................................. 54
Limitation of Liability and Indemnification of Directors and Officers.................................. 55
The Bank as Advisor.................................................................................... 55
DESCRIPTION OF NEW PREFERRED SHARES............................................................................. 56
General .............................................................................................. 56
Dividends.............................................................................................. 57
Automatic Exchange..................................................................................... 58
Ranking .............................................................................................. 59
Voting Rights.......................................................................................... 59
Redemption............................................................................................. 60
Rights upon Liquidation................................................................................ 63
Independent Director Approval.......................................................................... 63
EXCHANGE OFFER; REGISTRATION RIGHTS............................................................................. 64
DESCRIPTION OF CAPITAL STOCK.................................................................................... 67
Common Stock........................................................................................... 67
Preferred Stock........................................................................................ 67
Power to Issue Additional Shares of Common Stock and Preferred Stock................................... 68
Restrictions on Ownership and Transfer................................................................. 69
Super-Majority Director Approval....................................................................... 70
Business Combinations.................................................................................. 70
Control Share Acquisitions............................................................................. 71
Form, Denomination, Book-Entry Procedures and Transfer................................................. 71
Depositary Procedures.................................................................................. 72
Certificated New Preferred Shares...................................................................... 73
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS................................................................. 74
Tax Impact of the Exchange Offer....................................................................... 74
Qualification of the Company as a REIT................................................................. 74
Stock Ownership Tests.................................................................................. 75
Asset Tests............................................................................................ 75
Gross Income Tests..................................................................................... 76
Distribution Requirement............................................................................... 76
Taxation of the Company................................................................................ 76
Tax Treatment of Automatic Exchange.................................................................... 77
Taxation of New Preferred Shares....................................................................... 77
Taxation of Tax-Exempt Entities........................................................................ 78
State and Local Taxes.................................................................................. 79
Taxation of Bank Preferred Shares...................................................................... 79
Certain United States Federal Income Tax Considerations Applicable to Foreign Holders.................. 79
Information Reporting and Backup Withholding........................................................... 80
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS...................................................................... 80
Automatic Exchange..................................................................................... 81
Taxation of Dividends.................................................................................. 81
Disposition of Bank Preferred Shares................................................................... 81
Redemption of Bank Preferred Shares.................................................................... 81
ERISA CONSIDERATIONS............................................................................................ 81
Status Under Plan Asset Regulations.................................................................... 82
Publicly-Offered Security Exception.................................................................... 83
Exemptions from Prohibited Transactions................................................................ 83
Unrelated Business Taxable Income...................................................................... 84
RATINGS ....................................................................................................... 84
PLAN OF DISTRIBUTION............................................................................................ 84
LEGAL MATTERS................................................................................................... 85
EXPERTS ....................................................................................................... 85
ANNEX A
</TABLE>
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<PAGE>
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus which are not
historical facts contain forward-looking information with respect to the
Company's plans, projections or future performance, the occurrence of which
involve certain risks and uncertainties that could cause the Company's actual
results or plans to differ materially from those expected by the Company.
All written or oral forward-looking statements attributable to
the Company are expressly qualified in their entirety by the foregoing
cautionary statement.
xii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus. The offering by NB
Capital Corporation (the "Company") of up to 238,400 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share
(the "New Preferred Shares") in exchange for up to 238,400 shares of the
outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "Old Preferred Shares" and together with the New
Preferred Shares, the "Preferred Shares"), of the Company is referred to herein
as the "Exchange Offer." References to dollars and US$ are to United States
dollars; references to C$ and $ are to Canadian dollars. As of , 1997, the
Canadian dollar exchange rate was C$ =US$1.00 and certain amounts stated herein
reflect such exchange rate.
The Company
General
The Company is a Maryland corporation incorporated on August
20, 1997. All of the common stock, par value $.01, of the Company (the "Common
Stock") is owned by National Bank of Canada (the "Bank"). 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 ("Mortgage Assets"). The Company will elect to be taxable
as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and
generally will not be liable for United States federal income tax to the extent
that it distributes its income to its stockholders and maintains its
qualification as a REIT. See "United States Federal Income Tax
Considerations--Qualification of the Company as a REIT." The Bank has indicated
to the Company that, for as long as any of the New Preferred Shares are
outstanding, the Bank intends to continue to own all of the outstanding shares
of the Common Stock. The Company was formed to provide investors with the
opportunity to invest in Canadian residential mortgages and other real estate
assets and to provide the Bank with a cost-effective means of raising capital.
The Company began operations on September 3, 1997.
Mortgage Assets
The Mortgage Assets consist of sixteen hypothecation loans
(the "Initial Mortgage Assets"), in an aggregate amount at December 31, 1997 of
US$456 million, issued to the Company by NB Finance that are recourse only to
the "Initial Mortgage Loans." The Initial Mortgage Loans consist of sixteen
pools of, at December 31, 1997, 11,701 "Mortgage Loans" in an aggregate amount
at December 31, 1997 of C$793 million (US$ ). Accordingly, the Initial Mortgage
Assets issued by NB Finance are overcollateralized by US$ . Mortgage Loans
consist of CMHC-insured residential first mortgages that are secured by real
property located in Canada. NB Finance was organized solely for the purpose of
acquiring Mortgage Loans and issuing the Initial Mortgage Assets, and other
similar obligations, to the Company. All of the ordinary shares of NB Finance
are owned by the Bank. The Bank has indicated to the Company that it intends to
maintain 100% ownership of the ordinary shares of NB Finance so long as the
Initial Mortgage Assets issued by NB Finance or any other obligations of NB
Finance are owned by the Company. NB Finance is not permitted to incur any
indebtedness or engage in any business activities other than the ownership of
Mortgage Loans and activities incidental thereto. See "Business and
Strategy--Description of the Initial Mortgage Loans." The Initial Mortgage
Assets issued by NB Finance will mature semi-annually beginning in 2000, and the
proceeds thereof (net of distributions and expenses) are expected to be
reinvested in additional Mortgage Assets as described under "Business and
Strategy--Description of Mortgage Assets; Investment Policy."
The Company acquired the Initial Mortgage Assets (which are
U.S. dollar denominated) backed by the Initial Mortgage Loans (which are
Canadian dollar denominated), rather than purchasing the Initial Mortgage Loans
directly, in order to eliminate potential foreign exchange gain or loss and to
provide a U.S. dollar denominated income stream that matched its obligations on
the Preferred Stock.
<PAGE>
The principal executive offices of the Company are located at
125 West 55th Street, New York, New York 10019. The telephone number of the
Company is (212) 632-8500.
The Bank
General
The Bank was formed through a series of amalgamations and its
roots date back to 1859 with the founding of the Banque Nationale in Quebec
City. Its head office and principal place of business is located at the National
Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, H3B 4L2, and its
telephone number is (514) 394-5000.
The Bank is a Schedule I bank under the Consolidated Bank Act
(Canada), as amended (the "Bank Act"). The Bank Act is the charter governing all
banks in Canada (both domestic banks and branches of foreign banks operating in
Canada). "Schedule I" of the Bank Act lists all Canadian domestic banks.
"Schedule II" of the Bank Act lists all subsidiaries of foreign banks with
branches in Canada. The specific provisions of the Bank Act which govern a
particular bank depend upon the schedule on which such bank is listed. As a
Canadian domestic bank, the Bank is a "Schedule I Bank."
The Bank, which ranks sixth among Canadian banks in terms of
total assets, is present in each of Canada's provinces. It delivers an extensive
range of financial services to individuals, commercial enterprises, financial
institutions and governments both in Canada and abroad.
Additional information regarding the Bank is included in the
Bank's short-form prospectus related to the Bank Preferred Shares affixed to
this Prospectus as Annex A.
Preferred Shares of the Bank
The authorized preferred capital of the Bank consists of an
unlimited number of First Preferred Shares ("First Preferred Shares") and up to
15 million Second Preferred Shares which may be issued for a maximum aggregate
consideration of C$1 billion and C$300 million, respectively, or the equivalent
thereof in other currencies. The Board of Directors of the Bank may by
resolution establish the terms of series of preferred shares. The Bank currently
has six series of First Preferred Shares outstanding with an aggregate
liquidation preference as of October 31, 1997 of C$376 million.
Canadian Statutory Requirements
Under Canadian law, the Bank is required to maintain adequate
capital in relation to its operations. The Office of Superintendent of Financial
Institutions Canada (the "Superintendent") has issued guidelines concerning the
maintenance of adequate capital (the "Capital Guideline") and has statutory
authority to direct the Bank to increase its capital even if the Bank is in
compliance with the Capital Guideline. Pursuant to the Capital Guideline,
requirements are applied to the Bank on a consolidated basis including all
subsidiaries except insurance subsidiaries or other regulated financial
institutions whose leverage is inappropriate for a deposit-taking institution
and which, because of their size, would have a material impact on the leverage
of the consolidated entity. Under the Capital Guideline, it is expected that the
Bank's total assets, including specified off-balance sheet items, should be no
greater than 20 times the Bank's total capital. It is also expected that the
Bank's total capital not be less than 8% of risk-weighted assets and
risk-weighted off-balance sheet items, unless a higher ratio is prescribed by
the Superintendent. The Capital Guideline prescribes risk-weighting and the
treatment of off-balance sheet items. The ratio of total capital to
risk-weighted off-balance sheet items is the "risk-based capital ratio" and is
based upon standards adopted by the Bank for International Settlement. The
Capital Guideline recognizes two tiers of capital. Tier 1 capital comprises the
highest quality capital elements based upon the attributes of permanence,
freedom from mandatory fixed charges against earnings and
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<PAGE>
subordination to the rights of depositors and other creditors. Tier 2 capital
contributes to the overall strength of a bank as a going concern, but falls
short in meeting the first two capital attributes described for Tier 1 capital.
Tier 2 capital differentiates between Tier 2A hybrid (debt/equity) instruments
and Tier 2B limited life instruments. Tier 1 capital elements consist of common
shareholders equity, qualifying non-cumulative perpetual preferred shares and
qualifying non-controlling interests in subsidiaries arising on consolidation
from Tier 1 capital instruments. Tier 1 capital instruments and preferred shares
qualifying as hybrid instruments in Tier 2A are intended to be permanent. Where
the share or instrument provides for redemption by the issuer after 5 years with
supervisory approval, the Superintendent would not normally prevent such
redemption by a healthy and viable bank where the instrument is or has been
replaced by equal or higher quality capital including an increase in retained
earnings, or if the bank is downsizing. All capital instruments must be issued
and fully paid for in money or, with the approval of the Superintendent, in
property. Net of amortization, the amount of Tier 2 capital may not exceed 100%
of Tier 1 capital after deducting goodwill and, consequently, the Capital
Guideline requires the amount of Tier 1 capital to be not less than 4% of
risk-weighted assets and risk-weighted off-balance sheet items, unless a higher
ratio is prescribed by the Superintendent. Also under the Capital Guideline, the
amount of Tier 2B capital net of amortization shall not exceed 50% of Tier 1
capital after deducting goodwill.
After giving effect to the issuance of the Old Preferred
Shares on September 3, 1997, the Tier 1 risk-based capital ratio and total
risk-based capital ratio levels of the Bank as of October 31, 1997 were 8.1% and
11.3%, respectively. The Bank's Tier 1 risk-based capital ratio and total
risk-based capital ratio were 6.9% and 10.2% at October 31, 1996, 6.8% and 10.4%
at October 31, 1995 and 6.9% and 11.1% at October 31, 1994.
Section 485 of the Bank Act requires Canadian banks to
maintain adequate capital and adequate and appropriate forms of liquidity and to
comply with related regulations. Under subsection 485(3), the Superintendent
may, by order, direct a bank to increase its capital or to provide additional
liquidity in such forms and amounts as the Superintendent may require. The
Superintendent may act under subsection 485(3) even if a bank is in compliance
with all applicable guidelines and regulations.
Exchange Event
Each of the New Preferred Shares will be exchanged
automatically (the "Automatic Exchange") for one Bank Preferred Share (i)
immediately prior to such time, if any, at which the Bank fails to declare and
pay or set aside for payment when due any dividend on any issue of its
cumulative First Preferred Shares or the Bank fails to pay or set aside for
payment when due any declared dividend on any of its non-cumulative First
Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based
capital ratio of less than 4.0% or a total risk-based capital ratio of less than
8.0%, (iii) in the event that the Superintendent takes control of the Bank
pursuant to the Bank Act, or proceedings are commenced for the winding-up of the
Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the
event that the Superintendent, by order, directs the Bank to act pursuant to
subsection 485(3) of the Bank Act and the Bank elects to cause the exchange
(each, an "Exchange Event"). In connection with the Exchange Offer, the Bank
Preferred Shares will be registered with the Commission. See "Risk
Factors--Certain Risks Associated with the Bank" and "Description of New
Preferred Shares--Automatic Exchange."
Organizational Diagram
The following diagram outlines the relationship between the
Bank and the Company relevant to the Exchange Offer: [Description of diagram:
The Bank on the top level of a two-tier diagram connected to the Company and NB
Finance on the second level of the two-tier diagram. Lines connect the Bank and
NB Finance and the Bank and the Company and indicate that the Bank owns 100% of
the common stock of the Company and 100% of the Common Stock of NB Finance.
Arrows indicate the flow of Initial Mortgage Loans (footnote number 1) from the
Bank to NB Finance and the flow of Initial Mortgage Assets (footnote number 2)
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<PAGE>
from NB Finance to the Company. A line connects the Company to Investors and
indicates that 100% of the Preferred Shares (footnote number 3) are owned by
investors. The following footnotes are included:
Footnote number 1: CMHC-insured residential first mortgages originated
by the Bank or acquired by the Bank from other NHA-Approved Lenders (as
defined).
Footnote number 2: Secured by residential real property and recourse
only to the Initial Mortgage Loans.
Footnote number 3: Subject to automatic exchange for the Bank Preferred
Shares in certain circumstances.]
Summary Risk Factors
The Preferred Shares offered hereby are subject to certain
risks. See "Risk Factors." Among such risks are the following:
o The Company's income consists principally of payments of
interest and, therefore, is heavily dependent upon prevailing
interest rates. Additionally, the Company's income is
denominated in Canadian dollars. Consequently, a significant
decline in interest rates or in the value of the Canadian
dollar may have an adverse effect on the Company, its assets
and its ability to make dividend payments with respect to the
New Preferred Shares.
o The Company's operations may be affected by prevailing real
estate market conditions. Consequently, there can be no
assurance that prevailing real estate market conditions will
not adversely affect the Company's ability to pay dividends.
o All of the residential real properties securing the Initial
Mortgage Assets issued by NB Finance are, and in the future
are expected to be, located outside the United States,
primarily in Quebec. Consequently, the Company will be subject
to the laws of a foreign jurisdiction with respect to any
actions taken and may be subject to a greater risk of default
than investments in comparable U.S. real property.
o The Initial Mortgage Assets issued by NB Finance are recourse
only to the Initial Mortgage Loans. Consequently, in the event
of default on the Initial Mortgage Assets issued by NB
Finance, the Company's only recourse will principally be
foreclosure on the real property securing the Initial Mortgage
Assets, and in certain circumstances, CMHC insurance may not
be available or receipt of payment thereof may be delayed.
o Dividends on the New Preferred Shares are not cumulative.
Consequently, if the Board of Directors of the Company (the
"Board of Directors") does not authorize and declare a
dividend on the New Preferred Shares for any particular
quarterly dividend period, the holders of the New Preferred
Shares would not be entitled to recover such dividend even if
funds are, or subsequently become, available for payment
thereof.
o As a subsidiary of the Bank, Canadian banking authorities
could, under certain circumstances, impose certain
restrictions on the operations of the Company. Consequently,
under such circumstances, such restrictions could cause the
Company to fail to qualify as a REIT as well as affect its
ability to pay dividends.
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<PAGE>
o The Company may not qualify as a REIT for United States
federal income tax purposes. Consequently, the Company may be
subject to United States federal income tax at normal
corporate tax rates.
o The Board of Directors may amend or revise the Company's
policies and strategies in the future without a vote of
stockholders, including holders of the New Preferred Shares.
Consequently, the holders of New Preferred Shares cannot
preclude the Board of Directors from making such amendments or
revisions even though the ultimate effect to the holders of
New Preferred Shares may be negative.
o The assets of the Company consist of obligations that do not
provide for complete amortization of principal over their term
to maturity and, therefore, require a balloon payment.
Consequently, holders of New Preferred Shares may be accepting
a greater degree of risk relative to an investment with
underlying assets that are comprised of fully amortizing
obligations.
o The Company has not obtained a third party valuation of its
assets for the purposes of the Exchange Offer. Consequently,
there can be no assurance that the fair market value of such
assets does not differ from the purchase price thereof.
o Under certain circumstances, including when the Bank is
experiencing financial difficulties or its financial condition
is deteriorating, the New Preferred Shares could be exchanged
automatically for the Bank's 8.45% Noncumulative First
Preferred Shares, Series Z (the "Bank Preferred Shares").
Consequently, the Bank Preferred Shares would represent an
investment in the Bank and not in the Company at a time when
the Bank is experiencing such financial difficulties or such
deterioration of financial condition.
o The Company is dependent upon the Bank and its affiliates in
virtually every phase of its operations. However, the
interests of the Company and the Bank may not be identical.
Consequently, because of the relationship between the Company
and the Bank and its affiliates, conflicts of interest may
arise between the Company and the Bank.
o The Old Preferred Shares may not be offered or sold, unless
registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the
Securities Act and applicable securities laws of states and
other jurisdictions. Consequently, holders of Old Preferred
Shares who fail to exchange their Old Preferred Shares for New
Preferred Shares pursuant to the Exchange Offer will continue
to be subject to the transfer restrictions set forth in the
legends thereon.
o The Company is under no obligation, and currently has no
intention, to list the New Preferred Shares on a national
exchange. Additionally, there is no existing market for the
New Preferred Shares and there can be no assurance as to the
liquidity of any markets that may develop, the ability of
holders to sell their New Preferred Shares or the sale price
thereof. Consequently, holders of New Preferred Shares may
find it difficult to sell their New Preferred shares or to
sell their New Preferred Shares at a price equivalent to the
purchase price thereof.
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 Mortgage Assets of the Company initially
consist solely of the Initial Mortgage Assets (sixteen hypothecation loans, in
an aggregate amount at
5
<PAGE>
December 31, 1997 of US$456 million, issued by NB Finance to
the Company that are recourse only to the Initial Mortgage Loans (which are
sixteen pools of, at December 31, 1997, 11,701 CMHC-insured residential first
mortgages, in an aggregate amount at December 31, 1997 of C$793 million (US$
million) and that are secured by the residential real property underlying the
Initial Mortgage Loans). See "Business and Strategy-- Description of the Initial
Mortgage Assets" and "-- Description of the Initial Mortgage Loans." The Company
has acquired 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
comparable to the Initial Mortgage Assets issued by NB Finance acquired from the
Bank or 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's current investment policy and current intention
is to invest at least 90% of its portfolio in the Initial Mortgage Assets issued
by NB Finance and obligations that are comparable to the Initial Mortgage Assets
issued by NB Finance. Accordingly, although the Company has no current intention
to invest in any assets other than the Initial Mortgage Loans or obligations
comparable to the Initial Mortgage Loans, potentially 10% of the Company's
portfolio could consist of investments in other assets permitted under the
Company's investment policy. See "Business and Strategy--Description of the
Company's Investment Policy" and "--Description of the Company's Management
Policies."
The Company intends and has the ability to hold the Mortgage
Loans to maturity unless there is a prepayment by the customer or a Mortgage
Loan is impaired. Therefore the Mortgage Loans will be recorded as a long-term
investment in the balance sheet of the Company.
Management
The Board of Directors is composed of five members, two of
whom are Independent Directors. 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. Pursuant to the terms of
the New Preferred Shares, the Independent Directors must consider the interests
of the holders of both the Preferred Stock and the Common Stock in determining
whether any proposed action requiring their approval is in the best interests of
the Company. The Company currently has six employees and does not anticipate
that it will require additional employees. See "Management."
Year 2000 Issue
Pursuant to the Advisory Agreement, dated as of September 3,
1997, between the Company and the Bank (the "Advisory Agreement"), the Bank
administers the day-to-day activities of the Company. Pursuant to the Servicing
Agreement, dated as of September 3, 1997, between the Company and the Bank (the
"Servicing Agreement"), the Bank services the Mortgage Loans on behalf of the
Bank. See "Risk Factors--Relationship with the Bank and Its Affiliates;
Conflicts of Interest," "--Dependence upon the Bank," "Business and
Strategy--Description of the Initial Mortgage Loans" and "Management--The Bank
as Advisor." Accordingly, the Company does not have a material Year 2000 issue.
The Bank, as originator and servicer of the Mortgage Loans
that underlie the Mortgage Assets and administrator of the day-to-day activities
of the Company, has formulated a detailed plan to address the Year 2000 issue.
The Bank expects to invest C$35 million dollars from 1997 through 2000 to modify
computer software and hardware in relation to the Year 2000 issue. According to
such plan, 30% of computer software and 20% of computer hardware were converted
and certified accurate by December 31, 1997. By
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<PAGE>
December 31, 1998, the Bank expects 95% of computer software and 50% of computer
hardware will be converted and certified accurate. By March 31, 1999, the Bank
expects that the conversion and certification of all remaining computer software
and hardware will be complete. The plan and budget also provide for monitoring
such conversion through the Year 2000.
Tax Status of the Company
The Company will elect to be taxable 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 liable for United States
federal income tax to the extent that it distributes its income to the holders
of its Common Stock and Preferred Stock, including the New Preferred Shares, and
maintains its qualification as a REIT. See "United States Federal Income Tax
Considerations--Qualifications of the Company 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 taxable income computed without regard to
the dividends paid deduction and the Company's net capital gain ("REIT taxable
income"). Notwithstanding its election to be taxable as a REIT, the Company may
be subject to federal, state and/or local tax. See "Risk Factors--Tax Risks" and
"United States Federal Income Tax Considerations."
The Exchange Offer
For a more complete description of the terms of the New
Preferred Shares specified in the following summary, see "Description of New
Preferred Shares."
The Exchange Offer The Company is offering to exchange pursuant to
the Exchange Offer up to 238,400 shares of its New
Preferred Shares for up to 238,400 of its
outstanding Old Preferred Shares at a rate of one
New Preferred Share for each Old Preferred Share.
The form and terms of the New Preferred Shares
(including the dividend rate, liquidation
preference and redemption rights) are identical in
all material respects to the form and terms of the
Old Preferred Shares, except that the New
Preferred Shares have been registered under the
Securities Act, and therefore, will not bear
legends restricting their transfer. Further, the
holders of New Preferred Shares will not be
entitled to the registration rights of holders of
Old Preferred Shares under the Registration Rights
Agreement, which rights with respect to the Old
Preferred Shares will terminate upon consummation
of the Exchange Offer. The issuance of the New
Preferred Shares is intended to satisfy certain
obligations of the Company contained in the
Registration Rights Agreement. Subject to certain
conditions, a holder of Old Preferred Shares who
wishes to tender must transmit a properly
completed and duly executed Letter of Transmittal
to The Bank of Nova Scotia Trust Company of New
York (the "Exchange Agent") on or prior to the
Expiration Date. For procedures related to
tendering, see "The Exchange Offer." As of the
date hereof, 300,000 shares of Old Preferred Stock
were outstanding. The Initial Purchaser currently
holds 61,600 Old Preferred Shares as an unsold
allotment.
Minimum Condition The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of Old
Preferred Shares being tendered for exchange.
Expiration Date; Withdrawal The Exchange Offer will expire at 5:00 p.m.,
New York City time, on the "Expiration
Date." As used herein, the term "Expiration Date"
means 5:00 p.m., New York City time, on , 1998;
unless the Company, in
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<PAGE>
its sole discretion, extends the period of time
for which the Exchange Offer is to remain open.
The tender of Old Preferred Shares pursuant to the
Exchange Offer may be withdrawn at any time prior
to the Expiration Date by sending a written notice
of withdrawal to the Exchange Agent.
Any Old Preferred Shares so withdrawn will be
deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any
Old Preferred Shares not accepted for exchange for
any reason will be returned without expense to the
tendering holder thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer. See "The Exchange
Offer--Expiration Date; Extension; Termination;
Amendment" and "--Withdrawal Rights."
Exchange Date The date of acceptance and exchange for the
Old Preferred Shares will be the business day
following the Expiration Date.
Conditions to the
Exchange Offer The Exchange Offer is subject to certain customary
conditions which may be waived by the Company. The
Company currently expects that each of these
conditions will be satisfied and that no waivers
will be necessary. See "The Exchange
Offer--Certain Conditions to the Exchange Offer."
The Company reserves the right to terminate or
amend the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition.
Procedure for
Tendering Old
Preferred Shares Each holder of Old Preferred Shares wishing to
accept the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal,
together with the Old Preferred Shares and any
other required documentation, to the Exchange
Agent at the address set forth herein. See "The
Exchange Offer--Procedures for Tendering Old
Preferred Shares" and "Plan of Distribution."
Use of Proceeds There will be no proceeds to the Company from the
exchange of Old Preferred Shares pursuant to the
Exchange Offer.
Special Procedures
for Beneficial
Owners Any beneficial owner whose Old Preferred Shares
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's own behalf. If such beneficial owner
wishes to tender on such beneficial owner's own
behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal
and delivering the Old Preferred Shares, either
make appropriate arrangements to register
ownership of the Old Preferred Shares in such
beneficial owner's name or obtain a properly
completed stock power from the registered holder.
The transfer of registered ownership may take
considerable time. See "The Exchange
Offer--Procedure for Tendering Old Preferred
Shares."
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<PAGE>
Guaranteed Delivery
Procedures Holders of Old Preferred Shares who wish to tender
their Old Preferred Shares and whose Old Preferred
Shares are not entirely available or who cannot
deliver their Old Preferred Shares, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior
to the Expiration Date must tender their Old
Preferred Shares according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Procedure for Tendering Old Preferred
Shares."
Acceptance of the
Old Preferred
Shares and Delivery
of the New
Preferred Shares The Company will accept for exchange any and all
Old Preferred Shares which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York
City time, on the of the New Expiration Date. The
New Preferred Shares issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--Procedures for Tendering Old Preferred
Shares."
Effect on the
Holders of Old
Preferred Shares As a result of the making of, and upon acceptance
for exchange of all validly tendered Old Preferred
Shares pursuant to the terms of the Exchange
Offer, the Company will have fulfilled the
covenant contained in the Registration Rights
Agreement and, accordingly, there will be no
liquidated damages pursuant to the terms of the
Registration Rights Agreement, and the holders of
the Old Preferred Shares will have no further
registration or other rights under the
Registration Rights Agreement. Holders of the Old
Preferred Shares who do not tender their Old
Preferred Shares in the Exchange Offer will
continue to hold such Old Preferred Shares without
any rights under the Registration Rights Agreement
that, by their terms, terminate or cease to have
further effectiveness as a result of the making
of, and the acceptance for exchange of all validly
tendered Old Preferred Shares pursuant to, the
Exchange Offer. To the extent that the Old
Preferred Shares are tendered and accepted in the
Exchange Offer, the trading market for untendered
Old Preferred Shares could be adversely affected.
Consequence of Failure
to Exchange Securities
Offered Holders of Old Preferred Shares who do not
exchange for New Preferred Shares pursuant to the
Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Preferred
Shares as set forth in the legend thereon as a
consequence of the offer or sale of the Old
Preferred Shares pursuant to an exemption from, or
in a transaction not subject to, the registration
requirements of the Securities Act and the
applicable state securities laws. The Company does
not currently anticipate that they will register
any Old Preferred Shares which are not exchanged
pursuant to the Exchange Offer under the
Securities Act after the Expiration Date.
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The New Preferred Shares
Issuer NB Capital Corporation, a Maryland corporation.
Securities Offered Up to 238,400 Noncumulative Exchangeable Preferred
Shares, Series A.
Ranking The New Preferred Shares rank senior to the Common
Stock with respect to dividend rights and rights
upon liquidation. In order to qualify as a REIT,
the capital stock of the Company must be held by
at least 100 holders during approximately 90% or
more of the taxable year beginning in the
Company's second taxable year and in each
subsequent taxable year. See "United States
Federal Income Tax Considerations--Stock Ownership
Tests." In making a determination whether the
capital stock of the Company is held by at least
100 holders, the number of shareholders of the
Bank is not considered. The Company has issued
shares of a series of cumulative, senior preferred
stock ("Senior Preferred Stock") with an aggregate
liquidation preference of up to US$450,000 and
limited transferability to ensure that it meets,
and will continue to meet, the 100 person
ownership requirement for REIT status without
having to constantly monitor the number of holders
of Preferred Shares. Except for the Senior
Preferred Stock, additional shares of Preferred
Stock ranking senior to the New Preferred Shares
may not be issued without the approval of holders
of at least two-thirds of the New Preferred
Shares. Additional shares of Preferred Stock
ranking on a parity with the New Preferred Shares
may not be issued without the approval of a
majority of the Board of Directors and a majority
of the Independent Directors.
Dividends Dividends on the New Preferred Shares are payable
at the rate of 8.35% per annum of the liquidation
preference (an amount equal to US$83.50 per annum
per share, calculated by multiplying the annual
dividend rate of 8.35% by the liquidation
preference of US$1,000 per share, assuming
authorization and declaration by the Board of
Directors of four quarterly dividends), if, when
and as authorized and declared by the Board of
Directors. If authorized and declared, dividends
are payable quarterly in arrears on the 30th day
of March, June, September and December in each
year, commencing June 30, 1998. With respect to
the dividend period in which the Exchange Offer is
consummated, dividends on each New Preferred Share
will accrue from the first day of the dividend
period. Thereafter, dividends accrue in each
quarterly period from the first day of such
period, whether or not authorized, declared or
paid with respect to New Preferred Shares for the
prior quarterly period. Dividends on the New
Preferred Shares are not cumulative and,
accordingly, if no dividend is authorized and
declared on the New Preferred Shares by the Board
of Directors for a quarterly dividend period,
holders of the New 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 authorized, declared and paid for any future
period with respect to either the New Preferred
Shares or the Common Stock. If no dividend is paid
on the New 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 New
Preferred Shares--Dividends."
10
<PAGE>
Liquidation Preference The liquidation preference for each of the New
Preferred Shares is US$1,000. Upon liquidation,
holders of the New Preferred Shares will also be
entitled to receive an amount equal to the
quarterly accrued and unpaid dividend, if any,
thereon to the date of liquidation. See
"Description of New Preferred Shares--Rights Upon
Liquidation."
Registration Rights
Agreement The Old Preferred Shares were sold by the Company
on September 3, 1997 pursuant to a Purchase
Agreement, dated as of August 22, 1997, among the
Company, the Bank and the Initial Purchaser (the
"Purchase Agreement"). Pursuant to the Purchase
Agreement, the Company and the Initial Purchaser
entered into the Registration Rights Agreement.
This Exchange Offer is intended to satisfy certain
rights under the Registration Rights Agreement,
which terminate upon the consummation of the
Exchange Offer. The holders of the New Preferred
Shares are not entitled to any exchange or
registration rights with respect to the New
Preferred Shares. The Old Preferred Shares are
subject to the payment of additional interest
under certain circumstances if the Company is not
in compliance with its obligations under the
Registration Rights Agreement. See "Exchange
Offer; Registration Rights."
Description of the
New Preferred Shares The form and terms of the New Preferred Shares are
the same as the form and terms of the Old
Preferred Shares except that (i) the New Preferred
Shares will be registered under the Securities Act
and therefore the New Preferred Shares will not
bear legends restricting the transfer thereof and
(ii) holders of the New Preferred Shares will not
be entitled to the registration rights available
to holders of Old Preferred Shares under the
Registration Rights Agreement, which registration
rights with respect to Old Preferred Shares will
terminate upon the consummation of the Exchange
Offer. See "Description of the New Preferred
Shares."
Redemption The New Preferred Shares are not redeemable prior
to September 3, 2007 (except upon the occurrence
of a Tax Event, as defined in "Description of New
Preferred Shares--Redemption," on or after
September 3, 2002). On and after September 3,
2007, the New 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
redemption prices set forth herein, plus the
quarterly accrued and unpaid dividend, if any,
thereon to the date of redemption. Upon the
occurrence of a Tax Event, on or after September
3, 2002, the Company will have the right to redeem
the New Preferred Shares in whole (but not in
part) at a redemption price equal to the
Make-Whole Amount (as defined in "Description of
New Preferred Shares--Redemption"), plus the
quarterly accrued and unpaid dividend, if any,
thereon to the date of redemption. Any redemption
is subject to the prior written approval of the
Superintendent. See "Description of New Preferred
Shares-- Redemption." The New 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 of the New Preferred Shares will be exchanged
automatically for one Bank Preferred Share upon
the occurrence of an Exchange Event. See
"Description of New Preferred Shares--Automatic
Exchange."
11
<PAGE>
Voting Rights Holders of the New Preferred Shares will not have
any voting rights, except as expressly provided
herein. On any matter on which holders of the New
Preferred Shares may vote, each of the New
Preferred Shares will be entitled to one vote. See
"Description of New Preferred Shares--Voting
Rights."
Ownership Limits Beneficial ownership by any individual of
more than 5% of any outstanding series of
Preferred Stock, including the New Preferred
Shares offered hereby, is restricted in order to
preserve the Company's status as a REIT for United
States federal income tax purposes. See
"Description of Capital Stock--Restrictions on
Ownership and Transfer."
Ratings The New Preferred Shares are rated "a2" by Moody's
Investors Service, Inc. and "BBB+" 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.
Use of Proceeds There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Federal Income Tax
Consequences For federal income tax purposes, the exchange
pursuant to the Exchange Offer will not result in
any income gain or loss to the holders or the
Company. See "United States Federal Income Tax
Considerations."
Exchange Agent The Bank of Nova Scotia Trust Company of New
York is serving as Exchange Agent in connection
with the Exchange Offer.
ERISA Consideration Each holder of the New Preferred Shares will, by
exchanging its Old Preferred Shares for New
Preferred Shares, be deemed to have directed the
Company to invest in the Initial Mortgage Assets
issued by NB Finance (as well as the other assets
held by the Company and identified at the time of
purchase) and represented and agreed that either
(A) no part of the assets to be used by it to
acquire and hold such New Preferred Shares
constitutes the assets of any (I) employee benefit
plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA")) subject to Title I of ERISA, (II) plan
(as defined in section 4975(e)(1) of the Code) or
(III) entity whose underlying assets include "plan
assets" under Department of Labor Regulation 29
C.F.R. Section 2510.3-101 (collectively, "Plans")
or (B) one or more prohibited transaction
statutory or class exemptions apply such that the
use of such plan assets to acquire and hold such
New Preferred Shares will not constitute a
nonexempt prohibited transaction under ERISA or
the Code.
In addition, in the event that the New Preferred
Shares are not treated as "publicly offered
securities" (within the meaning of the
above-referenced regulations) as of the date on
which the Exchange Offer is consummated or (if no
Exchange Offer is consummated) the shelf
registration statement, which the Company is
required to file, pursuant to the Registration
Rights Agreement, in lieu of or in addition to the
Registration Statement in the event (i) the
Company is not permitted to effect the Exchange
Offer, (ii) for any reason, the Registration
Statement is not declared effective within 180
days of the Issue Date, or (iii) in certain other
circumstances (the "Shelf Registration
Statement"), is declared effective, then during
the period commencing on
12
<PAGE>
such date and ending on the date on which the New
Preferred Shares become "publicly-offered
securities", each Plan purchaser will be deemed to
have appointed an independent fiduciary (the
"Independent Fiduciary"), which will be identified
by the Company to exercise any discretionary
authority with respect to transactions involving
both the Company and the Bank or any Bank
affiliate. The Independent Fiduciary will be
identified prior to any such transaction and will
be subject to removal and replacement by a
majority of the holders of the New Preferred
Shares.
Any Plan fiduciary that proposes to cause a Plan
to exchange New Preferred Shares for Old Preferred
Shares should consult with its counsel with
respect to the potential applicability of ERISA
and the Code to such investment and whether any
exemption or exemptions would be applicable and
determine on its own whether all conditions of
such exemption or exemptions have been satisfied.
Any such Plan fiduciary should also determine
whether the exchange of New Preferred Shares for
Old Preferred Shares is permitted under the
governing Plan instruments and is appropriate for
the Plan in view of the overall investment policy
and the composition and diversification of its
portfolio.
13
<PAGE>
Selected Financial Data
The selected financial data presented below as of and for the
period from August 20, 1997 (date of inception) to September 30, 1997 are
derived from and are qualified by reference to the Financial Statements
contained elsewhere in this Prospectus. The selected financial data presented
below as of and for the period from August 20, 1997 (date of inception) to
September 30, 1997, have been derived from the unaudited financial statements of
the Company which, in the opinion of management, include all adjustments, which
consist only of normal recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations for such period. The
following financial data should be read in conjunction with the Financial
Statements contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
August 20, 1997
(date of inception) to
Statement of Income Data: September 30, 1997
<S> <C>
Revenue.................................................................................. $ 3,053,269
Operating expenses....................................................................... 0
----------
Operating profit......................................................................... 3,053,269
Other income (expense):
Income tax............................................................................... 1,221,307
----------
Net income............................................................................... $ 1,831,962
Ratio of Earnings to Fixed Charges and Preferred Dividends(1)............................ 2.7
Balance Sheet Data:
Total assets............................................................................. $480,391,723
Total liabilities........................................................................ 2,346,307
8.35% Noncumulative Exchangeable
Preferred stock, Series A................................................................ 300,000,000
Common stock............................................................................. 1
Contribution Surplus..................................................................... 477,335,453
Retained Earnings........................................................................ 706,962
</TABLE>
Notes To Selected Financial Data
(1) Fixed charges for the period were nil. Preferred dividends were not
increased to an amount representing the pre-tax earnings which would be
required to cover such dividend requirement because the Company, as a
REIT, does not pay taxes.
14
<PAGE>
RISK FACTORS
Prospective exchanging stockholders should carefully consider
the following information in conjunction with the other information contained in
this Prospectus before exchanging Old Preferred Shares for the New Preferred
Shares in the Exchange Offer. 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.
Interest Rate Risk and Maturity of Initial Mortgage Loans
The Company's income currently consists of interest payments
from the Initial Mortgage Assets issued by NB Finance. Interest and principal
amounts generated by the Initial Mortgage Loans currently enables full payment
with respect to the Initial Mortgage Assets. The Initial Mortgage Assets and the
Initial Mortgage Loans mature between January 2000 and July 2001. Consequently,
(i) if there is a significant decline in interest rates at a time when the
Company must reinvest payments of interest and principal, the Company may find
it difficult to purchase additional Mortgage Assets or Mortgage Loans that
generate sufficient income to support the payment of dividends on the New
Preferred Shares, and (ii) there can be no assurance that a significant decline
in interest rates would not adversely affect the Company's ability to pay
dividends on the New Preferred Shares.
Currency Exchange Rate Risk
The Company's income consists principally of interest payments
from the Initial Mortgage Assets issued by NB Finance and obligations which are
comparable to the Initial Mortgage Assets issued by NB Finance. While the
Initial Mortgage Assets are, and the Company's future Mortgage Assets likely
will be, denominated in United States dollars, Mortgage Loans are denominated
and payable in Canadian dollars. Consequently, if there is a significant
decrease in the value of the Canadian dollar, the value in U.S. dollars of the
cash flow from Mortgage Loans assigned to the Company by NB Finance (including
principal payments) may decrease, which may adversely affect the cash flow to
the Company and the Company's ability to pay the dividends on the New Preferred
Shares. From the beginning of 1994 to and including , 1998, the exchange rate of
the Canadian dollar to the United States dollar has ranged from C$ to US$1.00 on
to C$ to US$1.00 on , with an average for such period of C$ to US$1.00.
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 and political conditions affecting real estate
values, particularly in Quebec, (ii) the level of interest income generated by
the Company's Mortgage Assets, (iii) the market value of the Company's Mortgage
Assets and (iv) the supply of and demand for the Company's Mortgage Assets.
Further, there can be no assurance that the value of the Initial Mortgage Assets
issued by NB Finance, or the value of the real property securing the Initial
Mortgage Assets issued by NB Finance, will remain at the levels existing on the
dates of origination of the Initial Mortgage Assets. Consequently, there can be
no assurance that prevailing real estate market conditions will not adversely
affect the Company's operations and its ability to pay dividends on the New
Preferred Shares. These foregoing factors may also have an effect on the
business and financial condition of the Bank. Consequently, such factors may
increase the likelihood of an Exchange Event.
15
<PAGE>
Geographic Concentration of the Real Property Securing the Initial Mortgage
Assets
All of the real property securing the Initial Mortgage Assets
issued by NB Finance is geographically concentrated in Canada, primarily located
in Quebec and New Brunswick, and the real property securing additional Mortgage
Assets acquired by the Company is also expected to be geographically
concentrated in Canada. Consequently, any actions taken by or on behalf of the
Company with respect to such real property will be dependent upon the laws of
the jurisdictions in which such real property is located.
In addition, from time to time Canada may experience weaker
economic conditions and housing markets than the United States which may
adversely affect the value of real property and mortgages thereon. Consequently,
the Initial Mortgage Assets issued by NB Finance may be subject to a greater
risk of default, individually and in the aggregate, than comparable obligations
secured by U.S. real property or comparable obligations secured by real property
that is less geographically concentrated.
Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC
Insurance
The Initial Mortgage Assets issued by NB Finance are recourse
only to the Initial Mortgage Loans, which have been assigned to the Company by
NB Finance, and are secured by residential real property underlying the Initial
Mortgage Assets issued by NB Finance. Consequently, in the event of nonpayment
of interest or other default on the Initial Mortgage Assets issued by NB
Finance, the Company's only recourse will be to exercise its rights under the
Initial Mortgage Loans (principally through foreclosure on the real property
securing the Initial Mortgage Assets issued by NB Finance), either directly or
through the Bank.
It is anticipated that additional Mortgage Assets acquired by
the Company will consist of similar limited recourse obligations. The CMHC
insurance with respect to the Initial Mortgage Loans is not a guarantee of
timely payment of principal and interest on such Mortgage Loans. Typically, CMHC
will only make payments pursuant to its insurance after the approved lender has
taken certain actions which may be time consuming and can cause delays in the
receipt of such payments. In addition, the CMHC insurance will cease to be in
force if any such Initial Mortgage Loan is sold to a person other than a lender
approved by CMHC unless such Initial Mortgage Loan continues to be administered
by CMHC or a lender approved by CMHC. The regulations of the CMHC stipulate that
the terms of repayment of Mortgage Loans shall not be altered and that no
derogation from the rights of the mortgagee against the mortgaged property by
way of postponement, partial discharge or otherwise shall be granted without
first obtaining the approval of the CMHC. Consequently, even though the Mortgage
Loans are CMHC insured, payments of principal and interest in respect of any
Mortgage Loan in default may not be available from CMHC or, if available,
receipt thereof may be delayed.
Tax Risks
Adverse Consequences of Failure to Qualify as a REIT
The Company operates 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 Shearman & Sterling has rendered an opinion,
described under "United States Federal Income Tax Considerations" below, that,
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, no
transaction closely comparable to that contemplated herein has been the subject
of any administrative pronouncement or judicial decision and 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 and administrative interpretations. The determination of
various factual matters and circumstances not entirely within the Company's
control, and not
16
<PAGE>
addressed by the opinion of Shearman & Sterling, 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, or future administrative
interpretations or court decisions, will not significantly change the tax laws
with respect to qualification as a REIT or the United States federal income tax
consequences of such qualification. The Company has issued shares of its Senior
Preferred Stock to meet the 100 person ownership requirement for REIT status. In
making a determination whether the capital stock of the Company is held by at
least 100 holders, the number of shareholders of the Bank is not considered.
The Company is relying on the opinion of Shearman & Sterling,
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.
Consequently, (i) if the Company fails to qualify as a REIT in
any taxable year, the Company would not be allowed a deduction for distributions
to stockholders in computing its taxable income and would be subject to United
States federal income tax on its taxable income in the same manner as a regular,
domestic corporation, (ii) as a result, the amount available for distribution to
the Company's stockholders, including the holders of the New Preferred Shares,
would be reduced for the year or years involved and (iii) unless entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for the four taxable years following the
year during which REIT qualification was lost. The failure of the Company to
qualify as a REIT would not necessarily give the Company the right to redeem the
New Preferred Shares, nor would it give the holders of the New Preferred Shares
the right to have their shares redeemed. See "Description of New Preferred
Shares--Redemption."
Notwithstanding the fact that the Company currently operates
in a manner designed to enable it to qualify as a REIT, future economic, market,
legal, tax and other considerations may cause the Board of Directors to
determine that it is in the best interests of the Company and the holders of the
Common Stock and the New Preferred Shares to revoke the Company's REIT election.
As long as any of the New Preferred Shares are outstanding, any such
determination by the Company may not be made without the approval of a majority
of the Independent Directors. United States federal income tax law prohibits the
Company from electing to be taxable as a REIT for the four taxable years
following the year of such revocation. See "United States Federal Income Tax
Considerations."
REIT Requirements with Respect to Stockholder Distributions
To qualify as a REIT under the Code, the Company is generally
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 failing to qualify as a REIT.
Consequently, the Company would become subject to tax at normal corporate rates.
In addition, the Company would be subject to a 4% nondeductible excise tax on
the amount, if any, by which certain distributions considered as paid by it with
respect to any calendar year are less than the sum of 85% of its ordinary income
for the calendar year, 95% of its capital gains net income for the calendar year
and any undistributed taxable income from prior periods. Under certain
circumstances, the Superintendent may restrict the ability of the Company, as a
subsidiary of the Bank, to make distributions to its stockholders. Consequently,
such a restriction could result in the Company's failing to satisfy the REIT
requirements with respect to stockholder distributions. See "--Dividend and
Other Regulatory Restrictions on Operations of the Company."
17
<PAGE>
Redemption upon Occurrence of a Tax Event
At any time following the occurrence of a Tax Event on or
after September 3, 2002, even if such Tax Event occurs prior to September 3,
2007, the Company will have the right to redeem the New Preferred Shares in
whole but not in part, subject to the prior written approval of the
Superintendent. The occurrence of a Tax Event will not, however, give the
holders of the New Preferred Shares any right to have such shares redeemed. See
"Description of New Preferred Shares--Redemption."
Automatic Exchange upon Occurrence of an Exchange Event
Upon the occurrence of an Exchange Event, the outstanding New
Preferred Shares will be exchanged automatically on a one-for-one basis for Bank
Preferred Shares. See "Description of New Preferred Shares--Automatic Exchange."
The Automatic Exchange will be a taxable event. Consequently, each holder of the
New Preferred Shares will have a gain or loss, as the case may be, equal to the
difference between the basis of such holder in the New Preferred Shares and the
fair market value of the Bank Preferred Shares received in the Automatic
Exchange. See "United States Federal Income Tax Considerations--Tax Treatment of
Automatic Exchange."
Changes in Tax Law
Under current tax law, payments on the Initial Mortgage Loans
and the Initial Mortgage Assets issued by NB Finance are not subject to any
imposition of withholding tax. There can be no assurance, however, that as a
result of any change in any applicable law, treaty, rule or regulation or any
interpretation thereof, the payments on the Initial Mortgage Loans or the
Initial Mortgage Assets issued by NB Finance might not in the future become
subject to withholding tax. In the event that any withholding tax is imposed on
payments of interest on the Initial Mortgage Loans, neither NB Finance nor the
Company will be entitled to receive additional amounts to compensate for such
withholding tax and accordingly, such tax would reduce the amount available to
make payments on the Initial Mortgage Assets issued by NB Finance. Consequently,
there can be no assurance that the remaining payments on the Initial Mortgage
Assets issued by NB Finance would be sufficient to make timely payments of
dividends on the New Preferred Shares.
Ownership of the New Preferred Shares
If the possibility of the occurrence of the Automatic Exchange
caused the Bank to be viewed from the date of issuance of the New Preferred
Shares as the holder for U.S. federal income tax purposes of the New Preferred
Shares, distributions on the New Preferred Shares would be subject to
withholding of United States federal income tax at a 30 percent rate.
Consequently, the Company, as withholding agent, would be liable for the payment
of such tax, which would reduce the amount available to pay dividends on the New
Preferred Shares.
Dividends Not Cumulative
Dividends on the New Preferred Shares are not cumulative. 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 New Preferred Shares or no dividend for any quarterly dividend
period, notwithstanding that funds are available to pay such dividend. Factors
that may be considered by the Board of Directors in making this determination
are the Company's financial condition and capital needs, legal or regulatory
requirements, economic conditions, and such other factors as the Board may deem
relevant. Consequently, if the Board of Directors does not authorize and declare
a dividend on the New Preferred Shares for a quarterly dividend period, the
holders of the New Preferred Shares would not be entitled to recover such
dividend, even if funds are, or subsequently become, available for payment
thereof. Notwithstanding the foregoing, to remain qualified as a REIT, the
Company must distribute annually at least 95% of its "REIT
18
<PAGE>
taxable income" (not including capital gains) to stockholders. See "--Tax Risks"
and "United States Federal Income Tax Considerations--Taxation of the Company."
Dividend and Other Regulatory Restrictions on Operations of the Company
Because the Company and NB Finance are subsidiaries of the
Bank, the Superintendent has the right to examine the Company and NB Finance and
their respective activities. Under certain circumstances, including any
determination that the Bank's relationship with the Company or NB Finance
results in an unsafe and unsound banking practice, the Superintendent has the
authority to restrict the ability of the Company or NB Finance to transfer
assets, to engage in transactions with the Bank, to make distributions to their
stockholders (including dividends to the holders of the New Preferred Shares, as
described below), or to redeem shares of Preferred Stock. The Superintendent
could also require the Bank to sever its relationship with or divest its
ownership of the Company. Consequently, such actions could potentially result in
the Company's failure to pay dividends in respect of the New Preferred Shares or
failure to qualify as a REIT, and therefore, result in the Company being (i)
subject to United States income tax in the same manner as a regular, domestic
corporation and (ii) unless entitled to relief, disqualified from treatment as a
REIT for four taxable years following the year during which such qualification
was lost. Failure to qualify as a REIT would not necessarily give the Company
the right to redeem the New Preferred Shares or give the holders thereof the
right to have the New Preferred Shares redeemed. See "--Tax Risks." In addition,
as subsidiaries of the Bank, the Company and NB Finance are subject to
supervision by U.S. bank regulators.
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 New Preferred
Shares. Consequently, holders of the New Preferred Shares cannot preclude the
Board of Directors from revising such policies and strategies and the ultimate
effect of such revision in the policies and strategies of the Company on a
holder of the New Preferred Shares may be negative. See "Business and
Strategy--Management Policies and Programs."
Balloon Payments
The Initial Mortgage Loans do not provide for the amortization
of the principal balance thereof over their term to maturity. Accordingly, a
principal payment equal to the original balance of such Initial Mortgage Loan
less any prepayments thereon will be due on each Initial Mortgage Loan at its
maturity date. The ability of the borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
mortgaged property. In attempting to do so, the borrower will be affected by a
number of factors, including the level of available mortgage rates at the time
of attempted sale or refinancing, the mortgagor's equity in the mortgaged
property, and prevailing economic conditions and the availability of credit for
residential real estate generally. Consequently, Mortgage Loans requiring
balloon payments may involve a greater degree of risk than fully amortizing
loans.
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations
with Affiliates
The Company and the Bank believe that the fair market value of
the Initial Mortgage Assets issued by NB Finance at acquisition was at least
equal the amount that the Company paid for the Initial Mortgage Assets issued by
NB Finance (approximately US$477 million). However, no third party valuations
were obtained for purposes of the Exchange Offer. Consequently, there can be no
assurance that the fair market value of the Initial Mortgage Assets issued by NB
Finance did not differ from the amount that the Company paid for the Initial
Mortgage Assets issued by NB Finance.
19
<PAGE>
In addition, it is not anticipated that any 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 such Mortgage Assets to, or purchasing such Mortgage Assets
from, the Company. Consequently, although the Company and the Bank intend that
future acquisitions or dispositions of Mortgage Assets will be on a fair market
value basis, there can be no assurance that the consideration to be paid (or
received) by the Company to (or from) the Bank or any of its affiliates in
connection with future acquisitions or dispositions of Mortgage Assets will not
differ from the fair market value of such Mortgage Assets.
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 and administers the day-to-day activities of the Company under the
Advisory Agreement. The Bank also services 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 issuance of the
Initial Mortgage Assets; future acquisitions of Mortgage Assets from the Bank
and/or affiliates of the Bank; servicing of Mortgage Loans (including the
Initial Mortgage Loans); future dispositions of Mortgage Assets to the Bank or
affiliates of 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, be fair
to all parties and consistent with market terms, including the prices paid and
received for Mortgage Assets or in connection with the servicing of Mortgage
Loans. The requirement in the Company's charter (the "Charter") that certain
actions of the Company be approved by a majority of the Independent Directors is
also intended to ensure fair dealings between the Company and 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."
Dependence upon the Bank
Pursuant to the Advisory Agreement, the Bank administers the
day-to-day operations of the Company. Pursuant to the Servicing Agreement, the
Bank services the Initial Mortgage Loans on behalf of, and as agent for, the
Company. Consequently, (i) the Company is dependent for the selection,
structuring and monitoring of its Mortgage Assets on the diligence and skill of
the officers and employees of the Bank and (ii) the Company is dependent upon
the expertise of the Bank for the servicing of Mortgage Loans. The Bank may
subcontract all or a portion of its obligations under the Advisory Agreement,
and the Bank 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.
Consequently, in the event the Bank subcontracts its obligations in such a
manner, the Company will be dependent upon the subcontractor to provide
services. See "Management--The Bank" and "Business and Strategy--Servicing."
Consequences of Failure to Exchange Old Preferred Shares
The New Preferred Shares will be issued in exchange for Old
Preferred Shares only after timely receipt by the Exchange Agent of such Old
Preferred Shares, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of Old Preferred Shares
desiring to tender such Old Preferred Shares in exchange for New Preferred
Shares should allow sufficient time to ensure
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<PAGE>
timely delivery. Neither the Exchange Agent nor the Company is under any duty to
give notification of defects or irregularities with respect to tenders of Old
Preferred Shares for exchange. In general, the Old Preferred Shares may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable securities laws of states and other jurisdictions. Consequently,
holders of Old Preferred Shares who do not exchange their Old Preferred Shares
for New Preferred Shares pursuant to the Exchange Offer (i) will continue to be
subject to the restrictions on transfer of such Old Preferred Shares as set
forth in the legends thereon as a result of the Old Preferred Shares having been
issued pursuant to exemption from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws and (ii) will not be entitled to the registration rights available pursuant
to the Registration Rights Agreement which will terminate upon completion of the
Exchange Offer. In addition, any holder of Old Preferred Shares who tenders in
the Exchange Offer for the purpose of participating in a distribution of the New
Preferred Shares will be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Preferred Shares for its own
account in exchange for Old Preferred Shares, where such Old Preferred Shares
were acquired by such broker-dealer as a result of market-making activities or
any other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such New Preferred Shares. The Company has
agreed that, for a period of six months after the date of this Prospectus, it
will make this Prospectus, as it may be amended or supplemented, available to
any broker-dealer for use in connection with any such resales and will update
this Prospectus, as required, during such six-month period.
Absence of Public Market
The Company is under no obligation, and currently has no
intention, to list the New Preferred Shares on a national exchange.
Additionally, there is no existing market for the New Preferred Shares and there
can be no assurance as to the liquidity of any markets that may develop for the
New Preferred Shares, the ability of the holders to sell their New Preferred
Shares or at what price holders of the New Preferred Shares will be able to sell
their New Preferred Shares. Future liquidity and trading prices of the New
Preferred Shares will depend on many factors including, among other things,
prevailing interest rates, the Company's operating results, the market for
similar securities and whether the New Preferred Shares are listed on a national
exchange. The Initial Purchaser has informed the Company that the Initial
Purchaser may make a market in the Series A Preferred Shares. However, the
Initial Purchaser is not obligated to do so and any such market making activity
may be terminated at any time without notice to the holders of the New Preferred
Shares. In addition, such market making activity will be subject to the limits
of the Securities Act and may be limited during the pendency of the Registration
Statement or the Shelf Registration Statement. Consequently, holders of New
Preferred Shares may find it difficult to sell their New Preferred Shares or to
sell their New Preferred Shares at a price equivalent to the purchase price
thereof.
Risks Associated with the Bank
Automatic Exchange.
.
The exchange of Old Preferred Shares for New Preferred Shares
involves risks to the holders of New Preferred Shares with respect to the
performance and capital levels of the Bank. An imminent failure to pay dividends
on preferred shares of the Bank when due, a decline in the capital levels of the
Bank or an act of the Superintendent could result in the New Preferred Shares
being exchanged automatically for the Bank Preferred Shares. Consequently, (i)
the Bank Preferred Shares would be an investment in the Bank and not in the
Company and (ii) as a result of an Exchange Event, holders of the New Preferred
Shares would be required to exchange their New Preferred Shares for Bank
Preferred Shares and become preferred shareholders of the Bank at a time when
the Bank is experiencing financial difficulties or its financial condition is
deteriorating or when the Bank has been taken over by the Superintendent or
proceedings for the winding-up of the Bank have been commenced. An Exchange
Event includes the Superintendent electing to cause the Automatic Exchange.
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<PAGE>
Investment in the Bank.
An investment in the Bank is also subject to risks
that are distinct from the risks associated with an investment in the Company,
including the general risks inherent in equity investments in depository
institutions. In the event of a winding-up 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. Consequently, if the Bank were to
be wound up, the holders of the New Preferred Shares likely would receive, if
anything, substantially less than they would have received had the New Preferred
Shares not been exchanged for the Bank Preferred Shares.
Dividend Restrictions on Bank Preferred Shares.
If an Exchange Event occurs, the Bank would likely be
prohibited from paying dividends on the Bank Preferred Shares. The Bank's
ability to pay dividends on the Bank Preferred Shares would also be subject to
various restrictions under applicable regulations and certain contractual
provisions. In addition, dividends on the Bank Preferred Shares owned by U.S.
investors will generally be subject to Canadian nonresident withholding tax.
Consequently, in the event of an Exchange Event, holders of New Preferred Shares
automatically exchanged for Bank Preferred Shares would likely receive no
dividends or, in the alternative, if dividends were paid on the Bank Preferred
Shares, holders of New Preferred Shares automatically exchanged for Bank
Preferred Shares would become subject to Canadian nonresident withholding tax.
The Bank currently has outstanding three series of cumulative First Preferred
Shares and three series of non-cumulative First Preferred Shares. The Bank may
not, without the approval of the holders of all such series and any future
series, create or issue any shares ranking in priority to or equally therewith
if any cumulative dividends have not been declared and paid or set aside for
payment or any declared and unpaid non-cumulative dividends have not been paid
or set aside for payment. Immediately prior to any failure by the Bank to
declare and pay or set aside for payment, the New Preferred Shares will be
automatically exchanged for Bank Preferred Shares. See "Canadian Federal Income
Tax Considerations." Potential holders of the New Preferred Shares should
carefully consider the foregoing.
Canadian Legal Considerations
A mortgagee (referred to in the Province of Quebec as a
"hypothecary creditor") holding a mortgage (referred to in the Province of
Quebec as a "hypothec") on a residential property located in the Province of
Quebec may, when the mortgagor is in default and the mortgagee's claim is due
and payable, take possession of such residential property in payment of its
claim or have the property sold by judicial authority. Such mortgagee must
notify the mortgagor at least 60 days prior to taking any action and register
such notice at the appropriate registry office for the residential property
before it may seek any remedies. If at the time the mortgagee's prior notice is
registered the mortgagor has discharged at least one-half of the obligations
secured by the mortgage, the mortgagee must obtain court authorization prior to
exercising its remedy of taking the property in payment. Subsequent mortgagees
or the mortgagor may, within the 60-day period following the registration of the
mortgagee's notice, require the mortgagee to abandon its remedy of taking the
property in payment and, instead, have the property sold by judicial authority.
In order to exercise this right, a subsequent mortgagee must furnish a bond
guaranteeing that the price at which the property will be sold at a judicial
sale will satisfy in full the prior mortgagee's claim.
Under Quebec law, until a mortgagor is notified of the
transfer of the mortgagee's interest in the mortgage, the mortgagor or any third
party, including a trustee in bankruptcy, may not be bound by such transfer.
Furthermore, until such transfer is registered at the registry office where the
mortgaged property is located, and a certified statement of registration is
furnished to the mortgagor, the transferee's rights may be subject to the
rights, title and interest of a subsequent assignee of the mortgage that has
properly registered its interest therein and notified the mortgagor thereof.
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<PAGE>
For residential properties outside the Province of Quebec,
remedial proceedings in the nature of foreclosure or sale by power of sale may
be taken to enforce the rights of a mortgagee when a mortgagor is in default,
provided that there has been compliance with the laws of the local jurisdiction.
Most provinces in Canada, including Quebec, have laws, public
policy and general principles of equity relating to the protection of
mortgagors. Consequently, depending on the provisions of the applicable law and
the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Company to collect all or
part of the principal of or interest on the Initial Mortgage Loans, may entitle
mortgagors to a refund of amounts previously paid and, in addition, could
subject the Company to damages and administrative sanctions.
23
<PAGE>
THE COMPANY
On August 20, 1997, the Company was incorporated under the
laws of the State of Maryland for the purpose of providing U.S. investors with
the opportunity to invest in Canadian residential mortgages and other real
estate assets. The Company began operations on September 3, 1997. The Company's
principal business objective is to acquire, hold, finance and manage Mortgage
Assets that will generate net income for distribution to stockholders. Mortgage
Assets are obligations secured by real property as well as certain other
qualifying REIT assets. The Company's Mortgage Assets currently consist of
sixteen hypothecation loans (the "Initial Mortgage Assets") issued to the
Company by NB Finance that are recourse only to sixteen pools of, at December
31, 1997, 11,701 Mortgage Loans (the "Initial Mortgage Loans"). Mortgage Loans
consist of CMHC-insured residential first mortgages that are secured by real
property located in Canada. See "Business and Strategy--Description of Initial
Mortgage Assets" and "--Description of Initial Mortgage Loans." At least 90% of
the Company's Mortgage Assets consist of obligations that are recourse only to
Mortgage Loans and that are secured by real property.
Generally, the Company acquired its Mortgage Assets from the
Bank and affiliates of the Bank. The Company may also from time to time,
however, acquire Mortgage Assets from unrelated third parties. The Bank
administers the day-to-day operations of the Company under the Advisory
Agreement. All of the Common Stock is owned by the Bank. The Company will elect
to be taxable as a REIT under the Code and will generally not be liable for
United States federal income tax to the extent that it distributes its income 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 "United States Federal Income Tax
Considerations."
The New Preferred Shares will be exchanged automatically on a
one-for-one basis for the Bank Preferred Shares upon the occurrence of the
Exchange Event. CONSEQUENTLY, HOLDERS OF THE NEW PREFERRED SHARES COULD BE
REQUIRED TO EXCHANGE THEIR NEW PREFERRED SHARES FOR BANK PREFERRED SHARES,
WITHOUT ANY ACTION BY THE HOLDER THEREOF, AT A TIME WHEN THE BANK IS
EXPERIENCING FINANCIAL DIFFICULTIES OR ITS FINANCIAL CONDITION IS DETERIORATING
OR WHEN THE SUPERINTENDENT HAS TAKEN CONTROL OF THE BANK OR PROCEEDINGS FOR THE
WINDING-UP OF THE BANK HAVE BEEN COMMENCED. See "Description of New Preferred
Shares--Automatic Exchange."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange
pursuant to the Exchange Offer.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the
Company as of September 30, 1997 (i) on an actual basis and (ii) as adjusted to
reflect the sale of the Old Preferred Shares by the Company and the application
of the net proceeds therefrom.
<TABLE>
<CAPTION>
September 30, 1997
(In thousands, except
share data)
<S> <C> <C>
Debt
Total long-term debt......................................................................... US$ --
Stockholders' Equity
Preferred Stock, US$.01 par value per share; none authorized,
issued and outstanding, actual and 10,000,000 shares authorized, 300,000 shares
issued and outstanding, as adjusted................................................. 3
Common Stock, US$.01 par value per share; 1,000 shares
authorized, 100 shares issued and outstanding, actual and as adjusted............... (1)
-----------
Additional paid-in capital................................................................... 483,335
Total stockholders' equity................................................................... 483,338(1)
Total Capitalization......................................................................... US$483,338
==========
</TABLE>
- --------------------------
(1) The Company was formed with an initial capitalization of US$1,000.
Contemporaneously with the consummation of the offering of the Old
Preferred Shares on September 3, 1997 (the "Offering"), the Bank made
capital contributions to the Company equal to US$177,000,000 plus an amount
sufficient to pay the Initial Purchaser's discount of US$6,000,000
("Initial Purchaser's Discount") and the expenses of the Offering and the
formation of the Company payable by the Company, estimated by the Company
to be approximately US$750,000. The additional paid-in capital of
US$483,335,000 represents (i) the total capital contributions made by the
Bank to the Company minus the aggregate Initial Purchaser's Discount and
the expense of the Offering and the formation of the Company payable by the
Company and (ii) the full US$300,000,000 of proceeds of the Offering minus
the aggregate US$3,000 par value of the Old Preferred Shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES
General
The Company was incorporated on August 20, 1997 and is a
Maryland corporation. The Company's principal business objective is to acquire,
hold, finance and manage assets consisting of obligations secured by real
property as well as other qualifying REIT assets. On September 3, 1997, the
Company issued US$300 million of Preferred Stock and, simultaneously, received a
capital contribution from the Bank of US$183 million. The Company used the
aggregate net proceeds of US$477 to acquire the Initial Mortgage Assets issued
by NB Finance.
In connection with its organization, the Company has incurred
significant legal and other advisory fees which will not be recurring.
Liquidity and Capital Resources
The Company's principal short-term and long-term liquidity
needs are to pay quarterly dividends on the New Preferred Shares, to pay fees
and expenses of the Bank pursuant to the Servicing Agreement and the Advisory
Agreement, and to pay franchise fees and expenses of advisors, if any, to the
Company. The Company does not have any indebtedness (current or long-term),
other material capital
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<PAGE>
expenditures, balloon payments or other payments due on other long-term
obligations. No negative covenants have been imposed on the Company.
The Company's revenues are derived from its Mortgage Assets.
As of September 30, 1997, the US$ million of Initial Mortgage Assets issued by
NB Finance are over-collateralized by the C$ million (US$ million) of Initial
Mortgage Loans. The Company believes that the amounts generated from the payment
of interest and principal on such Initial Mortgage Loans will provide more than
sufficient funds to make full payments with respect to the Initial Mortgage
Assets issued by NB Finance and that such payments will provide the Company with
sufficient funds to meet its operating expenses and to pay quarterly dividends
on the New Preferred Shares. To the extent that the cash flow from its Mortgage
Assets exceeds those amounts, the Company will use the excess to fund the
acquisition of additional Mortgage Assets and make distributions on the Common
Stock.
Significant Accounting Policy
The Company's financial statements are prepared in accordance
with accounting principals generally accepted in the United States of America.
The Company has been organized and will elect to be taxable as a REIT under the
Code and, as such, expects to pay an aggregate amount of dividends with respect
to its outstanding shares of stock equal to not less than 100% of its REIT
taxable income, subject to certain adjustments. In order to remain qualified as
a REIT, the Company must distribute annually at least 95% of its REIT taxable
income, subject to certain adjustments. As a REIT, the Company will not
generally be liable for United States federal income tax to the extent it
complies with the foregoing criteria.
THE EXCHANGE OFFER
General
The Company hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the Exchange Offer), to exchange up to
238,400 New Preferred Shares for a like number of Old Preferred Shares properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
pursuant to the procedures described below. The Exchange Offer is being made
with respect to all of the Old Preferred Shares.
As of the date of this Prospectus, the aggregate number of the
Old Preferred Shares outstanding is 300,000. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about , 1998, to all holders of
Old Preferred Shares known to the Company. The Company's obligation to accept
Old Preferred Shares for exchange pursuant to the Exchange Offer is subject to
certain conditions set forth under "--Certain Conditions to the Exchange Offer"
below. The Company currently expects that each of the conditions will be
satisfied and that no waivers will be necessary.
Purpose of the Exchange Offer
The Old Preferred Shares were issued on September 3, 1997 in a
transaction exempt from the registration requirements of the Securities Act.
Accordingly, the Old Preferred Shares may not be reoffered, resold, or otherwise
transferred unless registered under the Securities Act or any applicable
securities law or unless an applicable exemption from the registration and
prospectus delivery requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Preferred
Shares, the Company entered into the Registration Rights Agreement, which
requires (i) the Company to file with the Commission a registration statement
relating to the Exchange Offer not later than 150 days after the date of
issuance of the Old Preferred Shares, (ii) the Company to use its best efforts
to cause the registration relating to the Exchange Offer to become effective
under the Securities Act not later than 180 days after the date of issuance of
the Old
26
<PAGE>
Preferred Shares and (iii) the Exchange Offer to be consummated not later than
30 days after the date of the effectiveness of the Registration Statement (or,
if the Company is not permitted to effect the Exchange Offer, to use its best
efforts to cause to become effective as promptly as practicable the Shelf
Registration Statement with respect to resales of the Old Preferred Shares). A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement.
The Exchange Offer is being made by the Company to satisfy
certain of its obligations under the Registration Rights Agreement. The term
"holder," with respect to the Exchange Offer, means any person in whose name Old
Preferred Shares are registered on the books of the Company or any other person
who has obtained a properly completed stock power from the registered holder, or
any person whose Old Preferred Shares are held of record by The Depository Trust
Company. Other than pursuant to the Registration Rights Agreement, the Company
is not required to file any registration statement to register any outstanding
Old Preferred Shares. Holders of Old Preferred Shares who do not tender their
Old Preferred Shares or whose Old Preferred Shares are tendered but not accepted
would have to rely on exemptions to registration requirements under the
securities laws, including the Securities Act, if they wish to sell their Old
Preferred Shares.
Terms of the Exchange
The Company hereby offers to exchange, subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus, each New Preferred Share for each Old Preferred Share. The terms of
the New Preferred Shares are identical in all material respects to the terms of
the Old Preferred Shares for which they may be exchanged pursuant to this
Exchange Offer, except that the New Preferred Share will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. See "Description of New Preferred Shares."
The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Preferred Shares being tendered for exchange.
The Company is making the Exchange Offer in reliance on the
position of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letters, and there can be no assurance that the
Commission would make a similar determination with respect to the New Preferred
Shares. Based on these interpretations by the staff of the Commission, the
Company believes that New Preferred Shares issued pursuant to the Exchange Offer
in exchange for Old Preferred Shares may be offered for sale, resold and
otherwise transferred by any holder of such New Preferred Shares (other than any
such holder that is a broker-dealer or an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Preferred Shares are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Preferred Shares and
neither such holder nor any other such person is engaging in or intends to
engage in a distribution of such New Preferred Shares. Since the Commission has
not considered the Exchange Offer in the context of an interpretive letter,
there can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. See "--Resale of New Preferred
Shares" and "Plan of Distribution."
Dividends on the New Preferred Shares, if, when and as
authorized and declared by the Board of Directors, shall accrue from the first
day of the quarterly period whether or not authorized, declared or paid with
respect to Preferred Shares for the prior quarterly period on which paid on the
Old Preferred Shares so surrendered.
Tendering holders of the Old Preferred Shares shall not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of the
Old Preferred Shares pursuant to the Exchange Offer.
27
<PAGE>
Expiration Date; Extension; Termination; Amendment
The Exchange Offer will expire on the Expiration Date. The
Expiration Date will be at least 20 business days after the commencement of the
Exchange Offer in accordance with Rule 14e-1(a) under the Exchange Act. The
Company expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance for exchange of any Old Preferred Shares, by giving oral or
written notice to the Exchange Agent and by giving written notice of such
extension to the holders thereof or by timely public announcement no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. During any such extension, all Old Preferred Shares
previously tendered will remain subject to the Exchange Offer unless properly
withdrawn. The Company does not anticipate extending the Expiration Date.
The Company expressly reserves the right to (i) terminate the
Exchange Offer and not to accept for exchange any Old Preferred Shares not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "--Certain Conditions to the Exchange Offer" which have
not been waived by the Company and (ii) amend the terms of the Exchange Offer in
any manner which, in its good faith judgment, is advantageous to the holders of
the Old Preferred Shares, whether before or after any tender of the Old
Preferred Shares. If any such termination or amendment occurs, the Company will
notify the Exchange Agent and will either issue a press release or give oral or
written notice to the holders of the Old Preferred Shares as promptly as
practicable.
For purposes of the Exchange Offer, a "business day" means any
day other than Saturday, Sunday or a date on which banking institutions are
required or authorized by New York State law to be closed, and consists of the
time period from 12:01 a.m. through 12:00 midnight, New York City time. Unless
the Company terminates the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date, the Company will exchange the New Preferred Shares
for the Old Preferred Shares on the business day following the Exchange Date.
Procedures for Tendering Old Preferred Shares
The tender to the Company of Old Preferred Shares by a holder
thereof as set forth below and the acceptance thereof by the Company will
constitute a binding agreement between the tendering holder and the Company upon
the terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal.
A holder of Old Preferred Shares may tender the same by (i)
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Old Preferred Shares being tendered
and any required signature guarantees and any other documents required by the
Letter of Transmittal, to the Exchange Agent at its address set forth below on
or prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
The method of delivery of Old Preferred Shares, Letters of
Transmittal and all other required documents is at the election and risk of the
holders. If such delivery is by mail, it is recommended that registered mail,
properly insured, with return receipt requested, be used. In all cases,
sufficient time should be allowed to insure timely delivery. No Old Preferred
Shares or Letters of Transmittal should be sent to the Company.
If tendered Old Preferred Shares are registered in the name of
the signer of the Letter of Transmittal and the New Preferred Shares to be
issued in exchange therefor are to be issued (and any untendered Old Preferred
Shares are to be reissued) in the name of the registered holder (which term, for
the
28
<PAGE>
purposes described herein, shall include any participant in The Depository Trust
Company ("DTC," also referred to as a "book-entry transfer facility") whose name
appears on a security listing as the owner of Old Preferred Shares), the
signature of such signer need not be guaranteed. In any other case, the tendered
Old Preferred Shares must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Company and duly executed by the registered
holder, and the signature on the endorsement or instrument of transfer must be
guaranteed by a bank, broker, dealer, credit union, savings association,
clearing agency or other institution (each an "Eligible Institution") that is a
member of a recognized signature guarantee medallion program within the meaning
of Rule 17Ad-15 under the Exchange Act. If the New Preferred Shares and/or Old
Preferred Shares not exchanged are to be delivered to an address other than that
of the registered holder appearing on the preferred stock register for the Old
Preferred Shares, the signature in the Letter of Transmittal must be guaranteed
by an Eligible Institution.
The Exchange Agent will establish accounts with respect to the
Old Preferred Shares at the book-entry transfer facility for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of Old Preferred Shares by
causing such book-entry transfer facility to transfer such Old Preferred Shares
into the Exchange Agent's account with respect to the Old Preferred Shares in
accordance with the book-entry transfer facility's procedures for such transfer.
Although delivery of Old Preferred Shares may be effected through book-entry
transfer into the Exchange Agent's account at the book-entry transfer facility,
an appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will
not permit a Letter of Transmittal or Old Preferred Shares to reach the Exchange
Agent before the Expiration Date or the procedure for book-entry transfer cannot
be completed on a timely basis, a tender may be effected if the Exchange Agent
has received at its address set forth below, on or prior to the Expiration Date,
a letter by hand or mail, or sent by facsimile transmission (receipt confirmed
by telephone and an original delivered by guaranteed overnight courier) from an
Eligible Institution setting forth the name and address of the tendering holder,
the names in which the Old Preferred Shares are registered and, if possible, the
certificate numbers of the Old Preferred Shares to be tendered, and stating that
the tender is being made thereby and guaranteeing that within three business
days after the Expiration Date, the Old Preferred Shares in proper form for
transfer (or a confirmation of book-entry transfer of such Old Preferred Shares
into the Exchange Agent's account at the book-entry transfer facility), will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Old Preferred Shares being tendered by the above-described method are deposited
with the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Company may, at its option, reject the tender. Copies of the
notice of guaranteed delivery ("Notice of Guaranteed Delivery") which may be
used by Eligible Institutions for the purposes described in this paragraph are
available from the Exchange Agent.
A tender will be deemed to have been received as of the date
when (i) the tendering holder's properly completed and duly executed Letter of
Transmittal accompanied by the Old Preferred Shares is received by the Exchange
Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Preferred Shares in exchange
for Old Preferred Shares tendered pursuant to a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Preferred
Shares (or a confirmation of book-entry transfer of such Old Preferred Shares
into the Exchange Agent's account at the book-entry transfer facility).
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All questions as to the validity, form, eligibility (including
time of receipt) and acceptance of Letters of Transmittal or Old Preferred
Shares tendered for exchange will be determined by the Company in its sole
discretion, which determination shall be final and binding. The Company reserves
the absolute right to reject any and all tenders of any particular Old Preferred
Shares not properly tendered and not to accept any particular Old Preferred
Shares for exchange which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities as to any particular Old Preferred Shares or
conditions of the Exchange Offer either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Preferred Shares in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Preferred Shares for exchange must be cured within such reasonable period
of time as the Company shall determine. None of the Company, the Exchange Agent
nor any other person shall be under any duty to give notification of any defect
or irregularity with respect to any tender of Old Preferred Shares for exchange,
nor shall any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons
other than the registered holder or holders of Old Preferred Shares, such Old
Preferred Shares must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names of the registered
holder or holders appear on the Old Preferred Shares.
If the Letter of Transmittal or any Old Preferred Shares or
powers of attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each holder will represent to the Company that,
among other things, (a) New Preferred Shares acquired pursuant to the Exchange
Offer are being acquired in the ordinary course of business of the person
receiving such New Preferred Shares, whether or not such person is the holder,
(b) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Preferred Shares and (c) neither the holder nor any such other person is an
"affiliate" of the Company as defined under Rule 405 of the Securities Act, or
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. Any holder
of Old Preferred Shares using the Exchange Offer to participate in a
distribution of the New Preferred Shares (i) cannot rely on the position of the
staff of the Commission enunciated in its interpretive letter with respect to
Exxon Capital Holdings Corporation (available April 13, 1989) or similar letters
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives New Preferred Shares for its
own account in exchange for Old Preferred Shares where such Old Preferred Shares
were acquired by such broker-dealer as a result of market-making activities or
other trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Shares. The Company has agreed
that, for a period of six months after the date of this Prospectus, it will make
this Prospectus, as it may be amended or supplemented, available to any
broker-dealer for use in connection with any such resale and will update this
Prospectus, as required, during such six-month period. See "Plan of
Distribution."
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the
following terms and conditions, which are part of the Exchange Offer.
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The party tendering Old Preferred Shares for exchange (the
"Transferor") exchanges, assigns and transfers the Old Preferred Shares to the
Company and irrevocably constitutes and appoints the Exchange Agent as the
Transferor's agent and attorney-in-fact to cause the Old Preferred Shares to be
assigned, transferred and exchanged. The Transferor represents and warrants that
it has full power and authority to tender, exchange, assign and transfer the Old
Preferred Shares and to acquire New Preferred Shares issuable upon the exchange
of such tendered Old Preferred Shares, and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
Old Preferred Shares, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Preferred Shares or
transfer ownership of such Old Preferred Shares on the account books maintained
by a book-entry transfer facility. The Transferor further agrees that acceptance
of any tendered Old Preferred Shares by the Company and the issuance of New
Preferred Shares in exchange therefor shall constitute performance in full by
the Company of certain of its obligations under the Registration Rights
Agreement. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor, and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
The Transferor certifies that neither it, nor the person
receiving the New Preferred Shares, whether or not such person is the
Transferor, (a) is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, (b) is acquiring the New Preferred Shares offered
hereby in the ordinary course of such Transferor's business and (c) has an
arrangement with any person to participate in the distribution of such New
Preferred Shares. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of New
Preferred Shares. Each Transferor which is a broker-dealer receiving New
Preferred Shares for its own account must represent that the Old Preferred
Shares to be exchanged for New Preferred Shares were acquired by it as a result
of market-making activities or other trading activities and acknowledge that it
will deliver a prospectus in connection with any resale of such New Preferred
Shares. By so acknowledging and by delivering a prospectus meeting the
requirements of the Securities Act, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Preferred Shares received
in exchange for Old Preferred Shares where such Old Preferred Shares were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company will, for a period of up to six months after the
date of this Prospectus, make copies of this Prospectus available to any
broker-dealer for use in connection with any such resale and will update this
Prospectus, as required, during such six-month period.
Withdrawal Rights
Tenders of Old Preferred Shares may be withdrawn at any time
prior to the Expiration Date.
For a withdrawal to be effective, a written notice of
withdrawal sent by telegram, facsimile transmission (receipt confirmed by
telephone) or letter must be received by the Exchange Agent at the address set
forth herein prior to the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having tendered the Old Preferred Shares to
be withdrawn (the "Depositor"), (ii) identify the Old Preferred Shares to be
withdrawn (including the certificate number), (iii) specify the number of Old
Preferred Shares to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Preferred Shares exchanged, (v) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such Old Preferred Shares were tendered or as otherwise
described above (including any required signature guarantees) and (vi) specify
the name in which any such Old Preferred Shares are to be registered, if
different from that of the Depositor. The Exchange Agent will return the
properly withdrawn Old Preferred Shares promptly following receipt of notice of
withdrawal. If Old Preferred Shares have been tendered pursuant to the procedure
for book-entry transfer, any notice of withdrawal must specify the
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<PAGE>
name and number of the account at the book-entry transfer facility to be
credited with the withdrawn Old Preferred Shares or otherwise comply with the
book-entry transfer facility procedure. All questions as to the validity of
notices of withdrawals, including time of receipt, will be determined by the
Company and such determination will be final and binding on all parties.
Any Old Preferred Shares so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer. Any
Old Preferred Shares which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Old Preferred Shares tendered by book-entry
transfer into the Exchange Agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described above, such Old
Preferred Shares will be credited to an account with such book-entry transfer
facility specified by the holder) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Preferred Shares may be retendered by following one of the procedures described
under "--Procedures for Tendering Old Preferred Shares" above at any time on or
prior to the Expiration Date.
Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred
Shares
Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, the Company will accept, on the Exchange Date, all Old Preferred
Shares properly tendered and will issue the New Preferred Shares promptly after
such acceptance. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Preferred Shares for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
For each Old Preferred Share accepted for exchange, the holder
of such Old Preferred Share will receive a New Preferred Share.
In all cases, issuance of New Preferred Shares for Old
Preferred Shares that are accepted for exchange pursuant to the Exchange Offer
will be made only after timely receipt by the Exchange Agent of certificates for
such Old Preferred Shares or a timely book-entry confirmation of such Old
Preferred Shares into the Exchange Agent's account at the book-entry transfer
facility, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Old Preferred Shares are not accepted
for any reason set forth in the terms and conditions of the Exchange Offer or if
Old Preferred Shares are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Preferred
Shares will be returned without expense to the tendering holder thereof (or, in
the case of Old Preferred Shares tendered by book-entry transfer into the
Exchange Agent's account at the book-entry transfer facility pursuant to the
book-entry transfer procedures described above, such non-exchanged Old Preferred
Shares will be credited to an account maintained with such book-entry transfer
facility) as promptly as practicable after the expiration of the Exchange Offer.
Certain Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or
any extension of the Exchange Offer, the Company shall not be required to accept
for exchange, or to issue New Preferred Shares in exchange for, any Old
Preferred Shares and may terminate or amend the Exchange Offer (by oral or
written notice to the Exchange Agent or by a timely press release) if at any
time before the acceptance of such Old Preferred Shares for exchange or the
exchange of the New Preferred Shares for such Old Preferred Shares, any of the
following events occur:
(a) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency or regulatory
authority or any injunction, order or decree is issued with respect to
the Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of
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the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to
the Company; or
(b) any change (or any development involving a prospective
change) shall have occurred or be threatened in the business,
properties, assets, liabilities, financial condition, operations,
results of operations or prospects of the Company that is or may be
adverse to the Company, or the Company shall have become aware of facts
that have or may have adverse significance with respect to the value of
the Old Preferred Shares or the New Preferred Shares or that may
materially impair the contemplated benefits of the Exchange Offer to
the Company; or
(c) any law, rule or regulation or applicable interpretations
of the staff of the Commission is issued or promulgated which, in the
good faith determination of the Company, do not permit the Company to
effect the Exchange Offer; or
(d) any governmental approval has not been obtained, which
approval the Company, in its sole discretion, deems necessary for the
consummation of the Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any
law, statute, rule or regulation (or an amendment to any existing law,
statute, rule or regulation) which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed
with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company; or
(f) there shall occur a change in the current interpretation
by the staff of the Commission which permits the New Preferred Shares
issued pursuant to the Exchange Offer in exchange for Old Preferred
Shares to be offered for resale, resold and otherwise transferred by
holders thereof (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Preferred
Shares are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in
the distribution of such New Preferred Shares; or
(g) there shall have occurred (i) any general suspension of,
shortening of hours for, or limitation on prices for, trading in
securities on any national securities exchange or in the
over-the-counter market (whether or not mandatory), (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks by Federal or state
authorities in the United States (whether or not mandatory), (iv) a
commencement of a war, armed hostilities or other international or
national crisis directly or indirectly involving the United States, (v)
any limitation (whether or not mandatory) by any governmental authority
on, or other event having a reasonable likelihood of affecting, the
extension of credit by banks or other lending institutions in the
United States, or (vi) in the case of any of the foregoing existing at
the time of the commencement of the Exchange Offer, a material
acceleration or worsening thereof.
The Company expressly reserves the right to terminate the
Exchange Offer and not accept for exchange any Old Preferred Shares upon the
occurrence of any of the foregoing conditions (which represent all of the
material conditions to the acceptance by the Company of properly tendered Old
Preferred Shares). In addition, the Company may amend the Exchange Offer at any
time prior to the Expiration Date if any of the conditions set forth above
occur. Moreover, regardless of whether any of such conditions has occurred, the
Company may amend the Exchange Offer in any manner which, in its good faith
judgment, is advantageous to holders of the Old Preferred Shares.
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<PAGE>
The foregoing conditions are for the sole benefit of the
Company and may be asserted by the Company regardless of the circumstances
giving rise to any such condition or may be waived by the Company in whole or in
part at any time and from time to time in its sole discretion. The failure by
the Company at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right, and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time. If the
Company waives or amends the foregoing conditions, it will, if required by law,
extend the Exchange Offer for a minimum of five business days from the date that
the Company first gives notice, by public announcement or otherwise, of such
waiver or amendment, if the Exchange Offer would otherwise expire within such
five business-day period. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old
Preferred Shares tendered, and no New Preferred Shares will be issued in
exchange for any such Old Preferred Shares, if at such time any stop order shall
be threatened or in effect with respect to the Registration Statement of which
this Prospectus constitutes a part. In any such event, the Company is required
to use every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
The Exchange Offer is not conditioned upon any minimum number
of Old Preferred Shares being tendered for exchange.
Exchange Agent
The Bank of Nova Scotia Trust Company has been appointed as
the Exchange Agent for the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at one of the addresses set forth
below:
By Hand/Overnight Courier:
The Bank of Nova Scotia
Trust Company of New York
One Liberty Plaza, 23rd Floor
New York, New York 10006
Attn: Reorganization Section
By Mail:
The Bank of Nova Scotia
Trust Company of New York
One Liberty Plaza, 23rd Floor
New York, New York 10006
Attn: Reorganization Section
By Facsimile: (212) 225-5436
By Telephone: (212) 225-5422
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN THE ONES
SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
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Solicitation of Tenders; Fees and Expenses
The Company has not retained any dealer-manager in connection
with the Exchange Offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of the Exchange Offer. The Company will,
however, pay the Exchange Agent reasonable and customary fees for its services
and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this and other related documents to the beneficial
owners of the Old Preferred Shares and in handling or forwarding tenders for
their customers.
The estimated cash expenses to be incurred in connection with
the Exchange Offer will be paid by the Company and are estimated in the
aggregate to be approximately US$ , which includes fees and expenses of the
Exchange Agent, registration fees, accounting, legal, printing and related fees
and expenses.
No person has been authorized to give any information or to
make any representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the respective dates as of which
information is given herein. The Exchange Offer is not being made to (nor will
tenders be accepted from or on behalf of) holders of Old Preferred Shares in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Old Preferred Shares in such jurisdiction. In any jurisdiction in
which the securities laws or blue sky laws of which require the Exchange Offer
to be made by a licensed broker or dealer, the Exchange Offer is being made on
behalf of the Company by one or more registered brokers or dealers which are
licensed under the laws of such jurisdiction.
Transfer Taxes
The Company will pay all transfer taxes, if any, applicable to
the exchange of Old Preferred Shares pursuant to the Exchange Offer. If,
however, certificates representing New Preferred Shares are to be delivered to,
or are to be issued in the name of, any person other than the registered holder
of the Old Preferred Shares tendered, or if tendered Old Preferred Shares are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Preferred Shares pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
Accounting Treatment
The New Preferred Shares will be recorded at the carrying
value of the Old Preferred Shares as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company upon the exchange of New Preferred
Shares for Old Preferred Shares. Expenses incurred in connection with the
issuance of the New Preferred Shares will be amortized over the term of the New
Preferred Shares.
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Consequences of Failure to Exchange
Holders of Old Preferred Shares who do not exchange their Old
Preferred Shares for New Preferred Shares pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Old Preferred
Shares as set forth in the legend thereon. Old Preferred Shares not exchanged
pursuant to the Exchange Offer will continue to remain outstanding in accordance
with their terms. In the event of an Exchange Event, each Old Preferred Share
not exchanged pursuant to the Exchange Offer will be exchanged automatically for
one newly issued Bank Preferred Share. In the event of a Tax Event on or after
September 3, 2002, the Company will have the right to redeem, in whole but not
in part, each Old Preferred Share not exchanged pursuant to the Exchange Offer,
subject to the prior written approval of the Superintendent. On and after
September 3, 2007, the Old 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 redemption prices set forth herein, plus the quarterly accrued and unpaid
dividend, if any, thereon to the date of redemption. See "Description of New
Preferred Shares--Redemption." In general, the Old Preferred Shares may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Preferred Shares under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders
of Old Preferred Shares should carefully consider whether to participate.
Holders of the Old Preferred Shares are urged to consult their financial and tax
advisors in making their decision with respect to tendering.
As a result of the making of, and upon acceptance for exchange
of all validly tendered Old Preferred Shares pursuant to the terms of, this
Exchange Offer, the Company will have fulfilled a covenant contained in the
Registration Rights Agreement. Holders of Old Preferred Shares who do not tender
their Old Preferred Shares in the Exchange Offer will continue to hold such Old
Preferred Shares and will not be entitled to any rights under the Registration
Rights Agreement that, by their terms, terminate or cease to have further
effectiveness as a result of the making of this Exchange Offer. To the extent
that Old Preferred Shares are tendered and accepted in the Exchange Offer, the
trading market for untendered Old Preferred Shares could be adversely affected.
Resale of New Preferred Shares
The Company is making the Exchange Offer in reliance on the
position of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter, and there can be no assurance that the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Commission, the Company believes that the
New Preferred Shares issued pursuant to the Exchange Offer in exchange for Old
Preferred Shares may be offered for resale, resold and otherwise transferred by
a holder (other than any Holder that is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act. However, any holder who is an "affiliate" of the Company or who
has an arrangement or understanding with respect to the distribution of the New
Preferred Shares to be acquired pursuant to the Exchange Offer, or any
broker-dealer who purchased Old Preferred Shares from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) cannot rely on the applicable interpretations of the staff of the Commission
and (ii) will not be entitled to tender its Old Preferred Shares in the Exchange
Offer, and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act. A broker-dealer who holds Old Preferred
Shares that were acquired for its own account as a result of market-making or
other trading activities may be deemed to be an "underwriter" within the meaning
of the Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of New
Preferred Shares. Each such broker-dealer that receives New Preferred Shares for
its own account in exchange for Old Preferred Shares, where such Old Preferred
Shares were acquired by such broker-dealer as a result of
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<PAGE>
market-making activities or other trading activities, must acknowledge in the
Letter of Transmittal that it will deliver a prospectus in connection with any
resale of such New Preferred Shares. The Company has agreed that, for a period
of six months after the date of this Prospectus, it will make this Prospectus,
as it may be amended or supplemented, available to any broker-dealer for use in
connection with any such resale and will update this Prospectus, as required,
during such six-month period. See "Plan of Distribution."
In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Preferred Shares may not be offered or
sold unless they have been registered or qualified for sale in such jurisdiction
or an exemption from registration or qualification is available and is complied
with.
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. Mortgage Assets are obligations secured by real
property, as well as certain other qualifying REIT assets. Currently, the
Company's Mortgage Assets consist of sixteen hypothecation loans issued to the
Company by NB Finance (the "Initial Mortgage Assets") that are recourse only to
the sixteen pools of, at December 31, 1997, 11,701 CMHC-insured residential
first mortgages secured by real property located in Canada (the "Initial
Mortgage Loans"). The Company acquired the Initial Mortgage Assets issued by NB
Finance for an aggregate purchase price of approximately US$477 million. See
"--Description of Initial Mortgage Assets" and "--Description of Initial
Mortgage Loans."
In order to preserve its status as a REIT under the Code,
substantially all of the assets of the Company consist of the Initial Mortgage
Assets issued by NB Finance and other real estate assets that are of the type
set forth in Section 856(c)(6)(B) of the Code. See "United States Federal Income
Tax Considerations."
Description of Dividend Policy
Dividends on the New Preferred Shares are payable at the rate
of 8.35% per annum of the liquidation preference (an amount equal to US$83.50
per annum per share, calculated by multiplying the annual dividend rate of 8.35%
by the liquidation preference of US$1,000 per share, assuming authorization and
declaration by the Board of Directors of four quarterly dividends), if, when and
as authorized and declared by the Board of Directors. As of December 31, 1997,
the US$456 million of Initial Mortgage Assets issued by NB Finance are
overcollateralized by C$793 million (US$ million) of Initial Mortgage Loans. The
Company believes that the amounts generated from the payment of interest and
principal on such Initial Mortgage Loans will more than provide sufficient funds
to make full payments with respect to the Initial Mortgage Assets and that such
payments will provide the Company with sufficient funds to meet its operating
expenses and to pay quarterly dividends on the New Preferred Shares. In order to
remain qualified as a REIT, the Company must distribute to stockholders annually
at least 95% of its taxable income computed without regard to the dividends paid
deduction and the Company's net capital gain ("REIT taxable income"). The
Company expects to pay an aggregate amount of dividends with respect to its
outstanding shares of stock equal to not less than 100% of the Company's REIT
taxable income. The Company anticipates that none of the dividends on the New
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 authorized and declared at the discretion of
the Board of Directors after considering the Company's distributable funds and
financial requirements, tax considerations and other factors. There are,
however, 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 on the New Preferred Shares). First, under the
Company's current dividend policy, the Company may not make any distribution in
respect of the Common Stock 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 in any year would
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exceed 105% of the Company's REIT taxable income for that year, plus net capital
gains of the Company for that year. This policy regarding the limitation on
payment of dividends on the Common Stock may not be modified without the
approval of a majority of the Independent Directors. Second, if the Company
fails to authorize and declare and pay the stated dividend on the New Preferred
Shares in any dividend period, the Company may not pay any dividends with
respect to the Common Stock until such time as dividends on all outstanding New
Preferred Shares have been (i) authorized and declared and paid for three
consecutive dividend periods and (ii) authorized and declared and paid or
authorized and declared and a sum sufficient for the payment thereof set apart
for the fourth consecutive dividend period. See "Description of New Preferred
Shares--Dividends." Third, the Maryland General Corporation Law ("MGCL")
provides that dividends may be paid on the stock of a corporation only if, after
payment of the distribution, (i) the corporation would be able to pay its
indebtedness as such indebtedness becomes due in the usual course of business
and (ii) the corporation's total assets would not be less than the sum of its
total liabilities plus, unless the corporation's charter provides otherwise
(which the Charter does), the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights on dissolution of stockholders whose rights on dissolution
are superior to those receiving the distribution. It is 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 under the Code. See
"United States Federal Income Tax Considerations--Taxation of the Company."
Description of the Company's Investment Policy
General
The Company has formulated the following investment policy.
The Company's current intention is to follow the investment policy as described
below. However, this policy 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 Independence Directors) without a vote of the
Company's stockholders, including holders of New Preferred Shares. See "Risk
Factors -- Risk of Future Revision in Policies and Strategies by the Board of
Directors." Accordingly, the following description of the Company's investment
policy includes descriptions of assets in which the Company does not currently,
but may in the future, have investments. There is no specific policy with
respect to the amount or percentage of assets which will be invested in any
specific property. All investments will be made primarily for income. The
general policy of the Bank with respect to uninsured loans is to lend no more
than 75% of the appraised value of the asset securing such loan.
Initial Mortgage Assets
Percentage of current portfolio: 100%. The Company's
investments currently consist solely of the Initial Mortgage Assets (i.e.,
sixteen hypothecation loans, in the aggregate amount at December 31, 1997 of
US$456 million, issued by NB Finance to the Company) that are recourse only to
the Initial Mortgage Loans (i.e., sixteen pools of CMHC-insured residential
first mortgages, in the aggregate amount at December 31, 1997 of C$793 million
(US$ million) originated by the Bank or acquired by the Bank from other lenders
approved by the National Housing Act (an "NHA-Approved Lender"). The Initial
Mortgage Assets issued by NB Finance are secured by residential real property
located primarily in Quebec underlying the Initial Mortgage Loans. See
"--Description of the Initial Mortgage Assets."
In order to perfect its security interest in the Initial
Mortgage Loans, the Company would need to register the transfer and assignment
of each one of the Initial Mortgage Loans in each land registry or land titles
office in Canada where the real properties securing the Initial Mortgage Loans
are located. The Company would also be required to properly notify each one of
the hypothecary debtors and mortgagors under the Initial Mortgage Loans of the
existence of such transfer and assignment. These procedures could be fulfilled
for any specific mortgage loan comprising the Initial Mortgage Loans or for all
of them. The Company can comply with these procedures at any time and,
therefore, decided not to currently incur the registration and signification
fees related to such procedures.
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The Servicing Agreement entered into between the Bank and the
Company provides that the Bank, on behalf of the Company, would foreclose on the
properties in accordance with the National Housing Act and normal mortgage
servicing practices of prudent mortgage lending institutions.
The Company's current investment policy is to invest at least
90% of its portfolio in the Initial Mortgage Assets issued by NB Finance and
obligations that are comparable to the Initial Mortgage Assets issued by NB
Finance. The maturities of the Initial Mortgage Assets range from January 2000
to July 2001. Accordingly, after July 2001, the Company's portfolio will not
include any Initial Mortgage Assets issued by NB Finance.
Mortgage Loans
Percentage of current portfolio: 0%. While no Mortgage Loans
are included in the Initial Mortgage Assets issued by NB Finance and while the
Company has no current intention to acquire Mortgage Loans, the Company may from
time to time acquire individual residential Mortgage Loans or pools of
residential Mortgage Loans from the Bank or other NHA-Approved Lenders. All
Mortgage Loans will consist of CMHC-insured residential first mortgages and,
accordingly, the credit risk associated therewith should be considerably
mitigated. The properties underlying such Mortgage Loans are expected to located
in Canada. See "--Description of the Initial Mortgage Loans." Potentially, up to
10% of the Company's portfolio could be comprised of Mortgage Loans.
When a CMHC-insured residential first mortgage is in arrears
for more than 90 days or when information has been obtained by the Bank
indicating that the global financial soundness of the borrower has declined,
such mortgage may be transferred to the Bank's collection department. Once
transferred, the Bank can forclose on the property, legally sell the property or
initiate a personal lawsuit against the borrower. In the event of a foreclosure
proceeding, the property securing such mortgage is offered for sale for 90 days.
If during the 90 day period the property is not sold, the CMHC will purchase the
property for the amount of the Bank's claim against such property. If the
property is sold during the 90 day period at an amount less than the Bank's
claim against such property, a claim is made to CMHC for the amount of the
deficiency. The Bank's claim against any such property, and therefore, the
amount recoverable from CMHC, includes interest for a period of twelve months at
the loan rate and for six additional months at the loan rate minus two percent
which should offset any claim processing delays in collection from CMHC. The
Bank may make a supplementary claim for expenses and interest thereon within 90
days of the original claim.
Residential Mortgage Loans
Percentage of current portfolio: 0%. While no residential
mortgages are included in the Initial Mortgage Assets issued by NB Finance and
while the Company has no current intention to acquire residential mortgages, the
Company may from time to time acquire individual residential mortgages other
than Mortgage Loans ("Residential Mortgage Loans"). These Residential Mortgage
Loans are expected to meet the requirements for sale to governmental or private
mortgage conduit programs or other investors in the secondary mortgage market
(i.e., such Residential Mortgages must be rated "A" (or better) by at least one
major rating agency (a Canadian rating agency for Canadian-based mortgages or a
U.S. rating agency for U.S.-based mortgages) or include some form of credit
enhancement (such as over-collateralization, letter of credit or accumulated
cash)).
While Mortgage Loans benefit from CMHC insurance, there can be
no assurance that any Residential Mortgage Loans acquired by the Company will be
similarly protected. Some Residential Mortgage Loans are, however, insured by
Mortgage Insurance Company of Canada (now part of GE Capital), therefore
considerably mitigating any credit risk relating to those mortgages. Moreover,
large (i.e., more than four housing units) residential uninsured mortgage loans
sold to the Company must have a Bank (as of the time of a sale) "credit score"
of five or better. The Bank has an internal credit scoring system whereby the
risk of large residential loans is ranked from one (the least risk) to ten (the
most risk) according to different factors such as the cash flow derived from the
mortgaged property. Potentially, up to 10% of the Company's portfolio could be
comprised of Residential Mortgage Loans.
Mortgage Insurance Company of Canada is a private insurer
owned by GE Capital Canada. The insurance premium is paid by the borrower and
may be added to the principal of the morgage loan. The premium rates vary in
accordance with the principal amount of the loan. Generally, the greater the
loan to value ratio, the greater the premium rate.
Mortgage-Backed Securities
Percentage of current portfolio: 0%. While no Mortgage-Backed
Securities are included in the Initial Mortgage Assets issued by NB Finance and
while the Company has no current intention to acquire 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 such as a NHA Mortgage-Backed Security ("NHA MBS") that evidences
an undivided interest in a pool of first mortgages originated by certain
approved financial institutions in Canada and insured by CMHC. There are four
different types of NHA MBS pools. The "exclusive homeowner" pools are classified
as prepayable because the borrowers within this type of pool have the option to
prepay their mortgage (often at a penalty) in accordance with the specific terms
of the mortgage. Depending upon the specific exclusive homeowner pool, the
appropriate penalty may or may not be passed through to the investors. The
"mixed" pools are comprised of a combination of homeowner, multiple family or
social housing
39
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mortgages. The "multi-family" pools are comprised exclusively of multiple family
loans and are generally not prepayable. Also, there is a special category of NHA
MBS pool created to allow exclusive pools of "social housing mortgages"
(mortgages issued to finance low-cost housing for senior citizens, the disabled
and economically disadvantaged). The key feature of social housing pools is the
absence of prepayment at the option of the borrower on the underlying mortgages;
this makes them more attractive to investors who seek predictable cash flow. A
portion of any NHA MBS that the Company purchases may have been originated by
the Bank by exchanging pools of Mortgage Loans for the Mortgage-Backed
Securities. The Company does not intend to acquire any interest-only,
principal-only or similar speculative Mortgage-Backed Securities. Potentially,
up to 10% of the Company's portfolio could be comprised of Mortgage-Backed
Securities. Additionally, the Company could, potentially acquire all of the
Mortgage-Backed Securities of any one issuer; provided that such acquisition
does not exceed 10% of the Company portfolio.
Timely payment of both principal and interest on NHA MBS is
unconditionally guaranteed by CMHC. In the event the Company were to buy non-NHA
MBSs, the investment policies of the Company would require such MBSs to be rated
"A" (or better) by at least one major rating agency (a Canadian rating agency
for Canadian-based mortgages or a U.S. rating agency for U.S.-based mortgages),
and the underlying mortgages would be required to be first lien mortgages.
In general, the risk associated with investments in
Mortgage-Backed Securities are credit risk and prepayment risk. Credit risk
refers to the risk of not receiving either principal or interest payments. In
the case of a NHA MBS, credit risk is not an issue since CMHC unconditionally
guarantees timely payment of both principal and interest. For a non-NHA MBS,
credit risk is strongly mitigated by the fact that the Company can, pursuant to
its current investment policy, only buy "A" (or better) rated instruments. In
general, a non-NHA MBS rated "A" or better are credit enhanced by
over-collateralization, a letter of credit, an initial deposit into a cash
collateral account or the presence of one or more subordinated classes.
Prepayment risk is the risk of receiving unscheduled principal payments while
the Mortgage-Backed Security is worth more than par. For example, a sale will
usually trigger a prepayment. More importantly for investors, prepayments are
motivated by a decline in interest rates. In Canada, however, prepayment risk is
mitigated by two factors: (a) lenders usually charge prepayment penalties,
thereby reducing the incentive to prepay and (b) almost all mortgages are
relatively short-term (typically, 6 month to 5 years) balloon mortgages, also
reducing the impact of prepayments.
Commercial Mortgage Loans
Percentage of current portfolio: 0%. While no Commercial
Mortgage Loans are included in the Initial Mortgage Assets issued by NB Finance
and while the Company has no current intention to acquire any Commercial
Mortgage Loans, the Company may from time to time acquire Commercial Mortgage
Loans secured by industrial and warehouse properties, recreational facilities,
office buildings, retail space and shopping malls, hotels and motels, 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 total book value of the Company's Mortgage Assets
immediately following such acquisition. Also, Commercial Mortgage Loans sold to
the Company must have a Bank (as of the time of the sale) credit score of five
or better. See "-- Residential Mortgage Loans." Unlike Mortgage Loans and
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. There is no requirement
regarding the percentage of any commercial real estate property that must be
leased at the time the Company acquires a Commercial Mortgage Loan secured by
such commercial real estate property, and there is no requirement that
Commercial Mortgage Loans have third party guarantees.
40
<PAGE>
Commercial Mortgage Loans will not be CMHC insured and 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 Commercial Mortgage Loans 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. Potentially, up to 5% of the
Company's portfolio could be comprised of Commercial Mortgage Loans.
Partnership Interests
Percentage of current portfolio: 0%. While no partnership
interests are included in the Initial Mortgage Assets issued by NB Finance and
while the Company has no current intention to acquire any partnership interests,
the Company may from time to time acquire limited partnership interests in
partnerships the only activities of which are the purchase and ownership of
Mortgage Loans ("Partnership Interests") that are comparable to the Initial
Mortgage Loans (i.e., government insured residential first mortgages). The
ability to invest in Partnership Interests allows the Company to acquire
Partnership Interests that in effect function as conduits for Mortgage Loans, as
an alternative to acquiring a direct interest in such Mortgage Loans. Any
Partnership Interests would be economically comparable to an investment in
Mortgage Loans. The limitations imposed by the REIT rules on the ownership of
Partnership Interests are the same as those imposed on the ownership of Mortgage
Loans. Potentially, up to 10% of the Company's portfolio could be comprised of
Partnership Interests.
Other Assets
Percentage of current portfolio: 0%. While the Company has no
current intention to do so, the Company may invest up to 10% of the total value
of its portfolio in assets eligible to be held by REITs other than those
described above. Assets eligible to be held by REITs are, and therefore the
Company's portfolio could include, cash, cash equivalents, government securities
and shares or interests in other REITs. Cash, cash equivalents and government
securities would be expected to be relatively low risk investments. However, the
return on investment related thereto would also be expected to be relatively
low. The Company expects that any investment in shares or interests in other
REITs would be made in REITs holding assets similar to the Initial Mortgage
Loans. Accordingly, the expected risks and return related to such an investment
would be similar to the risks and returns related to the Initial Mortgage Assets
and Initial Mortgage Loans.
Description of the Company's Management Policies
General
In administering the Company's Mortgage Assets, the Bank has a
high degree of autonomy. The Board of Directors has, however, adopted certain
policies to guide the Company and the Bank 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 New Preferred Shares. See also "--Dividend Policy"; "Risk
Factors--Risk of Future Revisions in Policies and Strategies by Board of
Directors."
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Asset Acquisition and Disposition Policies.
The Company may, from time to time, use payments of interest
and principal in respect of its Mortgage Assets to purchase additional Mortgage
Assets (which are essentially loans to other persons secured by real property)
and may also purchase additional Mortgage Assets out of the proceeds from the
issuance, and not by direct issuance, of additional shares of Preferred Stock or
the contribution of additional capital by the Bank; provided, however, that (i)
to the extent that the investment of such payments or proceeds occurs prior to
the consummation of the Exchange Offer, such payments or proceeds will be
invested in Canadian or U.S. government guaranteed, mortgage-backed certificates
and other Canadian or U.S. government obligations which will be purchased on the
open market or from entities unaffiliated with the Bank or the Company or banks
that are not affiliated with the Bank and (ii) in the event that the New
Preferred Shares are not treated as "publicly-offered securities" as of the date
on which the Exchange Offer is consummated, then during the period commencing on
such date and ending on the date on which the New Preferred Shares become
"publicly-offered securities," any investment by the Company in any Mortgage
Assets in a transaction with the Bank and/or affiliates of the Bank will be made
only upon the decision of the Independent Fiduciary. The Company has acquired
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 may also from time to time, however, acquire Mortgage Assets from
unrelated third parties. As of the date of this Prospectus, the Company has not
entered into any agreements with any 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 would purchase Mortgage Assets from unrelated third parties
only if neither the Bank nor any affiliate of the Bank had an amount or type of
Mortgage Assets sufficient to meet the requirements of the Company.
At least 90% of the Company's portfolio will consist of the
Initial Mortgage Assets issued by NB Finance and obligations which are
comparable to the Initial Mortgage Assets. The Company may, however, invest in
other assets eligible to be held by REITs. See "-- Description of the Company's
Investment Policy." The Company's current policy prohibits the acquisition of an
interest in any Mortgage Loan (other than an interest resulting from the
acquisition of Mortgage-Backed Securities or a Partnership Interest) which is
delinquent in the payment of principal or interest at the time of proposed
acquisition.
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, or retention of cash flow (after consideration of
the provisions of the Code requiring the distribution by a REIT of a certain
percentage of its income annually and taking into account taxes that would be
imposed on the Company's undistributed taxable income), or a combination of
these methods. The Company will have no debt outstanding following consummation
of the Exchange Offer and has no intention of incurring any indebtedness in the
future.
In order to qualify as a REIT, the capital stock of the
Company must be held by at least 100 holders during approximately 90% or more of
the taxable year beginning in the Company's second taxable year and in each
subsequent taxable year. See "United States Federal Income Tax Considerations --
Stock Ownership Tests." The Company has issued the Senior Preferred Shares with
an aggregate liquidation preference of up to US$450,000 and limited
transferability to ensure that it meets, and will continue to meet, the 100
person ownership requirement for REIT status without having to constantly
monitor the number of holders of Preferred Shares. In making the determination
whether the capital stock of the Company is held by at least 100 holders, the
number of shareholders of the Bank is not considered. Except for such Senior
Preferred Shares, the Company may not, pursuant to its Charter, issue additional
shares of Preferred Stock senior to the New Preferred Shares either in the
payment of dividends or in the distribution of assets in liquidation, without
the consent of holders of at least two-thirds of the outstanding shares of
Preferred Stock at that time, including the New Preferred Shares, and the
Company may not issue additional shares of Preferred Stock on a parity with
42
<PAGE>
the New Preferred Shares either in the payment of dividends or in the
distribution of assets in liquidation without the approval of a majority of the
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 59% 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.
Credit Risk Management Policies.
The Company intends that each Mortgage Loan, if any, acquired
from the Bank, an affiliate of the Bank, or an unrelated third party in the
future will represent a first lien position, will be covered by valid CMHC
insurance 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. The Company also
expects that all Mortgage Loans held by the Company directly or indirectly will
be serviced pursuant to the Servicing Agreement, or a similar agreement which
requires servicing in conformity with accepted secondary market standards, with
any servicing guidelines promulgated by the Company and with relevant government
agency guidelines and procedures.
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 renewal, termination or modification of the
Advisory Agreement or the Servicing Agreement. It is the Company's policy that
the terms of any dealings with the Bank and its affiliates will be consistent
with those available from third parties. In addition, neither the Advisory
Agreement nor the Servicing Agreement may be renewed, terminated or modified by
the Company 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 stockholder 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, be fair to all parties and
consistent with market terms for such types of transactions. The Servicing
Agreement provides that foreclosures and dispositions in connection with
Mortgage Loans will be performed with a view toward maximizing the recovery by
the Company of amounts due on its Mortgage Assets and the Bank will be required
to service 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 other
affiliates. The requirement in the terms of the New 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
dealings will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
There are no provisions in the Charter limiting any officer,
director, security holder or affiliate of the Company from having any direct or
indirect pecuniary interest in any Mortgage Asset to be acquired or disposed of
by the Company or in any transaction in which the Company has an interest or
from engaging in acquiring, holding and managing Mortgage Assets. As described
herein, the Bank and its affiliates have direct interests in transactions with
the Company (including without limitation the issuance of Mortgage Assets to the
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Company); however, none of the officers or directors of the Company will have
any interests in such Mortgage Assets.
Other Policies
The Company operates in a manner that will not subject it to
regulation under the Investment Company Act of 1940, as amended, including by
investing primarily in mortgages and other interests in and liens on real
estate.
The Company intends to distribute to stockholders annual
reports containing financial statements prepared in accordance with generally
accepted accounting principles and certified by the Company's independent public
accountants. The Charter provides that following the consummation of the
Exchange Offer the Company shall maintain its status as a reporting company
under the Exchange Act, for as long as any of the New Preferred Shares are
outstanding.
The Company currently has no intention to (a) invest in
securities of other issuers for the purpose of exercising control or (b)
underwrite securities of other issuers. The Company intends, and has the
ability, to hold the Mortgage Assets and the underlying Mortgage Loans until
maturity. Although the Company has no current intention to do so, the Company
may, pursuant to the terms of its Charter, redeem the Preferred Shares. See
"Description of the New Preferred Shares--Redemption."
The Company makes investments and operates its business at all
times in such a manner as to comply 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 the Company's REIT status.
Description of the Initial Mortgage Assets
The Initial Mortgage Assets are comprised of sixteen
hypothecation loans issued by NB Finance to the Company. As of December 31,
1997, the principal amount of the Initial Mortgage Assets was approximately
US$456 million. Each of the sixteen hypothecation loans comprising the Initial
Mortgage Assets is secured by a pool of Mortgage Loans. The sixteen pools of
Mortgage Loans comprise the Initial Mortgage Assets issued by NB Finance. As of
December 31, 1997, the Initial Mortgage Loans were comprised of, in the
aggregate, 11,701 Mortgage Loans in an aggregate amount of approximately C$793
million (US$ million). The value of each pool of Mortgage Loans comprising the
Initial Mortgage Loans exceeds the principal amount of the hypothecation loan
that it secures. Accordingly, the Initial Mortgage Assets issued by NB Finance
are overcollateralized by the Initial Mortgage Loans. The aggregate amount of
the overcollateralization is, as of December 31, 1997 US$ . The Company acquired
the Initial Mortgage Assets issued by NB Finance pursuant to the terms of a loan
agreement with NB Finance.
Each Initial Mortgage Asset issued by NB Finance is recourse
only to the Initial Mortgage Loan securing such Initial Mortgage Asset. Each
Initial Mortgage Loan is a pool of between 130 and 2,495 CMHC-insured
residential first mortgages. See "Description of the Initial Mortgage Loans."
Each Initial Mortgage Asset issued by NB Finance is further secured by the
residential real property underlying such CMHC-insured first mortgages. Such
residential real property is located primarily in Quebec. The Initial Mortgage
Loans are insured by CMHC. Accordingly, there can be no loss of principal or
interest. However, CMHC insurance does not guarantee timely payment of interest
and principal. See "Risk Factors--Limited Recourse Nature of Certain Mortgage
Assets; Limitation on CMHC Insurance." The Initial Mortgage Assets have
maturities ranging from January 2000 to July 2001. The Initial Mortgage Assets
pay interest at rates ranging from 6.90% to 9.77%, with an average rate of
approximately 8.40% per annum.
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<TABLE>
<CAPTION>
The following table summarizes the Initial Mortgage Assets:
Initial Mortgage Assets
Outstanding Maturity Interest Monthly
Amount Date Rate* Interest Payments
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
US$ 22,971,484 Jan. 2000 6.895% US$ 136,954
22,127,264 Jan. 2000 7.471% 142,550
46,022,201 Jan. 2000 8.047% 318,171
15,147,402 Jan. 2000 8.622% 115,524
42,353,437 July 2000 6.895% 248,660
28,780,803 July 2000 7.471% 182,178
6,988,033 July 2000 8.622% 51,156
9,056,588 July 2000 8.047% 62,737
31,830,449 Jan. 2001 9.198% 250,531
44,641,787 Jan. 2001 9.774% 374,309
4,999,372 Jan. 2001 8.047% 34,679
6,100,814 Jan. 2001 8.622% 44,773
21,278,095 July 2001 8.047% 146,079
101,518,193 July 2001 8.622% 740,026
21,767,957 July 2001 9.198% 173,070
30,635,309 July 2001 9.774% 258,853
US$ 456,219,188 8.404% US$ 3,280,250
</TABLE>
- ------------------------
* All rates quoted on a 30/360 semiannual basis
Payments of interest are made monthly out of payments on the
Initial Mortgage Loans. Pursuant to an agreement between the Company and NB
Finance (the "Mortgage Loan Assignment Agreement"), dated September 3, 1997, the
Company receives all scheduled payments made on the Initial Mortgage Loans,
retains a portion of any such payments equal to the amount due and payable on
the Initial Mortgage Assets and remits the balance, if any, to NB Finance. The
Company also retains a portion of any prepayments of principal in respect of the
Initial Mortgage Loans equal to the proportion of such prepayments that the
outstanding principal amount of the Initial Mortgage Loans bears to the
outstanding principal amount of the Initial Mortgage Assets issued by NB
Finance, which amount would be applied to reduce the outstanding principal
amount of the Initial Mortgage Assets. Repayment of the Initial Mortgage Assets
issued by NB Finance is secured by an assignment of the Initial Mortgage Loans
to the Company pursuant to the Mortgage Loan Assignment Agreement, which will be
governed by the laws of Bermuda. The assignment of the Initial Mortgage Loans by
NB Finance to the Company is without recourse. The Company has a security
interest in the real property securing the Initial Mortgage Loans and, subject
to fulfilling certain procedural requirements under applicable Canadian law, is
entitled to enforce payment on the Initial Mortgage Loans in its own name if a
mortgagor should default thereon. In the event of such a default, the Company
has the same rights as NB Finance to force a sale of the mortgaged property and
satisfy the obligations of NB Finance out of the proceeds. In the event of a
default in respect of an Initial Mortgage Loan, the amount of the Initial
Mortgage Assets issued by NB Finance will be reduced by an amount equal to the
portion thereof allocable to defaulting mortgage. The Initial Mortgage Loans are
administered by the Bank, as agent of the Company, and the Company has the right
to perfect its security interest in the Initial Mortgage Loans by notice and
registration. Following repayment of the Initial Mortgage Assets issued by NB
Finance, the Company will reassign any outstanding Initial Mortgage Loans
(without recourse) and deliver them to, or as directed by, NB Finance. All
payments in respect of the Initial Mortgage Loans are made in Canadian dollars.
The amounts due on the Initial Mortgage Assets issued by NB Finance are retained
by the Company free and clear of and without
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withholding or deduction for or on account of any present or future taxes
imposed by or on behalf of Bermuda or any political subdivision thereof or
therein.
With respect to its underwriting policies, the Bank will not
make any residential mortgage loans that exceed a loan to value ratio of 75%
unless such loan is insured by CMHC. If the residential mortgage loan is
CMHC-insured (i) a cash down payment of between 5% and 24.9% is required, (ii)
the monthly payment for capital, interest, taxes and heating must not exceed 32%
of the gross monthly revenue of the borrower and (iii) the monthly payment for
capital, interest, taxes, heating and all other monthly payments, including,
without limitation, personal loans, lease payments and credit card debt service,
must not exceed 40% of the net monthly revenue of the borrower. Additionally,
for all mortgage loans, an external credit check must be positive. If the loan
is privately insured through Mortgage Insurance Company of Canada, an additional
amount may be added to the principal amount of the mortgage loan representing
the premium related thereto. The premium rates vary in accordance with the
principal amount of the loan. Generally, the greater the loan to value ratio,
the greater the premium rate.
From 1992 through 1997, the Bank's annual loss experience for
residential mortgage loans ranged from a low of approximately C$208,000 million
on a loan volume of approximately C$2.325 billion, or 0.0089%, in 1992 to a high
of approximately C$1.425 million on a loan volume of approximately C$6.415
billion, or 0.0222%, in 1995, with an average annual loss during that period of
approximately C$689,000 on an average annual loan volume of approximately
C$5.171 billion, or 0.0133%.
On the last day of the Bank's fiscal year in each of 1993
through 1997, the Bank's delinquency experience for CMHC-insured residential
mortgage loans ranged from, in the 30 to 59 day category, 727 (0.97%) to 1,641
(1.72%) loans with a principal and interest delinquent amount of approximately
C$46.3 million (1.01%) to approximately C$126.4 million (1.95%), respectively,
in the 60 to 89 day category, 283 (0.38%) to 607 (0.65%) loans with a principal
and interest delinquent amount of approximately C$19.5 million (0.43%) to
approximately C$43.7 million (0.72%), respectively, and in the 90 day or more
category, 736 (0.98%) to 1,594 (1.71%) loans with a principal and interest
delinquent amount of approximately C$59.7 million (1.31%) to approximately
C$125.8 million (2.08%), respectively. Percentages are based upon total
CMHC-insured residential mortgage loans originated by the Bank and total
principal and interest due thereon.
Description of the Initial Mortgage Loans
Information with respect to the Initial Mortgage Loans is
presented as of August 8, 1997.
The detailed information set forth in this Prospectus with
respect to the Initial Mortgage Loans applies only to the mortgages purchased by
NB Finance.
The Initial Mortgage Loans consist of sixteen pools of
residential first mortgages originated by the Bank or acquired by the Bank from
other CMHC approved lenders. Each pool consists of between 130 and 2,495
CMHC-insured residential first mortgages and is secured by the underlying
residential real property located in Canada. Approximately 95% of such property
is located in the provinces of Quebec and New Brunswick. The remaining 5% of
such property is located throughout the remaining Canadian provinces. See "Risk
Factors--All of the Real Property Securing the Initial Mortgage Assets is
Located Outside of the United States." As of December 31, 1997, 11,701
CMHC-insured residential first mortgages comprise the sixteen pools. Generally,
the CMHC-insured residential first mortgages comprising any individual pool are
less than C$100,000. Accordingly, no individual CMHC-insured residential first
mortgage is material to the Company, its operation or its business.
Payments on the Initial Mortgage Loans are due monthly in
arrears on the 1st day of each month through July 2001 or such earlier date on
which payment in full of the Initial Mortgage Loans is made (the "Final Payment
Date") or, if the 1st day of a month is not a business day, on the first
business day following the 1st day of such month (a "Monthly Payment Date").
Payments of interest and principal on the Initial Mortgage Loans are made in
Canadian dollars.
The Initial Mortgage Loans mature monthly beginning in 1999
and bear interest at rates ranging from approximately 6.0% to 8.99% with an
average interest rate of 7.53% per annum. The Final Payment Date may occur at an
earlier date if final payment on the Initial Mortgage Loans occurs earlier than
such date, because of unscheduled prepayments.
46
<PAGE>
The following table summarizes the Initial Mortgage Loans as
of December 31, 1997:
Initial Mortgage Loans
(as of December 31, 1997)
<TABLE>
<CAPTION>
Smallest Largest Origination Date
Outstanding Amount* Loan Loan Earliest Latest Maturity
------------------ ------------------ --------------- -------------------------------------- ----------- -
<S> <C> <C> <C> <C> <C>
$ 39,912,395 $ 8,723.66 $ 674,130.25 Jun-1986 Jan-1997 Jan-2000
38,444,699 14,457.89 1,118,189.58 Jun-1984 Jan-1997 Jan-2000
79,960,294 13,249.13 352,320.10 Aug-1983 Jan-1997 Jan-2000
26,319,677 9,708.22 314,697.46 Sep-1983 Dec-1996 Jan-2000
73,591,245 5,604.36 688,957.68 Apr-1986 Jul-1997 Jul-2000
50,004,886 4,907.53 612,452.46 May-1985 Jul-1997 Jul-2000
12,142,186 11,936.51 889,759.33 Mar-1985 Jul-1997 Jul-2000
15,735,515 6,931.20 323,940.67 Apr-1984 Jul-1997 Jul-2000
8,730,228 15,874.92 182,474.82 Feb-1985 Aug-1997 Jan-2001
10,493,696 7,844.42 208,616.64 Feb-1985 Jul-1997 Jan-2001
55,026,166 6,368.53 455,474.11 Jun-1987 May-1997 Jan-2001
78,352,736 5,201.57 580.003.32 Oct-1984 Jul-1997 Jan-2001
36,972,357 6,825.40 236,868.62 Apr-1986 Jul-1997 Jul-2001
176,395,306 5,856.08 2,270,054.60 Feb-1986 Jul-1997 Jul-2001
37,821,382 10,045.36 729,680.17 May-1985 Jun-1997 Jul-2001
53,228,970 4,938.29 344,466.58 May-1986 Jun-1997 Jul-2001
$793,131,746
</TABLE>
Initial Mortgage Loans
(as of December 31, 1997)
<TABLE>
<CAPTION>
Number
Min. Max. Avg. Min. Max. Avg. of Loans
- ---------- --------- ---------- ---------- ---------- ---------- ----------
Interest rate** Remaining Term (months)
--------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
6.000% 6.499% 6.223% 20.00 25.00 24.12 622
6.500% 6.999% 6.765% 20.00 25.00 23.68 527
7.000% 7.499% 7.165% 20.00 25.00 23.34 1,277
7.500% 7.999% 7.785% 20.00 25.00 21.29 385
6.000% 6.499% 6.197% 26.00 31.00 28.85 1,052
6.500% 6.999% 6.632% 26.00 31.00 29.35 832
7.500% 7.999% 7.606% 26.00 31.00 28.00 160
7.000% 7.499% 7.189% 26.00 31.00 26.88 241
7.000% 7.499% 7.231% 32.00 37.00 35.46 124
7.500% 7.999% 7.804% 32.00 37.00 35.34 130
8.000% 8.499% 8.262% 32.00 37.00 34.68 668
8.500% 8.999% 8.707% 32.00 37.00 34.08 1,224
7.000% 7.499% 7.304% 38.00 43.00 40.82 407
7.500% 7.999% 7.759% 38.00 43.00 40.85 2,495
8.000% 8.499% 8.199% 38.00 43.00 41.15 520
8.500% 8.999% 8.530% 38.00 43.00 41.85 1,037
7.309% 7.808% 7.520% 30.36 35.36 33.30 11,701
</TABLE>
* All amounts quoted in Canadian $
** All rates quoted on a 30/360 semiannual basis
47
<PAGE>
All of the Initial Mortgage Loans were originated in
accordance with underwriting policies customarily employed by the Bank, or with
underwriting policies acceptable to the Bank. As is generally the case in the
Canadian residential mortgage business, the Bank's underwriting policies are
derived from CMHC approved underwriting criteria, and they focus on the
borrower's ability to repay the mortgage loan and the adequacy of the proposed
security.
As a CMHC approved lender, the Bank has access to the National
Housing Act (NHA) mortgage insurance program. All of the Initial Mortgage Loans
are insured by CMHC pursuant to that program. The bulk of those loans were
insured at origination. Whether a loan is insured at origination or through the
CMHC portfolio insurance program, the insurance is valid until the expiration of
the loan.
All of the Initial Mortgage Loans are balloon mortgages.
Accordingly, the Initial Mortgage Loans do not provide for the amortization of
the principal balance thereof over their term to maturity and a principal
payment equal to the original balance less any prepayment will be due on each
Initial Mortgage Loan at maturity. Mortgage Loans that require a balloon payment
typically involve a greater degree of risk than fully amortizing loans. See
"Risk Factors--Balloon Payments." Balloon mortgages are the most prevalent type
of mortgage offered by Canadian mortgage lenders. At the expiration of the term,
the mortgage is generally renewed, based on then current market conditions, for
a new term. Although the Bank offers terms varying from 3 months to 10 years,
terms exceeding 5 years are relatively rare. Moreover, although the Bank offers
monthly, semi-monthly and weekly pay mortgages, all of the Initial Mortgage
Loans are monthly pay mortgages. In general, loans are amortized over a period
not exceeding 25 years.
The Initial Mortgage Loans provide for limited prepayment
rights. For example, typically up to 10% of the original principal amount of an
Initial Mortgage Loan may be prepaid without penalty. Moreover, an Initial
Mortgage Loan may also be prepaid without penalty if the mortgaged property is
sold and the mortgagor enters into a new mortgage with the same terms and
conditions as the Initial Mortgage Loan. In most other circumstances,
prepayments or renegotiations of either the interest rate or the term of an
Initial Mortgage Loan will be subjected to prepayment penalties. During the
first three years following the most recent interest adjustment date, such
penalties are tantamount to a yield maintenance clause. After three years, such
penalties will be limited to three months of interest.
On the date of purchase, the Initial Mortgage Loans had an
aggregate principal amount of approximately C$828 million (US$596 million) and a
fair market value of approximately C$848 million (US$610 million). The Initial
Mortgage Loans mature monthly beginning in 2000, with an average maturity of
approximately September 2000.
The Company intends and has the ability to hold the Mortgage
Loans to maturity unless there is a prepayment by the customer or a Mortgage
Loan is impaired. Therefore the Mortgage Loans will be recorded as a long-term
investment in the balance sheet of the Company.
Effect of Interest Rate Fluctuation on Assets and Earnings
It is anticipated that the Company's income will consist
principally of interest payments from the Initial Mortgage Assets issued by NB
Finance and obligations that are comparable to the Initial Mortgage Assets
issued by NB Finance. Interest and principal amounts generated by the Initial
Mortgage Loans and other assets acquired pursuant to the Company's investment
policy enable full payment with respect to the Initial Mortgage Assets issued by
NB Finance. The Initial Mortgage Assets issued by NB Finance and the Initial
Mortgage Loans mature between January 2000 and July 2001.
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 or Mortgage Loans, the Company may find it difficult to
purchase additional Mortgage Assets or Mortgage Loans which generate sufficient
income to support the payment of dividends on the New Preferred Shares. Because
the rate at which dividends on the
48
<PAGE>
New Preferred Shares, if, when and as authorized and declared, are payable 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 New Preferred Shares. Further, it is
possible that a significant decline in interest rates could effect a prepayment
of Mortgage Loans. Assuming all Mortgage Loans provide similar limitations on
prepayments as the Initial Mortgage Loans, the effect on earnings will be, to a
certain extent, mitigated. However, such prepayments could adversely affect the
Company's assets.
A significant increase in interest rates would not be expected
to adversely affect the assets or the earnings of the Company.
Servicing
The Initial Mortgage Loans, and certain other Mortgage Loans,
are serviced by the Bank pursuant to the terms of the Servicing Agreement. The
Bank receives a fee equal to 0.25% per annum on the principal balances of the
loans serviced. Payment of such fees is subordinated to payments of dividends on
the New Preferred Shares.
The Servicing Agreement requires the Bank to service Mortgage
Loans in a manner generally consistent with normal mortgage servicing practices
of prudent mortgage lending institutions which service mortgage loans of the
same type as the Mortgage Loans, with any servicing guidelines promulgated by
the Company and with relevant government agency guidelines and procedures. The
Servicing Agreement requires the Bank to service 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 other affiliates (including NB Finance). The Bank
collects and remits principal and interest payments, administers mortgage escrow
accounts, submits and pursues mortgage insurance claims and supervises
foreclosure proceedings on any Mortgage Loans it services. The Bank also
provides accounting and reporting services with respect to such Mortgage Loans.
The Servicing Agreement requires the Bank to follow such collection procedures
as are customary in normal mortgage servicing practices of prudent mortgage
lending institutions which service mortgage loans of the same type as the
Mortgage Loans. The Bank may from time to time subcontract all or a portion of
its servicing obligations under the Servicing Agreement to a third party subject
to the prior written approval of the Company. The Bank 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 Bank is required to pay all expenses related to the
performance of its duties under the Servicing Agreement. The Bank is required to
make advances of taxes and required insurance premiums that are not collected
from mortgagors 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 Bank generally will be reimbursed prior to the Company being
reimbursed out of the payments with respect to such Mortgage Loan. The Bank also
is 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 Bank is responsible to the Company
for any loss suffered as a result of the Bank's failure to make and pursue
timely claims or as a result of actions taken or omissions made by the Bank
which cause the policies to be cancelled by the insurer. Subject to approval by
the Company, the Bank may institute foreclosure proceedings, exercise any power
of sale contained in any Mortgage Loan or deed of trust, obtain a deed in lieu
of foreclosure or otherwise acquire title to a mortgaged property underlying a
Mortgage Loan by operation of law or otherwise in accordance with the terms of
the Servicing Agreement. The Bank does not, however, have the authority to
conclude 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 Bank's proper and timely performance of its
duties and obligations under the Servicing Agreement. In addition, the Company
may also
49
<PAGE>
terminate the Servicing Agreement without cause upon 60 days' notice and payment
of a termination fee equal to the product of 0.0002% of the then current
aggregate unpaid principal balance of the Mortgage Loans and the number of
months remaining until the first anniversary of the Servicing Agreement. 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
of the New Preferred Shares remain outstanding, the Company may not renew,
terminate, or modify the Servicing Agreement without the approval of a majority
of the Independent Directors.
As is customary in the mortgage loan servicing industry, the
Bank is entitled to retain any late payment charges, penalties and assumption
fees collected in connection with the Mortgage Loans serviced by it. The Bank
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, to the extent permitted by law, 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 Bank 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 Bank 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 nominal
fee is typically required, which sum will be retained by the Bank as additional
servicing compensation.
Employees
The Company has six employees. Information regarding the
executive officers of the Company is provided below under "Management--Directors
and Executive Officers." The Company does not anticipate that it will require
any additional employees because it retains the Bank to perform certain
functions pursuant to the Advisory Agreement as described below under
"Management--The Bank." Each employee of the Company currently is also an
officer and/or director of the Bank and/or affiliates of the Bank. The Company
maintains corporate records and audited financial statements that are separate
from those of the Bank and of any of the Bank's affiliates.
Competition
The Company does not engage in the business of originating
Mortgage Assets. While the Company will purchase additional Mortgage Assets, it
anticipates that such Mortgage Assets will be purchased from the Bank and/or
affiliates of the Bank. Accordingly, the Company does not 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.
As of October 31, 1997, the Bank held more than C$13 billion
of residential mortgage assets. Slightly more than 70% of such mortgages were
located in Quebec, the Bank's principal place of business. The major competitor
of the Bank in Quebec is the Caisses Populaires Desjardins (a credit union). The
market share of the Bank for such mortgages in Quebec is approximately 18%
compared with a significantly greater market share for Caisses Populaires
Desjardins.
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 issued by NB Finance or
the Initial Mortgage Loans, other than routine litigation arising in the
ordinary course of business, most of which is expected to be covered by
liability insurance.
50
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Board of Directors consists of the individuals set forth
below. Messrs. Hanley and Michel are Independent Directors. Pursuant to the
terms of the New Preferred Shares, the Independent Directors will consider the
interests of the holders of both the New Preferred Shares and the Common Stock
in determining whether any proposed action requiring their approval is in the
best interests of the Company. The Company currently has six employees and does
not anticipate that it will require additional employees. See "Business and
Strategy--Employees."
As of January 30, 1998, the persons who are directors and
executive officers of the Company are as follows:
Name Position and Offices Held
- ---- -------------------------
Michael Hanley Director
Alain Michel Director
John Richter Director; Chairman of the Board; Chief Executive
Officer; President
Tom Doss Director; Chief Financial Officer; Treasurer
Pierrette Lacroix Director; Vice President
Francois Bourassa (Vice President--Legal; Secretary), Andree
Grimard (Assistant Secretary) and Martin Ouellet (Vice President) are the only
other employees of the Company. The following is a summary of the experience of
the executive officers and current and proposed directors of the Company:
Mr. Hanley has been Vice President and Chief Financial Officer
of Gaz Metropolitain since June 1997. Prior to that he was Vice President,
Finance of St. Laurent Paperboard Inc. since November 1995 and Corporate
Controller since June 1994. Prior to that, Mr. Hanley was Manager, Financial
Analysis, at Avenor Inc. since May 1993 and Internal Auditor since September
1990. Prior to that, he was Senior Advisor for Arthur Andersen & Co., an
international firm of accountants and management consultants.
Mr. Michel has been Senior Vice President and Chief Financial
Officer of Le Groupe Videotron Ltee since September 1994. Prior to that, he was
Vice President Finance and Treasurer of Videotron since July 1992. Mr. Michel is
a member of the Board of Directors of Group Goyette Inc., a public
transportation company, and is Vice-Chairman of the Board and Chairman of the
Audit Committee of Optel Inc., its U.S. division.
Ms. Pierrette Lacroix joined the Montreal Head Office of
National Bank of Canada in 1975. As senior officer, she has been involved in
various functions related to the Treasury area of the Bank and has, over the
years, participated in several task forces within the Bank. She came to the
United States in May of 1993 to assume the position of Senior Vice President and
Treasurer of the USA Division. As such, she is responsible for the management of
all Treasury related activities for the USA, including asset/liability
management. She is also a member of the USA Division's Management Committee.
Mr. Doss joined the Bank in 1981 and has served as Chairman,
Credit Committee (United States) since 1981. He was elected Vice President,
Credit (U.S.) in 1988. He is an officer of several of the Bank's U.S.
subsidiaries and is a director of National Canada Finance Corp. and NB Finance.
He is also a member of the Board of Trustees for Soundview Preparatory School.
Mr. Richter has been Vice President - Eastern United States of
the Bank since 1988. In this position he functions as the Bank's senior lender
officer in the United States. Mr. Richter is President of National Canada
Finance Corp., a United States subsidiary of the Bank. He is also a member of
the Bank's
51
<PAGE>
management committee in the United States. Mr. Richter has been Chairman of the
Board; Chief Executive Officer; President of the Company since January 30, 1998.
Compensation of Executive Officers
The officers, employees and directors other than the
Independent Directors of the Company did not receive any form of compensation
from the Company for the fiscal year ended December 31, 1997. The compensation
of the officers, employees and directors other than the Independent Directors of
the Company is paid directly by the Bank and charged-back to the Company for
services provided thereto pursuant to the terms of the Advisory Agreement. See
"-- The Bank as Advisor." The following table summarizes compensation
information for the fiscal year-ended December 31, 1997 for Roger Smock, who
resigned from his positions with the Bank and the Company in January 1998:
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------------------------- ----------------
Other Securities
Name and Annual Underlying All Other
Principal Salary Bonus Compensation Options/ Compensation
Position (1) Year (US$) (US$) (US$) SARs(#) (US$)
- --------------------- ---------- ------------ ------------- -------------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger Smock, 1997 183,287 0 14,555 (2) 18,000 0
President (1)
- ---------------
<FN>
(1) Compensation disclosed in this table for Mr. Smock was paid in
consideration for all of Mr. Smock's services to the Bank and its
subsidiaries. Only a portion of such compensation is attributable to Mr.
Smock's services to the Company, which portion was charged-back to the
Company by the Bank pursuant to the terms of the Advisory Agreement. See
"-- The Bank as Advisor." No executive officer of the Company was paid more
than $100,000 of compensation for the fiscal year ended December 31, 1997
that would be attributable to services performed for the Company and its
subsidiaries and thus are not included in this table.
(2) Consists of a US$10,000 annual education allowance and a US$4,555 annual
car allowance.
</FN>
</TABLE>
52
<PAGE>
Options Exercised and Year-End Option/SAR Holdings
The following table provides information about stock option
exercises by Mr. Smock during 1997 and stock options/SARs held by Mr. Smock at
fiscal year-end:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End (C$) (2)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized (C$)(1) Unexercisable Unexercisable
---- --------------- ---------------------- ------------- -------------
<S> <C> <C> <C> <C>
Roger Smock 22,000 C$99,994 0/45,000 C$0/C$535,250
<FN>
- ---------------
(1) Market value of the underlying Bank common stock less the exercise or base
price.
(2) Market value of Bank common stock underlying in-the-money options/SARs at
the end of 1997, minus the aggregate exercise price of the options/SARs.
</FN>
</TABLE>
53
<PAGE>
Pension Plan
<TABLE>
<CAPTION>
Pension Plan Table
Canadian dollars Years of Service
--------------------------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ ------------------- ------------------- ------------------- ------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
C$100,000 C$26,334 C$34,945 C$43,556 C$52,414 C$61,348
125,000 31,751 40,369 48,973 57,830 66,764
150,000 37,168 45,779 54,390 63,247 72,181
175,000 42,584 51,195 59,806 68,664 77,598
200,000 48,001 56,612 65,223 74,080 83,014
225,000 53,418 62,029 70,640 79,497 88,431
250,000 58,834 67,445 76,056 84,914 93,848
300,000 58,834 67,445 76,056 84,914 93,848
</TABLE>
The above table illustrates the estimated annual retirement
benefit payable on a straight line annuity basis to participating employees at
normal retirement age (generally age 60), in the earnings and years of service
classifications indicated, under the defined benefit pension plan sponsored by
the Bank (the "Bank Pension Plan") and an excess benefit plan which covers
certain employees of the Bank and its Subsidiaries. For each year of service
credited to a participant in the Bank Pension Plan, a participant will be
entitled to 2% of his or her annual eligible earnings, less the amount earned
under the Canada or Quebec pension plans while participating in the Bank Pension
Plan. Annual eligible earnings is defined as a participant's average earnings
for such participant's 60 highest-paid consecutive months, based on salary and
25% of bonus. Mr. Smock had accrued 16.4 years of credited service under the
Bank Pension Plan as of his resignation.
In addition to the Bank Pension Plan, certain employees of the
Bank and its Subsidiaries, including those of the Company, may also participate
in an excess benefit plan for participants in the Bank Pension Plan whose
benefits are reduced pursuant to limitations on pensions imposed by the Income
Tax Act (Canada). Employees covered by the excess benefit plan receive a benefit
equal to the amount of benefit disallowed under the Pension Plan due to such
limitations.
Independent Directors
The terms of the New Preferred Shares require that, as long as
any New Preferred Shares are outstanding, certain actions by the Company must be
approved by a majority of the Independent Directors. See "Description of New
Preferred Shares--Independent Director Approval." Mr. Hanley and Mr. Michel are
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 the Independent Directors.
If at any time the Company fails to declare and pay a
quarterly dividend on the New Preferred Shares, the number of directors then
constituting the Board of Directors will be increased by at least two at the
Company's next annual meeting and the holders of the New Preferred Shares,
voting together as a single class with the holders of any other outstanding
series of Preferred Stock entitled to vote on the matter, including the Senior
Preferred Shares, will be entitled to elect two additional directors to serve on
the Board of Directors. Any member of the Board of Directors elected by holders
of 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.
The Company expects that the Bank will elect a majority of the Board of
Directors. See "Description of New Preferred Shares--Voting Rights."
Audit Committee
The Board of Directors has established an audit committee
which reviews the engagement of independent accountants and their independence.
The audit committee also reviews the adequacy of the Company's internal
accounting controls. The audit committee is comprised of Mr. Hanley and Mr.
Michel.
Compensation of Directors and Officers
The Company pays the Independent Directors fees for their
services as directors. The Independent Directors 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.
54
<PAGE>
Limitation of Liability and Indemnification of Directors and Officers
The MGCL permits a Maryland corporation to include in its
charter a provision limiting the liability of the corporation's directors and
officers to the corporation and its stockholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty established
by a final judgment as being material to the cause of action. The Charter
contains such a provision which eliminates such liability to the maximum extent
permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of the Company. The Bylaws of the
Company (the "Bylaws") obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by the Company and (b) a
written statement by or on his behalf to repay the amount paid or reimbursed by
the Company if it shall ultimately be determined that the standard of conduct
was not met.
The Bank as Advisor
The Company entered into the Advisory Agreement with the Bank
to administer the day-to-day operations of the Company. The Bank is 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, Mortgage Assets held by the
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Company, (iii) holding documents relating to the Company's Mortgage Assets as
custodian, (iv) monitoring the Company's compliance with the requirements
necessary to qualify as a REIT and (v) maintaining its status as a NHA Approved
Lender. The Bank 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 one or more related or
unrelated third parties. The Bank 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 Bank and its affiliates 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 of the New Preferred Shares remain outstanding, any decision by the
Company to renew, terminate or modify 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 Bank is entitled to receive an advisory fee equal to
US$25,000 payable in equal quarterly installments with respect to the advisory
and management services provided by it to the Company. Payment of such fees is
subordinated to payments of dividends on the New Preferred Shares.
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."
In addition, under certain circumstances, The Independent Fiduciary will
exercise the discretionary authority reserved to the Company with respect to
transactions involving both the Company and the Bank or any Bank affiliate. See
"ERISA Considerations."
DESCRIPTION OF NEW PREFERRED SHARES
The following summary of the material terms and provisions of
the New Preferred Shares does not purport to be complete and is qualified in its
entirety by reference to Maryland law and to the terms and provisions of the
Charter establishing the New Preferred Shares and the other provisions of the
Charter, a copy of which is available from the Company upon request. See
"Description of Capital Stock."
General
The New Preferred Shares form a series of Preferred Stock,
which Preferred Stock may be issued from time to time in one or more series with
such designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption as are determined by the Board of
Directors. The Board of Directors has authorized the Company to issue the New
Preferred Shares.
When issued, the New Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the New Preferred Shares will have
no preemptive rights with respect to any shares of the stock of the Company or
any other securities of the Company convertible into or carrying rights or
options to purchase any such shares. The New Preferred Shares are perpetual and
will not be convertible into shares of Common Stock or any other class or series
of stock of the Company and will not be subject to any sinking fund or other
obligation of the Company for their repurchase or retirement. The New Preferred
Shares will be exchanged automatically on a one-for-one basis for the Bank
Preferred Shares upon the occurrence of an Exchange Event.
The transfer agent, registrar and dividend disbursement agent
for the New Preferred Shares will be The Bank of Nova Scotia Trust Company of
New York. The registrar for shares of New Preferred
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Shares will send notices to shareholders of any meetings at which holders of the
New Preferred Shares have the right to elect directors of the Company or to vote
on any other matter.
Dividends
Holders of the New Preferred Shares shall be entitled to
receive, if, when and as authorized and declared by the Board of Directors out
of assets of the Company legally available therefor, noncumulative cash
dividends at the rate of 8.35% per annum of the liquidation preference
(equivalent to US$83.50 per share per annum, calculated by multiplying the
annual dividend rate of 8.35% by the liquidation preference of US$1,000 per
share, assuming authorization and declaration by the Board of Directors of four
quarterly dividends.) If authorized and declared, dividends on the New Preferred
Shares shall be payable quarterly in arrears on the 30th day of March, June,
September and December (or, if any such day is not a business day, on the next
business day) of each year, at such annual rate, commencing , 1998. With respect
to the dividend period in which the Exchange Offer is consummated, dividends on
each New Preferred Share will accrue from the first day of such dividend period.
Thereafter, dividends in each quarterly dividend period will accrue from the
first day of such period, whether or not authorized, declared or paid with
respect to New Preferred Shares for the prior quarterly period. Each authorized
and 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 calendar days nor less than 10 calendar days preceding the
payment dates thereof, as shall be fixed by the Board of Directors. Dividends
payable on the New Preferred Shares for any dividend period greater or less than
a full dividend period shall be computed on the basis of twelve 30-day months, a
360-day year and the actual number of days elapsed in the period; provided,
however, that in the event of the Automatic Exchange, any accrued and unpaid
dividends on the New Preferred Shares as of the Time of Exchange (as defined)
shall be deemed to be accrued and unpaid dividends on the Bank Preferred Shares.
The right of holders of the New Preferred Shares to receive
dividends is noncumulative. Accordingly, if the Board of Directors fails to
authorize or declare a dividend on the New Preferred Shares for a quarterly
dividend period, then holders of the New 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 authorized and
declared and paid for any future period with respect to either the Preferred
Stock or the Common Stock authorized. If the Company fails to pay or authorize
and set aside for payment a quarterly dividend on the New Preferred Shares,
holders of Preferred Stock, including the New Preferred Shares and the Senior
Preferred Shares, will be entitled to elect two directors. See "--Voting
Rights."
If full dividends on the New Preferred Shares for any dividend
period shall not have been authorized, declared and paid, or authorized,
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 Company
ranking junior to or on a parity with the New 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 New Preferred
Shares as to dividends or amounts upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any monies to be paid to or made
available for a sinking fund for the redemption of any such stock) by the
Company (except by conversion into or exchange for other stock of the Company
ranking junior to the New Preferred Shares as to dividends and amounts upon
liquidation), until such time as dividends on all outstanding New Preferred
Shares have been (i) authorized, declared and paid for three consecutive
dividend periods and (ii) authorized, declared and paid or authorized, 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 New Preferred Shares and the shares
of any other series of stock ranking on a parity as to dividends with the New
Preferred Shares, all dividends authorized and declared upon the New Preferred
Shares and any other series of stock ranking on a parity as to dividends with
the New Preferred Shares shall be authorized and
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declared proportionately so that the amount of dividends authorized and declared
per New Preferred Share and such other series of stock shall in all cases bear
to each other the same ratio that full dividends, for the then-current dividend
period, per New 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 other series of
stock bear to each other.
For a discussion of the tax treatment of distributions to
stockholders, see "United States 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 New Preferred Share will be exchanged automatically for
one newly issued Bank Preferred Share (i) immediately prior to such time, if
any, at which the Bank fails to declare and pay or set aside for payment when
due any dividend on any issue of its cumulative First Preferred Shares or the
Bank fails to pay or set aside for payment when due any declared dividend on any
of its non-cumulative First Preferred Shares, (ii) in the event that the Bank
has a Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based
capital ratio of less than 8.0%, (iii) in the event that the Superintendent
takes control of the Bank pursuant to the Bank Act or proceedings are commenced
for the winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange. Upon an Exchange Event, each holder of the New Preferred
Shares shall be unconditionally obligated to surrender to the Bank the
certificates representing each New Preferred Share held by such holder, and the
Bank shall be unconditionally obligated to issue to such holder in exchange for
each such New Preferred Share a certificate representing one Bank Preferred
Share. Any New Preferred Shares purchased or redeemed by the Company prior to
the Time of Exchange (as defined below) shall be deemed not to be 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 date for such exchange set forth in the requirements of the
Superintendent or, if such date is not set forth in such requirements as of 8:00
a.m. on the earliest possible date such exchange could occur consistent with
such requirements (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 New Preferred Shares will be deemed cancelled without any further action by
the Company, all rights of the holders of the New 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 holders of Bank
Preferred Shares. The Company will mail notice of the occurrence of an Exchange
Event to each holder of the New Preferred Shares within 30 days of such event,
and the Bank will deliver to each such holder certificates for the Bank
Preferred Shares upon surrender of such holder's certificates for the New
Preferred Shares. The Charter provides that, immediately after the delivery of
such notice, the existence of the Company shall terminate and the Company will
be liquidated and its affairs wound up in accordance with the procedures of the
MGCL relating to forfeiture of the charter of a corporation and expiration of
corporate existence. Until such replacement stock certificates are delivered (or
in the event such replacement certificates are not delivered), certificates
previously representing the New Preferred Shares shall be deemed for all
purposes to represent the Bank Preferred Shares. All corporate action necessary
for the Bank to issue the Bank Preferred Shares has been taken by the Bank.
Accordingly, once an Exchange Event occurs, no action will be required to be
taken by holders of the New Preferred Shares, by the Bank or by the Company in
order to effect the Automatic Exchange as of the Time of Exchange.
Holders of the New Preferred Shares, by purchasing such New
Preferred Shares, will be deemed to have agreed to be bound by the unconditional
obligation to exchange such New Preferred Shares for the Bank Preferred Shares
upon the occurrence of an Exchange Event. The obligation of the holders of the
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New Preferred Shares to surrender such shares and the obligation of the Bank to
issue the Bank Preferred Shares in exchange for the New Preferred Shares shall
be enforceable by the Bank and such holders, respectively, against the other.
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 First Preferred Shares of the Bank ranking senior to
all shares of common stock of the Bank then issued and outstanding and equally
with all other series of First Preferred Shares of the Bank then issued and
outstanding. As of October 31, 1997, 170,461,483 shares of common stock of the
Bank were issued and outstanding. The Bank Preferred Shares would constitute
100% of the issued and outstanding Bank Preferred Shares. The Bank Preferred
Shares would have a liquidation preference of US$1,000 and be subject to
redemption on the same terms as the New Preferred Shares (except that there
would be no redemption for a Tax Event). Any accrued and unpaid dividends on the
New Preferred Shares as of the Time of Exchange would be accounted for as
accrued and unpaid dividends on the Bank Preferred Shares. The Bank Preferred
Shares would rank equally, in terms of dividend payments and liquidation
preference, with, or senior to, any outstanding First 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 8.45% per annum of the liquidation
preference, if, when and as declared by the Board of Directors of the Bank. 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 National Association of Securities Dealers Automated Quotation
System. 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 First
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.
Holders of the New Preferred Shares cannot exchange the New
Preferred Shares for the Bank Preferred Shares voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of the New Preferred Shares
will have no dividend, voting, liquidation preference or other rights with
respect to the Bank or any security of the Bank.
Ranking
The New Preferred Shares will rank prior to the Common Stock
and to all other classes and series of equity securities of the Company now or
hereafter issued, other than the Senior Preferred Shares or any other series of
equity securities of the Company expressly designated as being on a parity with
("Parity Stock") or senior to the New Preferred Shares as to dividend rights and
rights upon liquidation, winding up or dissolution. The Company has the power to
create and issue additional Preferred Stock or other classes of stock ranking on
a parity with the New Preferred Shares, or ranking junior to the New Preferred
Shares, without any approval or consent of the holders of New Preferred Shares.
So long as any New Preferred Shares remain outstanding, additional shares of
Senior Stock may not be issued without the approval of the holders of at least
two-thirds of the New Preferred Shares. See "--Voting Rights." So long as any
New Preferred Shares remain outstanding, additional shares of Parity Stock may
not be issued without the approval of a majority of the Board of Directors and a
majority of the Independent Directors. See "--Independent Director Approval."
Voting Rights
Except as indicated below, the holders of the New Preferred
Shares will not be entitled to vote. In the event the holders of the New
Preferred Shares are entitled to vote as indicated below, each New Preferred
Share will be entitled to one vote on matters on which holders of the New
Preferred Shares are entitled to vote.
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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
failed to authorize and declare and set aside for payment a quarterly dividend
on any series of Preferred Stock of the Company, including the New Preferred
Shares, the number of directors then constituting the Board of Directors will be
increased by at least two (if not already increased by two due to a default in
preference dividends), and the holders of the New Preferred Shares and the
holders of Senior 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 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 a director until the later of (i) the full term
for which he or she shall have been elected or (ii) the payment of one quarterly
dividend on the Preferred Stock, including the New Preferred Shares. Any such
director may be removed by, and shall not be removed except by, the vote of the
holders of record of the outstanding the New Preferred Shares and Parity Stock
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 Company's stockholders, or of the holders of the New Preferred Shares and
Parity Stock so entitled to vote thereon, called for that purpose. As long as
dividends on the New Preferred Shares shall not have been paid for the preceding
quarterly dividend period, (i) any vacancy in the office of any such director
may be filled (except as provided in the following clause (ii)) by a person
designated in an instrument in writing signed by any such remaining director and
filed with the Company, and (iii) in the case of the removal of any such
director, the vacancy may be filled by the vote of the holders of the
outstanding New Preferred Shares and Parity Stock 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.
The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of each series of Preferred Stock,
including the New Preferred Shares, will be required (a) to create any class or
series of stock (other than the Senior Preferred Stock) which shall, as to
dividends or distribution of assets, rank prior to or on a parity with any
outstanding series of Preferred Stock other than a series which shall not have
any right to object to such creation or (b) alter or change the provisions of
the Charter (including the terms of the New Preferred Shares) so as to adversely
affect the voting powers, preferences or special rights of the holders of a
series of Preferred Stock to any material extent; provided that if such
amendment shall not adversely affect all series of Preferred Stock, such
amendment need only be approved by at least two-thirds of the holders of shares
of all series of Preferred Stock adversely affected thereby.
Redemption
The New Preferred Shares are not redeemable prior to September
3, 2007 (except upon the occurrence of a Tax Event on or after September 3,
2002). On or after such date, the New Preferred Shares may be redeemed at the
option of the Company, or its successor or any acquiring or resulting entity
with respect to the Company (including by any parent or subsidiary of the
Company, any such successor, or any such acquiring or resulting entity), as
applicable, 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 following redemption
prices (expressed as a percentage of the US$1,000 per share liquidation
preference), if redeemed during the 12-month period beginning September 3 of the
years indicated below, plus the quarterly accrued and unpaid dividend to the
date of redemption, if any, thereon:
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Year Redemption Price
2007 104.1750%
2008 103.7575
2009 103.3400
2010 102.9225
2011 102.5050
2012 102.0875
2013 101.6700
2014 101.2525
2015 100.8350
2016 100.4175
and thereafter at a redemption price of US$1,000 per share, plus the quarterly
accrued and unpaid dividend to the date of redemption, if any, thereon.
In the event that fewer than all the outstanding New Preferred
Shares are to be redeemed, the number of New 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 proportionately 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
New Preferred Shares are then listed.
Any such redemption must comply with applicable capital
distribution regulations of the Superintendent, which may prohibit a redemption
and will require the Superintendent's prior written approval. Unless full
dividends on the New Preferred Shares have been, or contemporaneously are,
authorized, declared and paid or authorized and declared and a sum sufficient
for the payment thereof set apart for payment for the then-current dividend
period, no New Preferred Shares shall be redeemed unless all outstanding New
Preferred Shares are redeemed and the Company shall not purchase or otherwise
acquire any New Preferred Shares; provided, however, that the Company may
purchase or acquire New Preferred Shares pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding New Preferred Shares.
Furthermore, the Company may, at its option, on or after
September 3, 2002 and prior to September 3, 2007, redeem the New Preferred
Shares, in whole but not in part, at any time upon a Tax Event, at a redemption
price per share equal to the sum of (i) the quarterly accrued and unpaid
dividend to the date of redemption plus (ii) the Make-Whole Amount (as defined
herein).
"Adjusted Treasury Rate" means, with respect to any redemption
date, the rate per annum equal to the semi-annual equivalent yield to maturity
of the Comparable Treasury Issue (as defined herein), assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price (as defined herein) for such prepayment
date plus 0.50%.
"Comparable Treasury Issue" means the United States Treasury
security selected by the Quotation Agent as having a maturity comparable to the
Make-Whole Term that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Make-Whole Term.
"Comparable Treasury Price" means, with respect to any
redemption date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third business day preceding such redemption date, as set forth in the
daily statistical release published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotation for U.S. Government Securities" (or
any successor release) or (ii) if such release is not published or does not
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contain such prices on such business day, (a) the average of the Reference
Treasury Dealer Quotations for such redemption date, after excluding the highest
and lowest such Reference Treasury Dealer Quotations, or (b) if the Company
obtains fewer than three such Reference Treasury Dealer Quotations, the average
of all such Quotations.
"Make-Whole Amount" means, with respect to a New Preferred
Share, the greater of (i) 100% of the Maturity Amount of such New Preferred
Share and (ii) the sum of the present values of the remaining scheduled payments
of dividends on such New Preferred Share to September 3, 2007, plus the present
value of the Maturity Amount at September 3, 2007, discounted to the date fixed
for redemption of such New Preferred Share (the "redemption date") on a
quarterly basis (assuming a 360-day year consisting of 30-day months), computed
using a discount rate equal to the Adjusted Treasury Rate.
"Make-Whole Term" means the period from the redemption date to
September 3, 2007.
"Maturity Amount" means the liquidation preference of the New
Preferred Shares.
"Quotation Agent" means the Reference Treasury Dealer (as
defined herein) appointed by the Company.
"Reference Treasury Dealer" means (i) Merrill Lynch Government
Securities, Inc. and their respective successors; provided, however, that if the
foregoing shall cease to be a primary U.S. Government securities dealer in New
York City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer
selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to
each Reference Treasury Dealer and any redemption date, the average, as
determined by the Company, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third business day preceding such redemption date.
"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 Canada, 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 this Prospectus, there is more than an insubstantial risk that (a) dividends
paid or to be paid by the Company with respect to the 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 and shall
include an assessment by the Internal Revenue Service that (a) dividends paid or
to be paid by the Company with respect to the 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 New 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 New Preferred Shares upon
liquidation, and subject to the rights of the holders of any class or series of
equity securities having preference with respect to distribution upon
liquidation and the rights of the Company's general creditors, liquidating
distributions in the amount of US$1,000 per share, plus the quarterly accrued
and unpaid dividend thereon, if any, to the date of liquidation, without
interest.
After payment of the full amount of the liquidation
distributions to which they are entitled, the holders of the New 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 the outstanding New
Preferred Shares and the corresponding amounts payable on all shares of other
classes or series of stock of the Company ranking on a parity with the New
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 New
Preferred Shares and such other classes or series of stock shall share ratably
in any such distribution of assets in proportion to the full liquidation
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 New Preferred Shares require that, as long as
any New Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors. Mr. Hanley and Mr. Michel
are the 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 the 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 elected by holders of Preferred Stock,
including the New Preferred Shares, will be deemed to be Independent Directors
for purposes of approving actions requiring the approval of a majority of the
Independent Directors. The actions which require approval of a majority of the
Independent Directors include (i) the issuance of additional Preferred Stock
ranking on a parity with the New Preferred Shares, (ii) the modification of the
Company's general distribution policy or the authorization of any distribution
in respect of the Common Stock for any year if, after taking into account any
such proposed distribution, total distributions on the New 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 Mortgage
Assets other than obligations which are comparable to the Initial Mortgage
Assets issued by NB Finance, Mortgage Loans, interests in Mortgage Loans and
Partnership Interests, (iv) the redemption of any shares of Common Stock, (v)
the renewal, termination or modification of the Advisory Agreement or the
Servicing Agreement or the subcontracting of any duties thereunder to third
parties unaffiliated with the Bank, and (vi) the determination to revoke the
Company's REIT status. The Charter requires that, in determining whether any
proposed action requiring their approval is in the best interests of the
Company, the Independent Directors will consider the interests of holders of
both the Common Stock and the Preferred Stock, including, without limitation,
holders of the New Preferred Shares.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Bank entered into the Registration Rights
Agreement for the benefit of the holders of the Old Preferred Shares wherein the
Company and the Bank agreed, for the benefit of the holders of the Old Preferred
Shares, (i) to use their best efforts to file with the Commission within 150
days after the Issue Date the Registration Statement relating to the Exchange
Offer for the New Preferred Shares, and (ii) to use its best efforts to cause
the Registration Statement to be declared effective under the Securities Act
within 180 days after the Issue Date. Promptly after the Registration Statement
has been declared effective, the Company will exchange the New Preferred Shares
for surrender of the Old Preferred Shares. The Company will keep the Exchange
Offer open for not less than 30 days (or longer if required by applicable law)
after the date notice of the Exchange Offer has been mailed to the holders of
the Old Preferred Shares. For each Old Preferred Share validly tendered to the
Company pursuant to the Exchange Offer and not validly withdrawn by the holder
thereof, the holder of such Old Preferred Share will receive a New Preferred
Share having a liquidation preference equal to the liquidation preference of the
tendered Old Preferred Share. Dividends on each New Preferred Share will accrue
from the first day of the dividend period in which the Exchange Offer is
consummated.
Based on existing interpretations of the Securities Act by the
Staff set forth in several no-action letters to third parties, and subject to
the immediately following sentence, the Company believes that the New Preferred
Shares issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by the holders thereof (other than holders who are
broker-dealers) without further compliance with the registration and prospectus
delivery provisions of the Securities Act. However, any prospective holder of
New Preferred Shares who is an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New
Preferred Shares, or any broker-dealer who purchased the Old Preferred Shares
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (i) will not be able to rely on the
interpretation of the Staff set forth in the above-mentioned no-action letters,
(ii) will not be entitled to tender its Old Preferred Shares in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Old Preferred Shares unless such sale or transfer is made pursuant to an
exemption from such requirements. The Company does not intend to seek its own
no-action letter and there can be no assurance that the Staff would make a
similar determination with respect to the New Preferred Shares as it has in such
no-action letters to third parties.
Each holder of the Old Preferred Shares (other than certain
specified holders) who wishes to exchange the Old Preferred Shares for New
Preferred Shares in the Exchange Offer will be required to represent that (i) it
is not an affiliate of the Company, (ii) the New Preferred Shares to be received
by it were acquired in the ordinary course of its business and (iii) at the time
of the Exchange Offer, it has no arrangement with any person to participate in
the distribution (within the meaning of the Securities Act) of the New Preferred
Shares. In addition, in connection with any resales of New Preferred Shares, any
broker-dealer (a "Participating Broker-Dealer") who acquired the New Preferred
Shares for its own account as a result of market-making or other trading
activities must deliver a prospectus meeting the requirements of the Securities
Act. The Company has agreed that, for a period of six months after the date of
this Prospectus, it will make this Prospectus, as it may be amended or
supplemented, available to any broker-dealer for use in connection with any such
resale and will update this Prospectus, as required, during such six-month
period. The Commission has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to the New
Preferred Shares (other than a resale of an unsold allotment from the original
sale of the Old Preferred Shares) with this Prospectus. Under the Registration
Rights Agreement, the Company is required to allow Participating Broker-Dealers
and other persons, if any, subject to similar prospectus delivery requirements
to use this Prospectus in connection with the resale of such New Preferred
Shares for a period of up to six months.
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If, because of any change in law or in the applicable
interpretations of the Staff, the Company is not permitted to effect the
Exchange Offer on the terms set forth herein, or if for any reason the
Registration Statement is not declared effective within 180 days of the Issue
Date, or in certain other circumstances, including upon the request of the
Initial Purchaser, then in addition to or in lieu of effecting the registration
of the New Preferred Shares pursuant to the Registration Statement, the Company
will, at the Company's sole expense, (a) as promptly as practicable, file the
Shelf Registration Statement covering resales of the Old Preferred Shares (and
underlying interests in the Bank Preferred Shares), (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective the Shelf
Registration Statement until the earlier of two years after the Issue Date (six
months in the case of a Shelf Registration Statement filed at the request of the
Initial Purchaser) or such time as all of the Old Preferred Shares have been
sold thereunder or otherwise cease to be registrable securities within the
meaning of the Registration Rights Agreement. The Company will, in the event
that a Shelf Registration Statement is filed, provide to each holder copies of
the prospectus that is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Preferred Shares. A holder that sells Old Preferred Shares pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification rights and obligations). In addition,
if required by the Staff, each holder of Old Preferred Shares will be required
to deliver information to be used in connection with the Shelf Registration
Statement in order to have their Old Preferred Shares included in the Shelf
Registration Statement and to benefit from the provisions of the second
succeeding paragraph.
Each Old Preferred Share contains a legend to the effect that
the holder thereof, by its acceptance thereof, is deemed to have agreed to be
bound by the provisions of the Registration Rights Agreement. In that regard,
each holder is deemed to have agreed that, upon receipt of notice from the
Company of the occurrence of any event which makes such statement in the
prospectus which is part of the Shelf Registration Statement (or, in the case of
Participating Broker-Dealers, this Prospectus) untrue in any material respect or
which requires the making of any changes in such prospectus in order to make the
statements therein not misleading or of certain other events specified in the
Registration Rights Agreement, such holder (or Participating Broker-Dealer, as
the case may be) will suspend the sale of Old Preferred Shares pursuant to such
prospectus until the Company has amended or supplemented such prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such holder (or Participating Broker-Dealer, as the
case may be) or the Company has given notice that the sale of the Old Preferred
Shares may be resumed, as the case may be.
If the Company shall give such notice to suspend the sale of
the Old Preferred Shares, it shall extend the relevant period referred to above
during which the Company is required to keep effective the Shelf Registration
Statement (or the period during which Participating Broker-Dealers are entitled
to use this Prospectus in connection with the resale of New Preferred Shares) by
the number of days during the period from and including the date of the giving
of such notice to and including the date when holders shall have received copies
of the supplemented or amended prospectus necessary to permit resales of the Old
Preferred Shares or to and including the date on which the Company has given
notice that the sale of Old Preferred Shares may be resumed, as the case may be.
If the Company fails to comply with the Registration Rights
Agreement or if the Registration Statement or the Shelf Registration Statement
fails to become effective, then, an additional amount ("Liquidated Damages")
shall become payable in respect of the Old Preferred Shares as follows:
(i) if (A) neither the Registration Statement nor a Shelf
Registration Statement is filed with the Commission on or prior to the
150th day after the Issue Date or (B) notwithstanding that the
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Company has consummated or will consummate the Exchange Offer, the
Company is required to file a Shelf Registration Statement and such
Shelf Registration Statement is not filed on or prior to the date
required by the Registration Rights Agreement, then commencing on the
day after either such required filing date, Liquidated Damages shall be
payable to the holders of the Old Preferred Shares at a rate of 0.25%
per annum (US$2.50 per share); or
(ii) if (A) neither the Registration Statement is declared
effective by the Commission on or prior to the 180th day after the
Issue Date nor a Shelf Registration Statement is declared effective by
the Commission on or prior to the later of the 30th day after the
applicable required filing date or the 180th day after the Issue Date
or (B) notwithstanding that the Company has consummated or will
consummate the Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not
declared effective by the Commission on or prior to the later of the
30th day after the date such Shelf Registration Statement was required
to be filed or the 180th day after the Issue Date, then, commencing on
the 181st day after the Issue Day with respect to the Registration
Statement or the 31st day after the applicable required filing date (or
the 181st day of the Issue Date, if later), Liquidated Damages shall be
payable to the holders of the Old Preferred Shares at a rate of 0.25%
per annum (US$2.50 per share); or
(iii) if (A) the Company has not exchanged New Preferred
Shares for all Old Preferred Shares validly tendered in accordance with
the terms of the Exchange Offer on or prior to the 45th day after the
date on which the Registration Statement was declared effective or (B)
if applicable, the Shelf Registration Statement has been declared
effective and such Shelf Registration Statement ceases to be available
for use by holders of the Old Preferred Shares at any time prior to the
second anniversary of the Issue Date (other than after such time as all
Old Preferred Shares have been disposed of thereunder or otherwise
cease to be registrable securities within the meaning of the
Registration Rights Agreement), and such event continues for a period
exceeding 30 consecutive days or 90 days in any 360-day period, whether
or not consecutive, then Liquidated Damages shall be payable to the
holders of the New Preferred Shares at a rate of 0.25% per annum
(US$2.50 per share) commencing on (x) the 31st day after such effective
date, in the case of (A) above, or (y) the 31st consecutive day or 91st
day in any 360-day period following the day such Shelf Registration
Statement ceases to be available in the case of (B) above;
provided, however, that the Liquidated Damages rate on the liquidation
preference of the Old Preferred Shares may not exceed in the aggregate 0.25% per
annum; provided further, however, that (1) upon the filing of the Registration
Statement or a Shelf Registration Statement (in the case of clause (i) above),
(2) upon the effectiveness of the Registration Statement or a Shelf Registration
Statement (in the case of clause (ii) above), or (3) upon the exchange of New
Preferred Shares for all Old Preferred Shares tendered (in the case of clause
(iii) (A) above), or upon the availability of the Shelf Registration Statement
which had ceased to be available (in the case of clause (iii) (B) above),
Liquidated Damages as a result of such clause (or the relevant subclause
thereof) shall cease to accrue.
Any amounts of Liquidated Damages due pursuant to clause (i),
(ii) or (iii) above will be payable in cash quarterly on the 30th day of March,
June, September and December of each year to the Holders of record on the
immediately preceding 15th day of such month.
The Company will also agree that until such time as (a) all
Old Preferred Shares tendered are exchanged for New Preferred Shares or (b) a
Shelf Registration Statement is available, it will invest any payments received
on Initial Mortgage Loans prior to each quarterly dividend payment date in U.S.
government obligations.
The Registration Rights Agreement is governed by, and
construed in accordance with, the laws of the State of New York. The summary
herein of certain provisions of the Registration Rights Agreement does
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not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Rights Agreement, a form
of which is available upon request to the Company. See "Available Information."
In addition, the information set forth above concerning certain interpretations
of and positions taken by the Staff is not intended to constitute legal advice,
and prospective investors should consult their own legal advisors with respect
to such matters.
DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms of the stock of
the Company does not purport to be complete and is qualified in its entirety by
reference to Maryland law and to the Charter and By-laws of the Company, copies
of which are available upon request to the Company.
Common Stock
General. The Company is authorized by the Charter to issue up
to 1,000 shares of Common Stock. The Company has outstanding 100 shares of
Common Stock, all of which are held by the Bank. In addition, the Bank currently
intends that, so long as any New Preferred Shares are outstanding, it will
maintain direct or indirect ownership of all of the outstanding shares of the
Common Stock.
Dividends. Holders of the Common Stock are entitled to receive
dividends if, when, and as authorized and declared by the Board of Directors out
of assets legally available therefor, provided that, if the Company fails to
authorize, declare and pay full dividends on the New Preferred Shares or the
Senior Preferred Shares in any dividend period, the Company may not make any
dividend payments with respect to the Common Stock until such time as dividends
on all outstanding Senior Preferred Shares and New Preferred Shares have been
(i) authorized, declared and paid for three consecutive dividend periods or (ii)
authorized, declared and a sum sufficient for the payment thereof set apart for
payment for the fourth consecutive dividend period.
Voting Rights. Subject to the rights, if any, of the holders
of any class or series of Preferred Stock, including Senior Preferred Stock and
New Preferred Shares, all voting rights are vested in the Common Stock. The
holders of the Common Stock are entitled to one vote per share. All of the
issued and outstanding shares of the Common Stock are currently held by the
Bank.
As the holder of all of the outstanding shares of the Common
Stock, the Bank will be able, subject to the terms of the New Preferred Shares
and of any other class or series of stock subsequently issued by the Company, to
elect and remove directors, amend the Charter and approve other actions
requiring stockholder approval under the 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 the 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
10,000,000 shares of Preferred Stock. Assuming exchange of all 238,400 Old
Preferred Shares and the resale of all 61,600 Old Preferred Shares currently
held by the Initial Purchaser, 300,000 shares of New Preferred Shares will be
outstanding. Subject to limitations prescribed by Maryland law and the 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
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
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series and to fix the designation and any preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption of the
shares of any such class or series, and such other subjects or matters as may be
fixed by resolution of the Board of Directors.
Shares of Preferred Stock, upon issuance against full payment
of the purchase price therefor and in the manner authorized by the Board of
Directors, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock are described in the Charter.
The terms of the Charter relating to each class or series of
Preferred Stock set forth the preferences and other terms of such class or
series, including, without limitation, the following, as applicable: (1) the
designation 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 for such class or series; (4) whether dividends on such
class or series of Preferred Stock are cumulative or not and, if cumulative, the
date from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the terms
and conditions of redemption, if applicable, of such class or series; (7) any
limitations on direct or beneficial ownership and restrictions on transfer, in
each case as may be appropriate to preserve the status of the Company as a REIT
or as otherwise deemed appropriate by the Board of Directors; (8) the relative
ranking and preferences of such class or series as to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the Company; (9)
any limitations on issuance of any class or series of Preferred Stock ranking
senior to or on a parity with such class or series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; (10) any other specific terms, preferences, rights,
limitations or restrictions of such class or series; and (11) any voting powers
of such class or series.
Senior Preferred Stock. The shares of the Senior Preferred
Stock are validly issued, fully paid and nonassessable and will entitle the
holders thereof to cumulative, quarterly dividends. The shares of the Senior
Preferred Stock are redeemable, at any time in whole, but not in part, at the
option of the Company at a price equal to the liquidation preference thereof
plus accrued and unpaid dividends thereon through the redemption date. On the
December 30th following each ten year anniversary of the issuance of the Senior
Preferred Stock, each holder of Senior Preferred Stock may require the Company
to purchase such holder's Senior Preferred Stock at the liquidation preference
thereof plus accrued and unpaid dividends thereon through the date of
redemption. The Senior Preferred Stock rank senior to the Common Stock and the
New Preferred Shares as to dividend rights and rights upon liquidation, winding
up or dissolution. Except as provided below, holders of the Senior Preferred
Stock have no voting rights. If at any time the Company shall have failed to pay
all accrued and unpaid dividends on the Senior Preferred Stock when due, the
Company may not pay dividends on, or make certain other payments with respect
to, the New Preferred Shares or the Common Stock or any other series of stock
ranking junior to the Senior Preferred Stock. 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 failed to authorize and declare and set aside for payment a
quarterly dividend on any series of Preferred Stock, including the Senior
Preferred Shares, the number of directors then constituting the Board of
Directors will be increased by at least two (if not already increased by two due
to a default in preference dividends), and the holders of the Senior 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 Board of Directors at each such annual meeting.
Power to Issue Additional Shares of Common Stock and Preferred Stock
The Company believes that the power of the Board of Directors
to issue additional authorized but unissued shares of Common Stock or Preferred
Stock and to classify or reclassify unissued shares of Common Stock or Preferred
Stock and thereafter to cause the Company to use such classified or reclassified
shares of stock will provide the Company with increased flexibility in
structuring possible future financings and
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acquisitions and in meeting other needs which might arise. Except as set forth
under "Description of New Preferred Shares--Voting Rights," the additional
shares of stock will be available for issuance without further action by the
Company's stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which the Company's
securities may be listed or traded.
Restrictions on Ownership and Transfer
The Charter contains certain restrictions on the number of
shares of Preferred Stock that individual stockholders may directly or
beneficially own. For the Company to qualify, and to continue 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
(defined by the Code to include certain entities) during the last half of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year (the "Five or Fewer Test"). The Five or Fewer Test is
applied using certain consecutive ownership rules. The 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 the restrictions
on the number of shares of Preferred Stock that individual stockholders may
acquire and own (directly or indirectly), there would be a possibility that the
Company might fail the Five or Fewer Test. The Company issued the Senior
Preferred Stock in order to ensure continued compliance with the One Hundred
Persons Test without constant monitoring. In making a determination whether the
capital stock of the Company is held by at least 100 holders, the number of
shareholders of the Bank is not considered. The provisions of the Senior
Preferred Stock include a restriction that if any transfer of shares of such
stock would cause the shares of such series to be owned by fewer than 100
persons, such transfer shall be null and void and the intended transferee will
acquire no rights to the stock.
Subject to certain exceptions specified in the 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.
The Charter provides that shares of any class or series of
Preferred Stock owned, or deemed to be owned, by, or transferred to, a
stockholder in violation 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 in trust for the
exclusive benefit of a charity to be named by the Company as of the day prior to
the day the prohibited transfer took place. Any distributions paid with respect
to such Excess Shares prior to the discovery of the prohibited transfer or
ownership are to be repaid by the original transferee to the Company and by the
Company to the trustee; subject to applicable law, any vote of the Excess Shares
while the Excess Shares were held by the original transferee prior to the
Company's discovery of the prohibited transfer shall be void and the original
transferee shall be deemed to have given its proxy to the trustee. In
liquidation, the original transferee's ratable share of the Company's assets
would be limited to the price paid by the original transferee for the Excess
Shares or, if no value was given, the price per share equal to the closing
market price on the date of the purported transfer. The trustee of the trust
shall promptly sell the Excess Shares to any person whose ownership thereof is
not prohibited, whereupon the interest of the trust shall terminate. Proceeds of
such sale shall be paid to the original transferee up to its purchase price (or,
if the original transferee did not purchase the shares, the value on the date of
the purported transfer) and any remaining proceeds shall be paid to the
beneficiary of the trust.
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 a
particular individual or entity. As a result, the acquisition or ownership of
less than 5% of a class
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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.
The Ownership Limit 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 to continue to
qualify, as a REIT.
The Charter 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
must provide certain information to the Company within 30 days of June 30 and
December 31 of each year. In addition, each such 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.
Supermajority Director Approval
The Charter requires approval by two-thirds of the Board of
Directors in order for the Company to file a voluntary petition of bankruptcy.
Business Combinations
Under 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 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 10% 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.
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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 and
directors 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.
Form, Denomination, Book-Entry Procedures and Transfer
The New Preferred Shares will be issued only as fully
registered securities registered in the name of Cede & Co. (as nominee for DTC).
One or more fully registered global New Preferred Share certificates (the
"Global Certificate") representing the New Preferred Shares exchanged for Old
Preferred Shares will be deposited with DTC for credit to an account of a direct
or indirect participant in DTC as described below.
Except as set forth below, the Global Certificate may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee, and such transfer shall be effective only when
reflected in the securities register maintained by or on behalf of the Company.
Beneficial interests in the Global Certificate may not be exchanged for the New
Preferred Shares in certificated form.
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Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose
trust company created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers (including the Initial Purchaser), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Certificate, DTC will credit
the accounts of Participants designated by the Exchange Agent with portions of
the liquidation preference of the Global Certificate and (ii) ownership of such
interests in the Global Certificate will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC (with
respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interests in the Global
Certificate).
Investors in the Global Certificate may hold their interests
therein directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system. All
interests in the Global Certificate may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in certificated form of securities that they own.
Consequently, the ability to transfer beneficial interests in the Global
Certificate to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in the Global Certificate to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the New Preferred Shares, see "Certificated New Preferred Shares."
Except as described below, owners of interests in the Global
Certificate will not have New Preferred Shares registered in their name, will
not receive physical delivery of New Preferred Shares in certificated form and
will not be considered the registered owners or holders thereof for any purpose.
Payments in respect of the Global Certificate registered in
the name of DTC or its nominee will be payable to DTC in its capacity as the
registered holder. The transfer agent will treat the persons in whose names the
New Preferred Shares, including the Global Certificate, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the transfer agent nor any
agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Certificate, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Certificate or (ii) any other
matter relating to the actions and practices of DTC or any of its Participants
or Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the New Preferred
Shares, is to credit the accounts of the relevant Participants with the payment
on the payment date, in amounts proportionate to their respective holdings in
liquidation preference of beneficial interests in the relevant security as shown
on the records of DTC unless DTC has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of New Preferred Shares will be governed
by standing
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instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the transfer agent, or the Company. Neither the Company nor the transfer
agent will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the New Preferred Shares, and the Company
and the transfer agent may conclusively rely on and will be protected in relying
on instructions from DTC or its nominee for all purposes.
Secondary market trading activity in interests in the Global
Certificates will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
DTC has advised the Company that it will take any action
permitted to be taken by a holder of New Preferred Shares only at the direction
of one or more Participants to whose account with DTC interests in the Global
Certificate are credited and only in respect of such portion of the liquidation
preference of the New Preferred Shares as to which such Participant or
Participants has or have given such direction.
The information in this section concerning DTC and its
book-entry systems has been obtained from sources that the Company believes to
be reliable, but the Company does not take responsibility for the accuracy
thereof.
Although DTC has agreed to the foregoing procedures to
facilitate transfers of interest in the Global Certificates among participants
in DTC, they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the transfer agent will have any responsibility for the performance
by DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated New Preferred Shares
The Global Certificate is exchangeable for New Preferred
Shares in registered certificated form if (i) DTC (x) notifies the Company that
it is unwilling or unable to continue as Depositary for the Global Certificate
and the Company thereupon fails to appoint a successor Depositary within 90 days
or (y) has ceased to be a clearing agency registered under the Exchange Act or
(ii) the Company in its sole discretion elects to cause the issuance of the New
Preferred Shares in certificated form. In all cases, certificated New Preferred
Shares delivered in exchange for the Global Certificate or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depositary (in accordance with
its customary procedures).
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States federal
income tax considerations with respect to the Exchange Offer is for general
information only and is not tax advice. The discussion set forth below, to the
extent that it constitutes a summary of legal matters or legal conclusions, has
been reviewed by Shearman & Sterling, and it is such firm's opinion that such
discussion is accurate in all material respects. In rendering such opinion,
Shearman & Sterling has relied on Desjardins Ducharme Stein Monast, with respect
to certain matters of Quebec law, Osler Hoskin & Harcourt, with respect to
certain matters of Ontario law, and Conyers Dill & Pearman, with respect to
certain matters of Bermuda law. The discussion below is based on the Code,
existing and proposed Treasury Regulations issued thereunder, and administrative
and judicial interpretations thereof, all as of the date hereof and all of which
are subject to change, possibly with 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 persons that hold stock in the Company other than as a capital
asset, 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 United States federal income tax laws.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH
BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE
DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO THEM,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER NON-FEDERAL
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER NON-FEDERAL TAX
LAWS.
Tax Impact of the Exchange Offer
The Exchange Offer will not have a United States federal
income tax impact.
Qualification of the Company as a REIT
General. The Company will elect to be taxable 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 ended December 31, 1997. The Company believes that, commencing with its
taxable year ended December 31, 1997, it will be owned and organized and will
operate in such a manner as to qualify for taxation as a REIT. While the Company
intends to continue to operate in such a manner, 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 Shearman & Sterling, commencing with the
Company's taxable year ended 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. However, no transaction closely
comparable to that contemplated herein has been the subject of any
administrative pronouncement or judicial decision and 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
Offering Memorandum and certain legal opinions provided by Canadian and
Bermudian counsel to the Bank. Such qualification and taxation as a REIT,
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moreover, depends upon the Company's ability to meet, through actual annual
operating results, distribution levels, diversity of stock ownership and the
REIT Requirements discussed below, the satisfaction of which will not be
reviewed by Shearman & Sterling 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 "Tax Risks Adverse Consequences of Failure to
Qualify as a REIT."
There can be no assurance that the Company will continue to
qualify as a REIT in any particular taxable year, given the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in the circumstances of
the Company. If the Company were not to qualify as a REIT in any particular
year, it would be subject to United States federal income tax as a regular,
domestic corporation and its stockholders would be subject to tax in the same
manner as stockholders of such a corporation. In this event, the Company would
likely be subject to a substantial United States federal income tax liability in
respect of each taxable year that it fails to qualify as a REIT and the income
available for distribution to the holders of the New Preferred Shares could be
significantly reduced or eliminated.
The following is a brief summary of certain of the technical
requirements that the Company must meet on an ongoing basis in order to qualify,
and remain qualified, as a REIT under the Code:
Stock Ownership Tests
The capital stock of the Company must be held by at least 100
persons during approximately 90% or more of the taxable year and no more than
50% of the value of such capital stock may be owned, directly or indirectly, by
five or fewer individuals at all times during the last half of the taxable year.
Under the Code, certain tax-exempt entities, such as private foundations and
certain unemployment compensation trusts, are treated as individuals for
purposes of the latter test. These stock ownership requirements must be
satisfied in the Company's second taxable year and in each subsequent taxable
year. The Charter provides restrictions regarding the transfer of the Company's
shares in order to aid in meeting the stock ownership requirements. See
"Description of Capital Stock Restrictions on Ownership and Transfer." The
Company has also issued shares of Senior Preferred Stock to ensure continued
compliance with the 100 person ownership requirement for REIT status without
constant monitoring. In making a determination whether the capital stock of the
Company is held by at least 100 holders, the number of shareholders of the Bank
is not considered.
Asset Tests
The Company must generally meet the following asset tests (the
"REIT Asset Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, Government
securities, cash, and cash items (the "75% Asset Test"); and
(b) not more than 25% of the Company's total assets may
consist of securities other than those taken into account for purposes
of the 75% Asset Test and, of those securities, (i) the value of the
securities of any one issuer (other than another REIT) may not exceed
5% of the value of the Company's total assets and, (ii) the Company may
not own more than 10% of the outstanding voting securities of any such
issuer.
The Company expects that the Initial Mortgage Assets issued by
NB Finance will be a Qualified REIT Real Estate Asset. In addition, the Company
does not expect that the value of any security (other than a Qualified REIT Real
Estate Asset) of any one entity would ever exceed 5% of the Company's total
assets, and the Company does not expect to own more than 10% of any one issuer's
voting securities.
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Gross Income Tests
The Company must generally meet the following gross income
tests (the "REIT Gross Income Tests") for each taxable year.
(a) at least 75% of the Company's gross income must be derived
from certain specified sources including interest on obligations
secured by mortgages on real property, gain from the disposition of
Qualified REIT Real Estate Assets or "qualified temporary investment
income" (i.e., income derived from "new capital" within one year of the
receipt of such capital) (the "75% Gross Income Test"); and
(b) at least 95% of the Company's gross income must consist of
income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain
interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business (the "95% Gross Income
Test").
The Company intends to maintain its REIT status by carefully
monitoring its income, including income from sales of Mortgage Assets, to comply
with the REIT Gross Income Tests. Under certain circumstances, such as an
unanticipated decrease in the qualifying income of the Company, which may result
in the Company's nonqualifying income exceeding 5% of its gross income, the
Company may be unable to comply with certain of the REIT Gross Income Tests. See
"Taxation of the Company" for a discussion of the tax consequences of a failure
to comply with the REIT Gross Income Tests.
Distribution Requirement
The Company must generally 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 (which is defined
generally as the taxable income of the Company computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income (after tax), if any, 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.
The Company intends to monitor on an ongoing basis its
compliance with the REIT requirements described above. In order to maintain its
REIT status, the Company will be required to limit the types of assets that it
might otherwise acquire, or hold certain assets at times when it might otherwise
have determined that the sale or other disposition of such assets would be
desirable.
Taxation of the Company
In any year in which the Company qualifies as a REIT, the
Company will generally not be subject to United States federal income tax on
that portion of its REIT taxable income or capital gain which is distributed to
its stockholders. The Company will, however, be subject to United States federal
income tax at normal corporate income tax rates upon any undistributed REIT
taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may
be subject to tax in certain circumstances. If the Company fails to satisfy
either the 75% Gross Income Test or the 95% Gross Income Test, but nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will generally be subject to a 100% tax on the greater of the amount by
which the Company fails either the 75% Gross Income Test or the 95% Gross Income
Test (multiplied by a fraction intended to reflect the Company's profitability).
The Company will also be subject to a tax of 100% on net income derived from any
"prohibited
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transaction" and, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying net
income from foreclosure property, it will be subject to United States federal
income tax on such income at the highest corporate income tax rate. In addition,
if the Company fails to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year, and (iii) any undistributed taxable income from
prior periods, the Company would be subject to a 4% United States federal excise
tax on the excess of such required distribution over the amounts actually
distributed during the year. The Company may also be subject to the corporate
alternative minimum tax, as well as other taxes in certain situations not
presently contemplated.
If the Company fails to qualify as a REIT in any taxable year
and certain relieving provisions of the Code do not apply, the Company would be
subject to United States federal income tax (including any applicable
alternative minimum tax) in the same manner as a regular, domestic corporation.
Distributions to stockholders in any year in which the Company fails to qualify
as a REIT would not be deductible by the Company and would generally not be
required to be made under the Code. Further, unless entitled to relief under
certain provisions of the Code, the Company would be disqualified from
re-electing REIT status for the four taxable years following the year during
which it became disqualified.
Tax Treatment of Automatic Exchange
Upon the occurrence of an Exchange Event, the outstanding New
Preferred Shares will be automatically exchanged on a one-for-one basis for the
Bank Preferred Shares. See "Description of New Preferred Shares--Automatic
Exchange." The Automatic Exchange will be a taxable exchange with respect to
which each holder of the New Preferred Shares will recognize a gain or loss, as
the case may be, measured by the difference between the adjusted basis of such
holder in its New Preferred Shares and the fair market value of the Bank
Preferred Shares received in the Automatic Exchange. Assuming that such holder's
New Preferred Shares were held as capital assets prior to the Automatic
Exchange, any such gain or loss will be capital gain or loss. The basis of a
holder in the Bank Preferred Shares received in the Automatic Exchange will be
their fair market value at the time of the Automatic Exchange.
Taxation of New Preferred Shares
Distributions (including constructive distributions) made to
holders of the New Preferred Shares other than tax-exempt entities, will
generally be subject to United States federal income tax as ordinary income to
the extent of the Company's current and accumulated earnings and profits as
determined for United States federal income tax purposes. If the amount
distributed to a holder of the New Preferred Shares exceeds the holder's
allocable share of such earnings and profits, the excess will be treated first
as a nontaxable return of capital to the extent of such holder's adjusted basis
in the New Preferred Shares and, thereafter, as a gain from the sale or exchange
of a capital asset.
Distributions designated by the Company as capital gain
dividends will generally be subject to tax as long-term capital gain to the
extent that the distribution does not exceed the Company's actual net capital
gain for the taxable year (although corporations may be required to treat up to
20% of certain capital gain dividends as ordinary income). Distributions by the
Company, whether characterized as ordinary income or as capital gain, are not
eligible for the corporate dividends received deduction. In the event that the
Company realizes a loss for a taxable year, holders of the New Preferred Shares
will not be permitted to deduct any share of that loss. Future Treasury
Regulations may require that holders of the New Preferred Shares take into
account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the Company. Dividends declared
during the last quarter of a calendar year and actually paid during January of
the following year will generally be treated as having been received by the
holders of New Preferred Shares
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on December 31st of the year in which the dividends were declared and not on the
date actually received. In addition, the Company may elect to treat certain
other dividends distributed after the close of a taxable year as having been
paid during such taxable year, but holders of the New Preferred Shares will be
treated as having received such dividends in the taxable year in which the
distribution is made.
Upon a sale or other disposition of the New Preferred Shares,
a holder of the New Preferred Shares will generally recognize a capital gain or
loss in an amount equal to the difference between the amount realized and such
holder's adjusted basis in such stock, which gain or loss will be long-term if
the stock has been held for more than the applicable holding period. Any loss on
the sale or exchange of the New Preferred Shares held by the holder thereof for
six months or less will generally be treated as a long-term capital loss to the
extent of any long-term capital gain dividends received by such holder.
In any year in which the Company does not qualify as a REIT,
distributions made to its stockholders would be taxable in the same manner
discussed above, except that (i) no distributions could be designated as capital
gain dividends, (ii) distributions would be eligible for the corporate dividends
received deduction, (iii) the excess inclusion income rules would not apply, and
(iv) stockholders would not receive any share of the Company's tax preference
items. In such event, however, the Company would likely be subject to a
substantial United States federal income tax liability, and the amount of income
available for distribution to its stockholders (including holders of the New
Preferred Shares) would be significantly reduced or eliminated.
The Company is required under Treasury Regulations to demand
annual written statements from the record holders of designated percentages of
its stock disclosing the actual and constructive ownership of such stock and to
maintain permanent records showing the information it has received as to the
actual and constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.
Taxation of Tax-Exempt Entities
Subject to the discussion below regarding a "pension-held
REIT," a tax-exempt holder of the New Preferred Shares will generally not be
subject to tax on distributions from the Company or gain realized on the sale of
the New Preferred Shares, provided that such holder has not incurred
indebtedness to purchase or hold its New Preferred Shares, that such shares are
not otherwise used in an unrelated trade or business of such holder, and that
the Company, consistent with its present intent, does not hold a residual
interest in a REMIC that gives rise to "excess inclusion" income as defined
under section 860E of the Code.
If a qualified pension trust (i.e., any pension or other
retirement trust that qualifies under section 401(a) of the Code) holds more
than 10% by value of the interests in a "pension-held REIT" at any time during a
taxable year, a substantial portion of the dividends paid to the qualified
pension trust by such REIT may constitute UBTI. For these purposes, a
"pension-held REIT" is any REIT (i) that would not have qualified as a REIT but
for the provisions of the Code which look through qualified pension trust
stockholders in determining ownership of stock of the REIT and (ii) in which at
least one qualified pension trust holds more than 25% by value of the interests
in the REIT or one or more qualified pension trusts (each owning more than a 10%
interest by value in the REIT) hold in the aggregate more than 50% by value of
the interests in the REIT. Assuming compliance with the Ownership Limit
described in "Description of Capital Stock Restrictions on Ownership and
Transfer," it is unlikely that pension plans will accumulate sufficient stock to
cause the Company to be treated as a pension-held REIT.
Distributions to certain types of stockholders exempt from
United States federal income taxation under sections 501(c)(7), (c)(9), (c)(17),
and (c)(20) of the Code may also constitute UBTI, and such prospective investors
should consult their tax advisors concerning the applicable "set aside" and
reserve requirements.
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State and Local Taxes
The Company and its stockholders may be subject to state or
local taxation in various 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 United States federal income tax
consequences discussed above. Consequently, prospective holders of New Preferred
Shares should consult their tax advisors regarding the effect of state and local
tax laws on an investment in the New Preferred Shares.
Taxation of Bank Preferred Shares
Dividends on the Bank Preferred Shares (including any Canadian
nonresident withholding tax with respect thereto) generally will be includible
in the gross income of a holder of the Bank Preferred Shares as ordinary income
at the time such dividends are received. Dividends on the Bank Preferred Shares
will be foreign source income and, subject to certain limitations and
conditions, a holder of the Bank Preferred Shares will be eligible to claim a
foreign tax credit (or, alternatively, a deduction) in respect of any Canadian
nonresident withholding tax imposed thereon. Dividends on the Bank Preferred
Shares will not be eligible for a corporate dividends received deduction.
Holders of the Bank Preferred Shares will generally recognize
gain or loss upon the sale or exchange of the Bank Preferred Shares equal to
difference between the amount realized on the sale or exchange and the holder's
adjusted basis in the Bank Preferred Shares. Any gain realized on the sale or
exchange of the Bank Preferred Shares will generally be U.S. source.
The Bank does not believe that it is currently, for United
States federal income tax purposes, a passive foreign investment company (a
"PFIC"), and does not expect to become a PFIC in the future. If, however, the
Bank does become a PFIC, holders of the Bank Preferred Shares could be subject
to additional United States federal income tax with respect to certain
distributions on, or gains from the disposition of, the Bank Preferred Shares.
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 New Preferred Shares by an exchanging stockholder 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 includible 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 New 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
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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 New 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).
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 New 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 New 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 New Preferred
Shares constitute "United States real property interests" ("USRPIs"). The
Company does not believe that the New 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 and Backup Withholding
A holder of the New Preferred Shares may be subject to
information reporting and to backup withholding at a rate of 31% in respect of
dividends on, or proceeds from the sale or disposition of, the New Preferred
Shares. Certain holders of the New Preferred Shares (such as corporations and
tax-exempt entities) are not subject to backup withholding.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a holder of the
New Preferred Shares will generally be allowed as a refund or a credit against
such holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Desjardins Ducharme Stein Monast, the
following summary describes, as of the date hereof, the material Canadian
federal income tax consequences that would generally be applicable to a holder
of the Bank Preferred Shares in the event that the New Preferred Shares of the
Company are exchanged for the Bank Preferred Shares pursuant to the Automatic
Exchange. See "Description of New Preferred Shares--Automatic Exchange." The
discussion is based on the assumption that the holder of the Bank Preferred
Shares, for the purpose of the Income Tax Act (Canada) (the "Income Tax Act")
and at all relevant times, is not a resident of Canada, deals at arm's length
with the Bank, does not use or hold and is not deemed to use or hold the Bank
Preferred Shares in carrying on a business in Canada and is not an insurer that
carries on an insurance business in Canada.
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This summary is based on the current provisions of the Income
Tax Act and the regulations thereunder, our understanding of the current
administrative practices of Revenue Canada and all specific proposals to amend
the Income Tax Act and the regulations thereunder announced by the Minister of
Finance prior to the date hereof. This summary does not otherwise take into
account any changes in governing law, nor does it take into account tax
legislation or considerations of any province or territory of Canada or any
jurisdiction other than Canada.
This summary is of general nature only and is not intended to
be, and should not be interpreted as, legal or tax advice to any particular
holder of the Bank Preferred Shares. Holders of the New Preferred Shares are
advised to consult their own tax advisors with respect to their particular tax
position.
Automatic Exchange
In the event of the Automatic Exchange, the exchange will not
give rise to any immediate Canadian income tax consequences to a holder of the
New Preferred Shares. The Bank Preferred Shares received pursuant to the
Automatic Exchange will have a cost, for Canadian tax purposes, equal to their
fair market value at the time of the Automatic Exchange, expressed in Canadian
dollars.
Taxation of Dividends
Dividends paid on the Bank Preferred Shares to a non-resident
of Canada will be subject to Canadian withholding tax at the general rate of 25%
or such lesser rate as may be provided by an applicable income tax treaty.
Pursuant to the Canada-United States Income Tax Convention (1980) (the
"Treaty"), dividends paid by the Bank to a holder of the Bank Preferred Shares
that is resident in the United States for purposes of the Treaty would generally
be subject to withholding tax at the rate of 15%. Dividends paid to an "Exempt
Organization," as defined in the Treaty, would generally be exempt from Canadian
withholding tax.
Disposition of Bank Preferred Shares
A disposition or deemed disposition of the Bank Preferred
Shares by a resident of the United States for purposes of the Treaty, will
generally not result in any Canadian income or capital gains taxes being payable
by the holder.
Redemption of Bank Preferred Shares
A redemption of the Bank Preferred Shares could result in a
deemed dividend to the holder, equal to the excess of the amount paid for the
Bank Preferred Shares over their paid-up capital. The "paid-up capital" would
generally be considered to be the fair market value of the New Preferred Shares
received by the Bank at the time of the Automatic Exchange. A deemed dividend
would be subject to Canadian withholding tax, as described above under "Taxation
of Dividends."
ERISA CONSIDERATIONS
ERISA and the Code impose certain restrictions on (a)
employee benefit plans (as defined in Section 3(3) of ERISA) subject to Title I
of ERISA, (b) plans described in Section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans, (c) any entities whose underlying
assets include "plan assets" under the Plan Asset Regulation (as defined below)
(each a "Plan") and (d) persons and entities who have certain specified
relationships to such Plans ("Parties-in-Interest" under ERISA and "Disqualified
Persons" under the Code). Moreover, based on the reasoning of the United States
Supreme Court in John Hancock Mutual Life Insurance Co. v. Harris Trust &
Savings Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account (e.g.,
through the purchase of an annuity contract), and the insurance company might be
treated as a Party-in-Interest or
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Disqualified Person with respect to a Plan by virtue of such investment. ERISA
also imposes certain duties on persons who are fiduciaries of Plans subject to
ERISA, and ERISA and the Code prohibit certain transactions between a Plan and
Parties-in-Interest or Disqualified Persons with respect to such Plan.
Status Under Plan Asset Regulations
The Department of Labor has issued a regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulation"). The Plan Asset Regulation provides that,
as a general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan purchases an
equity interest will be deemed for purposes of ERISA and Section 4975 of the
Code to be assets of the investing Plan unless certain exceptions apply. Under
one such exception, the assets of such an entity are not considered to be Plan
assets where a Plan makes an investment in an equity interest that is a
"publicly-offered security." As described in more detail below, the Company
anticipates that the New Preferred Shares will, following the consummation of
the Exchange Offer or the effectiveness of a Shelf Registration Statement be
"publicly-offered securities" for purposes of the Plan Asset Regulation. Prior
to the consummation of the Exchange Offer or (if no Exchange Offer is
consummated) the effectiveness of a Shelf Registration Statement, however, the
New Preferred Shares will not be "publicly-offered securities" and, accordingly,
the assets of the Company may be treated as assets of a Plan that purchases the
New Preferred Shares.
Under the terms of the Plan Asset Regulation, if the Company
were deemed to hold plan assets by reason of a Plan's investment in the New
Preferred Shares, such plan assets would include an undivided interest in the
assets held by the Company including the Mortgage Assets. In such event, the
persons providing services, or exercising any discretionary authority or
control, with respect to the assets of the Company may become
Parties-in-Interest or Disqualified Persons with respect to such an investing
Plan and may be subject to the fiduciary responsibility provisions of Title I of
ERISA (including the general prohibition against maintaining the indicia of
ownership of Plan assets outside the jurisdiction of the U.S. district courts)
and the prohibited transaction provisions of ERISA and Section 4975 of the Code
with respect to transactions involving such assets. In this regard, if the
person or persons with discretionary responsibilities with respect to the
Mortgage Assets were affiliated with the Company, any such discretionary actions
taken with respect to such Mortgage Assets could be deemed to constitute a
prohibited transaction under ERISA or the Code (e.g., the use of such fiduciary
authority or responsibility in circumstances under which such persons have
interests that may conflict with the interests of the Plans for which they act
and affect the exercise of their best judgment as fiduciaries). In order to
avoid such prohibited transactions or other breaches of fiduciary duty, and to
delineate fiduciary responsibility appropriately, each investing Plan, by
purchasing the New Preferred Shares, will be deemed to have (i) directed the
Company to invest in the Initial Mortgage Assets issued by NB Finance (as well
as the other assets held by the Company and identified at the time of purchase)
and (ii) in the event that the New Preferred Shares are not treated as
"publicly-offered securities" as of the date on which the Exchange Offer is
consummated or a Shelf Registration Statement is declared effective, then during
the period commencing on such date and ending on the date on which the New
Preferred Shares become "publicly-offered securities," appointed the Independent
Fiduciary (an entity unaffiliated with and independent of the Bank and the
Company) as a fiduciary of such Plan to exercise any discretionary authority
reserved to the Company, to the extent that the duties of such entity involve
discretionary authority or control respecting transactions with the Bank or the
Bank's affiliates. The Independent Fiduciary will be identified by the Company
prior to any such transaction and will be subject to removal and replacement by
a majority of the holders of the New Preferred Shares.
The Company may from time to time invest the proceeds received
in connection with the repayment or disposition of the Initial Mortgage Assets
issued by NB Finance, the issuance of additional shares of Preferred Stock or
additional capital contributions with respect to the Common Stock. To the extent
that the investment of such proceeds occurs prior to the consummation of the
Exchange Offer or the effectiveness of a Shelf Registration Statement, such
proceeds will be invested in Canadian or U.S. government guaranteed,
mortgage-backed certificates and other Canadian or U.S. government obligations,
which will be purchased on the open market or
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from entities unaffiliated with the Bank or the Company. In addition, in the
event that the New Preferred Shares are not treated as "publicly-offered
securities" as of the date on which the Exchange Offer is consummated or a Shelf
Registration Statement is declared effective, then during the period commencing
on such date and ending on the date on which the New Preferred Shares become
"publicly-offered securities," such proceeds may be invested in additional
Mortgage Assets, provided that, to the extent any such proceeds are invested in
Mortgage Assets in a transaction with the Bank or any Bank affiliate, any
discretionary authority reserved to the Company in respect of such transaction
will be exercised by the Independent Fiduciary.
Publicly-Offered Security Exception
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 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. It is anticipated
that, in connection with the Exchange Offer, the New 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 anticipates that the New Preferred Shares will be
"widely held" upon the consummation of the Exchange Offer or the effectiveness
of a Shelf Registration Statement.
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
US$10,000 or less, as is expected to be the case with respect to the Exchange
Offer or a Shelf Registration Statement, 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 New Preferred Shares following the consummation of the Exchange
Offer or the effectiveness of a Shelf Registration Statement, will be limited to
the restrictions on transfer generally permitted under the Plan Asset Regulation
and are not likely to result in the failure of the New Preferred Shares to be
"freely transferable."
Exemptions from Prohibited Transactions
Any purchaser that is an insurance company using the assets of
an insurance company general account should note that the Small Business Job
Protection Act of 1996 added new Section 401(c) of ERISA relating to the status
of the assets of insurance company general accounts under ERISA and Section 4975
of the Code. Pursuant to Section 401(c), the Department of Labor is required to
issue final regulations (the "General Account Regulations") with respect to
insurance policies issued on or before December 31, 1998 that are supported by
an insurer's general account. The General Account Regulations, which were issued
in proposed form on December 22, 1997, are to provide guidance on which assets
held by the insurer constitute "Plan Assets" for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code. Section 401(c)
also provides that, except in the case of avoidance of the General Account
Regulations and actions brought by the Secretary of Labor relating to certain
breaches of fiduciary duties that also constitute breaches of state or federal
criminal law, until the date that is 18 months after the General Account
Regulations become final, no liability under the fiduciary responsibility and
prohibited transaction provisions of ERISA and Section 4975 of the Code may
result on the basis of a claim that the assets of the general account of an
insurance company constitute Plan Assets. The Plan Asset status of insurance
company separate accounts is unaffected by
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new Section 401(c) of ERISA, and separate account assets continue to be treated
as the assets of any such Plan invested in a separate account except to the
extent provided in the Plan Asset Regulation.
In addition, if the Bank, or in certain circumstances an
obligor with respect to a Mortgage Asset or other debt instrument held by the
Company, is a Party-in-Interest or Disqualified Person with respect to an
investing Plan, such Plan's investment could be deemed to constitute a
transaction prohibited under Title I of ERISA or Section 4975 of the Code (e.g.,
the extension of credit or sale of property between a Plan and a
Party-in-Interest or Disqualified Person). Such transactions may, however, be
subject to a statutory or administrative exemption such as Prohibited
Transaction Class Exemption ("PTCE") 90-1, which exempts certain transactions
involving insurance company pooled separate accounts; PTCE 95-60, which exempts
certain transactions involving insurance company general accounts; PTCE 91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager"; and PTCE 96-23, which exempts certain
transactions effected on behalf of a Plan by an "in-house asset manager"; or
pursuant to any other available exemption. Such exemptions may not, however,
apply to all of the transactions that could be deemed prohibited transactions in
connection with such Plan's investment.
Each exchanging stockholder will, by its exchange of Old
Preferred Shares for New Preferred Shares, be deemed to have represented and
agreed that either (i) no part of the assets to be used by it to acquire and
hold such New Preferred Shares constitutes the assets of any Plan or (ii) one or
more prohibited transaction statutory or class exemptions applies such that the
use of such assets to acquire and hold the New Preferred Shares will not
constitute a non-exempt prohibited transaction under ERISA or the Code. Any Plan
fiduciary that proposes to cause a Plan to acquire New Preferred Shares should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment and whether any exemption would be applicable
and determine on its own whether all conditions of such exemption or exemptions
have been satisfied such that the acquisition and holding of New Preferred
Shares by the purchaser Plan are entitled to the full exemptive relief
thereunder. Any such Plan fiduciary should also determine whether the exchange
of New Preferred Shares is permitted under the governing Plan instruments and is
appropriate for the Plan in view of the overall investment policy and the
composition and diversification of its portfolio.
Unrelated Business Taxable Income
Plan fiduciaries should also consider the consequences of
holding more than 10% of the New Preferred Shares if the Company is
"predominantly held" by qualified trusts. See "United States Federal Income Tax
Considerations Treatment of Tax-Exempt Entities."
RATINGS
The Old Preferred Shares are rated "a2" by Moody's Investors
Service, Inc. and "BBB+" 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. No person is obligated to maintain any rating on the New Preferred
Shares, and, accordingly, there can be no assurance that the ratings assigned to
the New Preferred Shares upon exchange will not be lowered or withdrawn by the
assigning rating organization at any time thereafter.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Preferred Shares for its
own account pursuant to the exchange offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Preferred Shares. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Preferred Shares received
in exchange for Old Preferred Shares where such Old Preferred Shares were
acquired as a result of market-making activities or other trading
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activities. To the extent any such broker-dealer participates in the Exchange
Offer, the Company has agreed that for a period of up to six months after the
date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to such broker-dealer for use in connection with any
such resale, will update this Prospectus, as required, during such six-month
period and will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents.
The Company will not receive any proceeds from any sale of New
Preferred Shares by broker-dealers. New Preferred Shares received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Preferred
Shares or a combination of such methods of resale, at prevailing market prices
at the time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers or any
such New Preferred Shares. Any broker-dealer that resells New Preferred Shares
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such New Preferred
Shares may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any such resale of New Preferred Shares and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay certain expenses incident to the
Exchange Offer and will indemnify the holders of the Old Preferred Shares
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
LEGAL MATTERS
The validity of the New Preferred Shares offered hereby will
be passed upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore,
Maryland, with respect to certain matters governed by Maryland law.
EXPERTS
The balance sheet of the Company as of August 20, 1997
included in this Prospectus has been audited by Deloitte & Touche, a general
partnership, independent auditors as set forth in their report thereon included
therein.
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GLOSSARY
Adjusted Treasury Rate: With respect to any redemption date, the rate
per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such prepayment date plus 0.50%.
Administrative Action: 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).
Advisory Agreement: The Advisory Agreement dated as of September 3,
1997 between the Company and the Bank.
Automatic Exchange: The automatic exchange of each New Preferred Share
for one Bank Preferred Share upon the occurrence of an Exchange Event.
Bank: National Bank of Canada.
Bank Act: The Bank Act (Canada), as amended.
Bank Preferred Shares: The 8.45% Noncumulative First Preferred Shares,
Series Z of the Bank.
BHCA: The Bank Holding Company Act of 1956.
Board of Directors: The Board of Directors of the Company.
Branch: The Bank's only United States branch located in New York and
licensed by the New York Superintendent under the NYBL.
business day: Any day other than Saturday, Sunday or a date on which
banking institutions are required or authorized by New York State law to be
closed.
Bylaws: The bylaws of the Company.
C$ or $: Canadian dollars.
Capital Guidelines: Guidelines issued by the Superintendent with
respect to the maintenance of adequate capital by Canadian banking institutions.
Charter: The Company's charter.
CMHC: Canada Mortgage and Housing Corporation.
Code: The Internal Revenue Code of 1986, as amended.
Commission: The U.S. Securities and Exchange Commission.
Common Stock: The Company's common stock, par value US$.01 per share.
Company: NB Capital Corporation.
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Comparable Treasury Issue: The United States Treasury security selected
by the Quotation Agent as having a maturity comparable to the Make-Whole Term
that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the Make-Whole Term.
Comparable Treasury Price: With respect to any redemption date, (i) the
average of the bid and asked prices for the Comparable Treasury Issue (expressed
in each case as a percentage of its principal amount) on the third Business Day
preceding such redemption date, as set forth in the daily statistical release
published by the Federal Reserve Bank of New York and designated "Composite 3:30
p.m. Quotation for U.S. Government Securities" (or any successor release) or
(ii) if such release is not published or does not contain such prices on such
Business Day, (a) the average of the Reference Treasury Dealer Quotations for
such redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (b) if the Company obtains fewer than three such
Reference Treasury Dealer Quotations, the average of all such Quotations.
Depositor: Any person having tendered Old Preferred Shares in exchange
for New Preferred Shares in the Exchange Offer.
Disqualified Persons: Under the Code, persons and entities who have
certain specified relationships to Plans.
DTC: The Depository Trust Company.
Eligible Institution: A bank, broker, dealer, credit union, savings
association, clearing agency or other institution that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act.
ERISA: The Employee Retirement Income Security Act of 1974, as
amended.
Excess Shares: Shares of any class or series of Preferred Stock owned,
or deemed to be owned, by, or transferred to, a stockholder in violation of the
Ownership Limit, or which would otherwise cause the Company to fail to qualify
as a REIT, which have been automatically transferred, by operation of law, to a
trustee in trust for the exclusive benefit of a charity to be named by the
Company as of the day prior to the day the prohibited transfer took place.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Agent: The Bank of Nova Scotia Trust Company of New York.
Exchange Event: An Exchange Event shall occur (i) immediately prior to
such time, if any, at which the Bank fails to declare and pay or set aside for
payment when due any dividend on any issue of its cumulative First Preferred
Shares or the Bank fails to pay or set aside for payment when due any declared
dividend on any of its non-cumulative First Preferred Shares, (ii) in the event
that the Bank has a Tier 1 risk-based capital ratio of less than 4.0% or a total
risk-based capital ratio of less than 8.0%, (iii) in the event that the
Superintendent takes control of the Bank pursuant to the Bank Act (Canada), as
amended (the "Bank Act"), or proceedings are commenced for the winding-up of the
Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the
event that the Superintendent, by order, directs the Bank to act pursuant to
subsection 485(3) of the Bank Act and the Bank elects to cause the exchange.
Exchange Offer: The offering by the Company to exchange up to 238,400
shares of its New Preferred Shares for up to 238,400 Old Preferred Shares
outstanding at the rate of one New Preferred Share for each Old Preferred Share
tendered.
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Expiration Date: The expiration date of the Exchange Offer which shall
be 5:00 p.m. New York City time on ________, 1998, unless the Company, in its
sole discretion, extends the period of time during which the Exchange Offer is
open.
FBSEA: The Foreign Bank Supervision Enhancement Act of 1991.
Final Payment Date: The date on which payment in full of the Initial
Mortgage Loans is made.
Five or Fewer Test: For a company to qualify, and to continue 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 (defined by the Code to include certain entities)
during the last half of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year.
General Account Regulations: Regulations issued by the Department of
Labor in proposed form on December 22, 1997 with respect to insurance policies
issued on or before December 31, 1998 that are supported by an issuer's general
account.
Global Certificate: Any global certificate representing the New
Preferred Shares registered in the name of Cede & Co.
Income Tax Act: The Income Tax Act (Canada).
Independent Director: 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.
Independent Fiduciary: An independent fiduciary which will be
identified by the Company to exercise any discretionary authority with respect
to transactions involving both the Company and the Bank or any Bank affiliate.
Indirect Participants: Any entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
Initial Mortgage Assets: Sixteen hypothecation loans issued to the
Company by NB Finance that are recourse only to the Initial Mortgage Loans.
Initial Mortgage Loans: Sixteen pools of, at December 31, 1997, 11,701
Mortgage Loans acquired by NB Finance from the Bank pursuant to the Mortgage
Loan Purchase Agreement dated as of September 3, 1998, between NB Finance and
the Bank.
Initial Purchaser: Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Initial Purchaser's Discount: The $6,000,000 Initial Purchaser's
discount in connection with the purchase of the Old Preferred Shares by the
Initial Purchaser on August 22, 1997.
Interested Stockholder: Any person who beneficially owns, directly or
indirectly, 10% or more of the voting power of a corporation's shares or an
affiliate of such corporation who, at any time within the two-year period prior
to the date of a "business combination" under the MGCL, was the beneficial owner
of 10% or more of the voting power of the then outstanding voting stock of such
corporation.
IRS: The Internal Revenue Service.
Issue Date: September 3, 1997.
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Make-Whole Amount: With respect to a New Preferred Share, the greater
of (i) 100% of the Maturity Amount of such New Preferred Share and (ii) the sum
of the present values of the remaining scheduled payments of dividends on such
New Preferred Share to September 3, 2007, plus the present value of the Maturity
Amount at September 3, 2007, discounted to the date fixed for redemption of such
New Preferred Share on a quarterly basis (assuming a 360-day year consisting of
30-day months), computed using a discount rate equal to the Adjusted Treasury
Rate.
Make-Whole Term: The period from the redemption date to September 3,
2007.
Maturity Amount: The liquidation preference of the New Preferred
Shares.
MGCL: The Maryland General Corporation Law.
Monthly Payment Date: The 1st day of each month through July 2001 or
such earlier date on which payment in full of the Initial Mortgage Loans is made
or, if the 1st day of a month is not a business day, on the first business day
following the 1st day of such month.
Mortgage Assets: Assets consisting of obligations secured by real
property, as well as other qualifying REIT assets.
Mortgage Loan Assignment Agreement: The Mortgage Loan Assignment
Agreement dated September 3, 1997 between the Company and NB Finance.
Mortgage Loans: CMHC insured residential first mortgages that are
secured by real property located in Canada.
NB Finance: NB Finance, Ltd., a Bermuda corporation.
New Preferred Shares: 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, par value US$.01 per share, of NB Capital Corporation issued under the
Registration Statement.
NHA: National Housing Act.
NHA-Approved Lender: A lender approved under the NHA.
NHA MBS: A NHA Mortgage-Backed Security.
95% Gross Income Test: At least 95% of the Company's gross income must
consist of income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain interest
rate swap and cap agreements entered into to hedge variable rate debt incurred
to acquire Qualified REIT Real Estate Assets) not held for sale in the ordinary
course of business.
Non-United States Holder: An exchanging stockholder that, for United
States federal income tax purposes, is not a "United States person."
Notice of Guaranteed Delivery: The notice of guaranteed delivery
available to holders of Old Preferred Shares in connection with the Exchange
Offer.
NYBL: The Banking laws of the State of New York.
Offering: The offering of Old Preferred Shares by the Company on the
Issue Date.
89
<PAGE>
Old Preferred Shares: 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, par value US$.01 per share, of NB Capital Corporation issued on the
Issue Date.
One Hundred Persons Test: To qualify as a REIT under the Code the stock
of a company must 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.
Other Series of First Preferred Shares: Various series of first
preferred shares which the Bank currently has outstanding, and may in the future
issue.
Ownership Limit: Under the Charter, subject to certain exceptions
specified therein, any natural person or entity that is considered to be an
individual under Section 542(a)(2) of the Code is prohibited from owning
(including shares deemed to be owned by virtue of the relevant attribution
provisions of the Code) more than 5% of any issued and outstanding class or
series of Preferred Stock.
Parity Stock: Any series of equity securities of the Company expressly
designated as being on a parity with or senior to the New Preferred Shares as to
dividend rights and rights upon liquidation, winding up or dissolution.
Participants: Securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations that hold securities on
behalf of DTC.
Participating Broker-Dealer: Any broker-dealer who acquired the New
Preferred Shares for its own account as a result of market-making or other
trading activities.
Parties-in-Interest: Under ERISA, persons and entities who have certain
specified relationships to Plans.
Partnership Interests: Limited partnership interests in partnerships
the only activities of which are to purchase and own Mortgage Loans.
PFIC: Passive foreign investment company.
Plan Asset Regulations: U.S. Department of Labor regulations (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan.
Plans: Any (I) employee benefit plan (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) subject
to Title I of ERISA, (II) plan (as defined in section 4975(e)(1) of the Code) or
(III) entity whose underlying assets include "plan assets" under Department of
Labor Regulation 29 C.F.R. Section 2510.3-101.
Preferred Shares: The Old Preferred Shares, together with the New
Preferred Shares.
Preferred Stock: The shares of preferred stock of the Company.
Primary Treasury Dealer: A primary U.S. Government securities dealer in
New York City.
Prospectus: This Prospectus dated February __, 1998 with respect to the
Exchange Offer.
PTCE: Prohibited Transaction Class Exemption.
90
<PAGE>
Purchase Agreement: The Purchase Agreement dated August 22, 1997, among
NB Capital Corporation, the Bank and the Initial Purchaser.
Quotation Agent: The Reference Treasury Dealer appointed by the
Company.
redemption date: The date fixed for redemption for a New Preferred
Share.
Reference Treasury Dealer: (i) Merrill Lynch Government Securities,
Inc. and their respective successor; provided, however, that if the foregoing
shall cease to be a primary U.S. Government securities dealer in New York City
(a "Primary Treasury Dealer"), the Company shall substitute therefor another
Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer selected by
the Company.
Reference Treasury Dealer Quotations: With respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Company, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Company by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third Business Day preceding such redemption date.
Registration Rights Agreement: The Registration Rights Agreement dated
September 3, 1997, among the Company, the Bank and the Initial Purchaser.
Registration Statement: The registration statement filed by the Company
on Amendment No. 3 to Form S-4/Amendment No. 2 to Form F-9/Amendment No. 1 to
Form S-1 dated February __, 1998.
REIT: Real estate investment trust.
REIT Asset Tests: The Company must generally meet the following asset
tests at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, Government
securities, cash, and cash items (the "75% Asset Test"); and
(b) not more than 25% of the Company's total assets may
consist of securities other than those taken into account for purposes
of the 75% Asset Test and, of those securities, (i) the value of the
securities of any one issuer (other than another REIT) may not exceed
5% of the value of the Company's total assets and, (ii) the Company may
not own more than 10% of the outstanding voting securities of any such
issuer.
REIT Gross Income Tests: The Company must generally meet the following
gross income tests for each taxable year:
(a) at least 75% of the Company's gross income must be derived
from certain specified sources including interest on obligations
secured by mortgages on real property, gain from the disposition of
Qualified REIT Real Estate Assets or "qualified temporary investment
income" (i.e., income derived from "new capital" within one year of the
receipt of such capital) (the "75% Gross Income Test"); and
(b) at least 95% of the Company's gross income must consist of
income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain
interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business.
91
<PAGE>
REIT Requirements or REIT Provisions: Sections 856 through 860 of the
Code and the applicable Treasury Regulations.
REIT taxable income: A REIT's taxable income computed without regard to
the dividends paid deduction and the REIT's net capital gain.
Residential Mortgage Loans: Individual residential mortgages other than
Mortgage Loans.
Securities Act: The Securities Act of 1993, as amended.
Senior Preferred Stock: A series of the Company's cumulative, senior
preferred stock with an aggregate liquidation preference of up to US$450,000.
Series Z Preferred Shares: The 8.45% Noncumulative First Preferred
Shares, Series Z of National Bank of Canada.
Servicer: The Bank in its role as servicer under the terms of the
Servicing Agreement.
Servicing Agreement: The Servicing Agreement dated as of September 3,
1998 between the Company and NB Finance.
Shelf Registration Statement: A shelf registration covering resales of
the Old Preferred Shares (and underlying interests in the Bank Preferred
Shares).
Superintendent: The Office of Superintendent of Financial Institutions
Canada.
Tax Event: 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 Canada, 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 Administration Action or 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 this Prospectus, there is more than an
insubstantial risk that (a) dividends paid or to be paid by the Company with
respect to the 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 an insignificant amount of other taxes, duties
or other governmental charges and shall include an assessment by the Internal
Revenue Service that (a) dividends paid or to be paid by the Company with
respect to the 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 an insignificant amount of other taxes, duties
or other governmental charges.
Time of Exchange: The Automatic Exchange shall occur as of 8:00 a.m.
Eastern Time on the date for such exchange set forth in the requirements of the
Superintendent or, if such date is not set forth in such requirements as of 8:00
a.m. on the earliest possible date such exchange could occur consistent with
such requirements as evidenced by the issuance by the Bank of a press release
prior to such time.
Transferor: Any holder tendering Old Preferred Shares in the Exchange
Offer.
92
<PAGE>
Treaty: The Canada-United States Income Tax Convention (1980).
United States person: For purposes of this discussion, 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 includible 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.
U.S.$ or U.S. dollars: U.S. dollars.
USRPI: United States real property interests.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements
Independent Auditors' Report..........................................F-2
Balance Sheet.........................................................F-3
Unaudited Interim Financial Statements
Balance Sheet.........................................................F-6
Statement of Income...................................................F-7
Statement of Retained Earnings (Deficit)..............................F-8
Statement of Changes in Financial Position............................F-9
F-1
<PAGE>
Deloitte & Touche, S.E.N.C.
Chartered Accountants
1 Place Ville-Marie Telephone: (514) 393-7115
Suite 3000 Facsimile: (514) 393-7140
Montreal QC H3B 4T9
Independent Auditors' Report
To the Board of Directors and Stockholder of
NB Capital Corporation
We have audited the accompanying balance sheet of NB Capital Corporation as of
August 20, 1997. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company as of August 20, 1997 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE
Chartered Accountants
Montreal, Canada
January 7, 1998
F-2
<PAGE>
NB CAPITAL CORPORATION
Balance Sheet
as of August 20, 1997
(in U.S. dollars)
Assets
Promissory note $ 1,000
Stockholder's equity (Note 2)
Common Stock, US$0.01 par value per share;
1,000 shares authorized,
100 shares issued and outstanding $ 1
Additional paid-in capital $ 999
---------
$ 1,000
========
See accompanying notes.
F-3
<PAGE>
NB CAPITAL CORPORATION
Notes to the Balance Sheet
as of August 20, 1997
1. Incorporation and nature of operations
The Company, a wholly-owned subsidiary of National Bank of Canada (the
"Bank"), a bank chartered under the Bank Act (Canada), is a Maryland
corporation incorporated on August 20, 1997. The Company was formed for the
purpose of carrying on any business.
2. Subsequent events
a) Articles of Amendment and Restatement
Subsequent to August 20, 1997, the Company amended and restated its
charter.
The authorized share capital was modified in order for the Company to
have the authority to issue 10,001,000 shares of stock, consisting of
1,000 shares of Common Stock, $0.01 par value per share, and
10,000,0000 shares of Preferred Stock, $0.01 par value per share.
The Company's principal business objective will be to acquire, hold,
finance and manage mortgage assets. The Company will elect to be
taxable as a Real Estate Investment Trust (a "REIT") under the
Internal Revenue Code of 1986, as amended, and generally will not be
liable for United States federal income tax to the extent that it
distributes at least 95% of its taxable income to its stockholders and
maintains its qualification as a REIT.
b) Offering Circular and capital contribution
Through an Offering Circular dated August 22, 1997, the Company issued
$300 million of the 8.35% Noncumulative Exchangeable Preferred Stock,
Series A.
Simultaneously with the consummation of the offering of the Preferred
Stock, the Bank made a capital contribution approximately in the
amount of $183 million.
c) Acquisition of Mortgage Assets
In September 1997, the Company used the aggregate net proceeds of
approximately $477 million received in connection with both the
offering and capital contribution to acquire mortgage assets which
consists of obligations of NB Finance, Ltd., a wholly-owned subsidiary
of the Bank. The mortgage assets are collateralized only by mortgage
loans, which are secured by residential first mortgages.
d) Agreements with the Parent Company
In September 1997, the Company entered into agreements with the Bank
in relation to the administration of the Company's operations.
e) Registration Statement with the U.S. Securities of Exchange Commission
("SEC")
On November 25, 1997, the Company filed a Registration Statement -
Form S-4 with the SEC pertaining to the registration of 300,000 shares
of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A.
These shares will be offered in exchange for up to 300,000 Preferred
Shares issued through the Offering Circular dated August 22, 1997
referred to in Note 2b) above.
F-4
<PAGE>
NB CAPITAL CORPORATION
Unaudited Interim Financial Statements
The financial statements presented below are the unaudited
interim financial statements of the Company which, in the opinion of management,
include all adjustments, which consist of only normally recurring adjustments,
necessary for a fair presentation of the financial position and the results of
operations of the Company as of September 30, 1997.
F-5
<PAGE>
NB CAPITAL CORPORATION
BALANCE SHEET
as at September 30, 1997
(in dollars)
(Unaudited)
Assets
Cash $ 3,667,213
Hypothecation note with affiliated company 473,681,802
Accrued interest hypothecation note 3,042,708
----------------
$ 480,391,723
Liabilities
Other liabilities
Accrued payable $ 2,888,587 $2,888,587
--------------
Equity
Preferred stock 3,000
Common stock 1
Contribution Surplus 477,335,453
Retained Earnings 164,682
----------------
$ 480,391,723
See accompanying Notes to Unaudited Interim Financial Statement.
F-6
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF INCOME
for the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
Interest income
Hypothecation note $ 3,042,708
Bank interest 10,561
----------------
TOTAL $ 3,053,269
================
Expenses(1)
Servicing fees $157,634
Legal fees 510,151
Auditing fees 112,100
Professional fees 230,697
Advisory fees 3,005
---------
$1,013,587
NET INCOME $ 2,039,682
================
See accompanying Notes to Unaudited Interim Financial Statement.
F-7
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF RETAINED EARNINGS
For the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
Beginning of the period $ --
Net income 2,039,682
Dividends (1,875,000)
-----------
End of the period $ 164,682
===========
See accompanying Notes to Unaudited Interim Financial Statement.
F-8
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
For the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
OPERATING ACTIVITIES
Net income $ 2,039,682
Items note affecting cash:
accrued interest receivable (3,042,708)
accrued liabilities 2,888,587
-----------------
$ 1,885,561
=================
FINANCING ACTIVITIES
Issue of common stock $ 183,338,454
Issue of preferred stock 300,000,000
Expenses related to shares issued (6,000,000)
Dividends (1,875,000)
-----------------
$ 475,463,454
=================
INVESTING ACTIVITIES
Hypothecation note, net of repayment $ (473,681,802)
-----------------
INCREASE IN CASH $ 3,667,213
Cash, at inception --
-----------------
Cash at end of period $ 3,667,213
See accompanying Notes to Unaudited Interim Financial Statement.
F-9
<PAGE>
NB CAPITAL CORPORATION
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
(1) The unaudited interim Statement of Income provides information from the
date of inception (August 20, 1997) through September 30, 1997. During the
period ended September 30, 1997, the Bank did not pay any expenses on
behalf of the Company. Any expenses paid in the future by the Bank on
behalf of the Company will be charged-back to the Company. In connection
with the servicing of the mortgage loans securing the hypothecation note
with affiliated company, the Company pays the Bank a servicing fee equal to
0.25% per annum of the principal balances of the loan serviced. In
connection with the day-to-day administration of the operations of the
Company, the Company pays the Bank US$25,000 per annum. The costs of all
services provided by the Bank on behalf of the Company (including
allocation of compensation of officers and employees of the Bank who are
also officers and employees of the Company) are reflected in the foregoing
fees.
F-10
<PAGE>
AMENDMENT NO. 1 TO
FORM F-9
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR
PURCHASERS
<PAGE>
New Issue
U.S.$300,000,000
[logo]
NATIONAL BANK OF CANADA
(300,000 Shares)
8.45% Noncumulative First Preferred Shares, Series Z
The 8.45% Noncumulative First Preferred Shares, Series Z (the
"Series Z Preferred Shares") of National Bank of Canada ("National Bank" or the
"Bank"), will be issued only upon the automatic exchange (see "Automatic
Exchange") of the 8.35% Noncumulative Exchangeable Preferred Stock, Series A
(the "Old Preferred Shares") of NB Capital Corporation, a U.S. subsidiary of the
Bank, and/or of the 8.35% Noncumulative Exchangeable Preferred Stock, Series A
(the "New Preferred Shares") of NB Capital Corporation into which the Old
Preferred Shares are exchangeable (see "Exchange Offer") upon the occurrence of
certain events.
Dividends on the Series Z Preferred Shares will be payable at
a rate of 8.45% per annum if, when and as declared by the Board of Directors of
the Bank. For a description of the terms of the Series Z Preferred Shares, see
"Description of the Series Z Preferred Shares" herein.
The Bank currently has outstanding, and may in the future
issue, various other series of first preferred shares (the "Other Series of
First Preferred Shares"). See "Capitalization". The Series Z Preferred Shares
will constitute a new series of first preferred shares of the Bank and will rank
pari passu in terms of cash dividend payment and liquidation preference with the
Other Series of First Preferred Shares (the Series Z Preferred Shares and the
Other Series of First Preferred Shares collectively, the "Preferred Shares").
The Preferred Shares rank, in priority of payment of dividends and rights upon
the voluntary or involuntary dissolution, liquidation or winding-up of the Bank,
junior to all claims of the Bank's creditors, including the claims of the Bank's
depositors and holders of the Bank's outstanding subordinated debentures. The
Preferred Shares rank superior and prior to the issued and outstanding Common
Shares of the Bank with respect to dividend rights and rights upon voluntary or
involuntary dissolution, liquidation or winding up of the Bank, and to all other
classes and series of shares of the Bank hereafter issued, other than any class
or series expressly designated as being on parity with or senior to the
Preferred Shares. The Common Shares of the Bank constitute the only class of
shares currently outstanding other than the Preferred Shares.
In the event the Old Preferred Shares and/or New Preferred
Shares are exchanged into Series Z Preferred Shares, the Bank does not intend to
apply for the listing of the Series Z Preferred Shares on any national
securities exchange in Canada or the United States or for quotation through the
National Association of Securities Dealers Automated Quotation System.
- --------------------------------------------------------------------------------
The Old Preferred Shares and/or New Preferred Shares are
exchangeable, if ever, at the rate of one Series Z Preferred Share for each Old
Preferred Share or New Preferred Share tendered.
- --------------------------------------------------------------------------------
The Bank is a Canadian issuer that is permitted, under a
multijurisdictional disclosure system adopted by the United States, to prepare
this short form prospectus in accordance with the disclosure requirements of its
home country. Prospective investors should be aware that such requirements are
different from those of the United States. The consolidated financial statements
included or incorporated by reference herein have been prepared in accordance
with Canadian generally accepted accounting principles, and thus may not be
comparable to financial statements of United States companies, and are subject
to Canadian auditing and auditor independence standards which differ from
standards in the United States.
<PAGE>
Prospective investors should be aware that the acquisition of
the securities described herein may have tax consequences both in the United
States and in Canada. Such consequences for investors who are residents in, or
citizens of, the United States may not be described fully herein.
The enforcement by investors of civil liabilities under the
federal securities laws of the United States may be affected adversely by the
fact that the Bank is incorporated or organized under the laws of Canada, that
some or all of its officers and directors may be residents of Canada, that some
or all of the experts named in the registration statement may be residents of
Canada and that all or a significant portion of the assets of the Bank and said
persons may be located outside the United States.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS SHORT FORM PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
The date of this short form prospectus is February __, 1998.
2
<PAGE>
ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS
National Bank of Canada is a Canadian bank; all of the
directors and executive officers of the Bank and certain of the Bank's advisers
named in this short form prospectus are residents of countries other than the
United States of America ("U.S."); and all or a substantial portion of the
assets of such non-U.S. residents are located outside the U.S. As a result, it
may not be possible for investors to effect service of process within the U.S.
upon such persons or to enforce against them in the U.S. judgments of U.S.
Courts predicated upon the civil liability provisions of the federal securities
laws of the U.S. The Bank will expressly accept the jurisdiction of the Supreme
Court of the State of New York or the U.S. District Court for the Southern
District of New York, in either case in the Borough of Manhattan, The City of
New York, for the purpose of any suit, action or proceeding arising out of the
Series Z Preferred Shares offered hereby, and has appointed NB Capital
Corporation, a subsidiary of the Bank, as its agent in The City of New York to
accept service of process in any such action. The Bank has been advised by
Desjardins Ducharme Stein Monast, Canadian counsel to the Bank, that there is
doubt as to the enforceability in the Province of Quebec, in original actions or
in actions for enforcement of judgments of U.S. Courts, of liabilities
predicated solely upon the federal securities laws of the U.S.
TRANSLATION OF FOREIGN CURRENCY
In this short form prospectus, unless otherwise specified, all
dollar amounts are expressed in Canadian dollars ("C$" or "$"). Solely for
convenience, this short form prospectus contains translations of certain
Canadian dollar amounts into U.S. dollar amounts. Unless otherwise specified,
those amounts presented in U.S. dollars ("U.S.$" or "U.S. dollars") are
translated from the Canadian dollar amounts at the rate of 1.4084 Canadian
dollar per U.S. dollar, the Bank of Canada closing rate for U.S. dollars as at
October 31, 1997.
3
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, filed with the Quebec Securities
Commission, form an integral part of this short form prospectus:
(a) Annual Information Form of the Bank dated December
19, 1996 and contained in the Bank's Annual Report
for the year ended October 31, 1996;
(b) Management's Discussion and Analysis of Operating
Results and Financial Condition of the Bank dated
December 19, 1996, and contained in the Bank's Annual
Report for the year ended October 31, 1996;
(c) Audited Consolidated Financial Statements of the Bank
for the year ended October 31, 1997, together with
the Auditors' Report thereon, which include
comparative audited consolidated financial statements
for the year ended October 31, 1996; and
(d) Management Circular dated January 16, 1997 in
connection with the Bank's annual meeting of
shareholders held on March 12, 1997.
Copies of the documents incorporated herein by reference may
be obtained on request without charge from the Corporate Secretary of the Bank
at National Bank Tower, 600 de La Gauchetiere Street West, Montreal, Quebec, H3B
4L2, telephone (514) 394-6080.
The Bank is required to file with the U.S. Securities and
Exchange Commission (the "Commission") all documents that it is required to send
to its shareholders, including its Annual Report, notices of Shareholders'
Meetings and Management Proxy Circulars. Such documents may be inspected and
copied at the Public Reference Section of the Commission, 455 Fifth Street,
N.W., Washington, DC 20549.
Any documents of the type referred to in the preceding
paragraph and any material change report (excluding confidential material change
reports) filed by the Bank with the Quebec Securities Commission, after the date
of this short form prospectus and prior to the termination of the offering, will
be deemed to be incorporated by reference into this short form prospectus.
Any statement contained in a document incorporated or deemed
to be incorporated by reference into this short form prospectus will be deemed
to be modified or superseded, for purposes of this short form prospectus, to the
extent that a statement contained in this short form prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference into this short form prospectus modifies or supersedes such statement.
Any statement so modified or superseded will not be deemed, except as so
modified or superseded, to constitute a part of this short form prospectus.
The financial information incorporated in this short form
prospectus has been prepared in accordance with Canadian generally accepted
accounting principles including the accounting requirements of the
Superintendent of Financial Institutions Canada.
4
<PAGE>
SHORT FORM PROSPECTUS SUMMARY
This short form prospectus summary does not purport to be
complete and is qualified in its entirety by the more detailed information and
financial statements and notes hereto appearing elsewhere in this short form
prospectus and in the documents incorporated by reference herein. Capitalized
terms used in the summary and not defined herein have the meanings ascribed to
such terms elsewhere in this short form prospectus or in the documents
incorporated by reference herein.
INCORPORATION AND HEAD OFFICE OF THE BANK
The Bank was formed through a series of amalgamations and its
roots date back to 1859 with the founding of Banque Nationale in Quebec City,
Quebec, Canada. The Bank is chartered under the Bank Act (Canada) (the "Bank
Act").
The head office and executive offices of the Bank are at the
National Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, Canada H3B
4L2.
BUSINESS OF THE BANK
The Bank, which ranks sixth among Canadian banks in terms of
total assets, is present in each of Canada's provinces. It delivers an extensive
range of financial services to individuals, commercial enterprises, financial
institutions and governments both in Canada and abroad.
The Bank's main sectors and divisions are the following:
Banking, which consists of Retail Banking, Commercial Banking and International;
Trust Services; Insurance; Treasury, Brokerage and Corporate Banking; and Human
Resources and Administration.
BANKING
Retail Banking
Through its network of 637 branches at October 31, 1997,
Retail Banking provides services to individuals and serves as support to the
commercial banking centres and the Corporate Banking, International Commercial
Operations and Treasury divisions.
In addition to personal and mortgage loans, the Bank offers a
broad range of transaction accounts and investment vehicles, such as term
deposits and investment certificates, mutual funds (managed by the Bank or by
third parties) and registered retirement savings plans and income funds, as well
as credit card and travelers cheque services. In response to clients' growing
demand for financial advisory services, the Bank embarked on a new phase in 1996
when it integrated more than 50 accredited financial planners into its branches.
Clients can access their accounts at any of the Bank's 738
banking machines as well as at the more than 303,426 banking machines in North
America and Europe which belong to the Cirrus, Interac and MasterCard ATM
networks. Furthermore, through the Interac Direct Payment network, debit card
holders can pay for their purchases without using cash at any of the Bank's
28,337 point-of-sale terminals.
The Bank continues to assume a leadership role in customer
service by offering its customers non-traditional services such as TelNat for
banking by phone and Personal CompuTeller for banking by computer. The first
service of its kind in Canada, Personal CompuTeller gives customers direct
access to their transaction accounts via their personal computer.
5
<PAGE>
To meet the new reality of consumer demand for fast, easy
access to banking services, the Bank developed another delivery concept in the
form of specially designed service units in supermarkets, open seven days a
week.
Commercial Banking
The Commercial Banking division administers loans to
independent businesses and offers them an array of complementary services. Of
the 38 commercial banking centres in operation as at October 31, 1997, 20 were
in Quebec, 9 in Ontario and 9 in Atlantic Canada. The centres are staffed by
account managers, each of whom services a small number of business clients, and
by experts in special financing methods. In addition to the specialized services
offered by Treasury and International Commercial Operations, businesses can
obtain a full range of services such as bankers' acceptances, operating loans
and fixed or variable-rate term loans, as well as computerized payroll
processing, bank reconciliation with cheques in consignment and pre-authorized
payments.
The Bank also serves mid-market companies through offices in
20 U.S. cities, including its own representative offices and the offices of its
subsidiary National Canada Finance Corp.
International
The International division is responsible for all the services
offered to the Bank's Canadian clients who are involved in foreign transactions.
Available through centres in Moncton, Quebec City, Montreal, Toronto and
Vancouver, as well as the branch network, these services include guarantees and
letters of credit, foreign exchange transactions, foreign payments and
documentary collections. In addition to these transaction services, the Bank
offers financing adapted to the needs of exporters, such as discounted foreign
receivables, identification of foreign partners or clients, as well as advisory
services for establishing foreign trade or an international strategy.
The International division has also made its presence felt
abroad through its representative offices in New York, the Caribbean, Mexico,
Santiago, London, Paris, Hong Kong, Seoul, Singapore, Taiwan and Shanghai;
cooperation agreements with seven European financial institutions and a Mexican
bank; and via a vast network of some 2,800 banking correspondents spanning 120
countries.
Through this presence abroad, the International division can
serve its clientele which includes Canadian clients, foreign companies,
international banks which obtain traditional services such as correspondent
banking, and immigrant investors to whom the Bank provides private banking
services as well as other products designed specifically to meet their needs.
The Bank has also developed partnerships with private
enterprise and all three levels of public administration. Partnerships created
in 1996 include the Action Asia Group, Montreal International, the Canada-Poland
Development Fund and a France-Quebec network for independent businesses, as well
as the agreement to accommodate Quebec trade delegates in the Bank's offices in
Boston, Los Angeles, Chicago and Atlanta.
Through its International division, the Bank is able to offer
international products and services adapted to the increasingly sophisticated
needs of its clients, including guarantees and letters of credit, foreign
exchange transactions, foreign payments and management of foreign accounts.
6
<PAGE>
TRUST SERVICES
With its investment services, personal trust services and
branches now integrated into the Bank's network, General Trust offers wealth
management services for high net worth households. Its corporate trust services
are geared to the needs of independent businesses and large corporations in
Quebec.
General Trust and National Bank Securities Inc., another Bank
subsidiary, provide active fund management on behalf of their clients. National
Bank Securities Inc. also offers its clients a wide selection of mutual funds
and discount brokerage services.
INSURANCE
National Bank Life Insurance Company administers credit
insurance plans for loans granted by the Bank and markets various general
insurance products. Personal and group insurance products are delivered through
National Bank Financial Services, a joint company formed by the Bank and
Metropolitan Life.
BROKERAGE AND CORPORATE BANKING
The Corporate Banking division, with the support of
specialized teams based in Montreal and Toronto, offers a broad range of
services customized to clients' needs. In addition to providing traditional
operating credit and term financing, these teams structure financing for
acquisitions or recapitalizations and arrange high-yield financing, often
through loan syndicates involving other institutions. They also offer advisory
services for restructuring, mergers and acquisitions and for hybrid financings
combining debt and equity. Together with the Treasury division, Corporate
Banking offers financial risk management instruments for hedging interest rates,
foreign exchange and import-export transactions. The division's specialists in
banking operations can suggest a vast range of electronic products, such as
point-of-sale debit and electronic data interchange (EDI), and tailor them to
each client's requirements.
The securities brokerage subsidiary Levesque Beaubien
Geoffrion Inc. provides services to business clients and individuals, in
addition to playing an important role in securing financing for various levels
of government. This subsidiary is active on all the major markets through its
network of 65 offices.
Another subsidiary, Natcan Investment Management Inc.,
specializes in portfolio management for institutional clients and identifies
investment opportunities in Canada the United States and abroad. Pension funds,
insurance companies, mutual funds, foundations and religious orders are among
the many clients for which this subsidiary manages assets in excess of $8.8
billion.
7
<PAGE>
THE OFFERING
Securities Offered: 300,000 Series Z Preferred Shares.
The Exchange Offer: Simultaneously with the filing of this short form
prospectus by the Bank, NB Capital Corporation, a
100% controlled subsidiary of the Bank, is
offering to exchange (the "Exchangeable Offer") up
to 300,000 shares of its 8.35% Noncumulative
Exchangeable Preferred Stock, Series A (the "New
Preferred Shares") for up to all of its
outstanding 8.35% Noncumulative Exchangeable
Preferred Stock, Series A (the "Old Preferred
Shares") at the rate of one New Preferred Share
for each Old Preferred Share tendered. The
issuance of the New Preferred Shares is intended
to satisfy certain obligations of NB Capital
Corporation contained in the Registration Rights
Agreement (as defined). See "The Exchange Offer".
Registration Rights
Agreement: The Old Preferred Shares were sold by the Company
on September 3, 1997 to Merrill Lynch, Pierce,
Fenner & Smith Incorporated as initial purchaser
(the "Initial Purchaser") pursuant to the purchase
agreement among the Company, the Bank and the
Initial Purchaser (the "Purchase Agreement").
Pursuant to the Purchase Agreement, the Company
and the Initial Purchaser entered into the
Registration Rights Agreement on September 3,
1997. Pursuant to the Registration Rights
Agreement, the Bank and the Company agreed to each
file a registration statement within a certain
time period and to use their best efforts to cause
such registration statements to become effective
within an additional time period with respect to
the Exchange Offer. The Exchange Offer is intended
to satisfy such rights under the Registration
Rights Agreement which terminate upon the
consummation of the Exchange Offer. See
"Registration Rights Agreement".
Automatic Exchange: The Series Z Preferred Shares are to be
issued, if ever, in connection with the automatic
exchange of the Old Preferred Shares and/or New
Preferred Shares into which the Old Preferred
Shares are exchangeable pursuant to the Exchange
Offer. See "Automatic Exchange" and "The Exchange
Offer".
Ranking: The Series Z Preferred Shares rank senior to the
Bank's common shares (the "Common Shares") and all
other classes and series of shares of the Bank
hereafter issued other than those expressly
designated as being on a parity with or senior to
the First Preferred Shares of the Bank, pari passu
with the other First Preferred Shares of the Bank
with respect to cash dividend payments and rights
upon liquidation and junior to all claims of the
Bank's creditors, including the claims of the
Bank's depositors and holders of the Bank's
outstanding subordinated debentures. Preferred
shares ranking senior to the Series Z Preferred
Shares may not be issued without the approval of
holders of at least two-thirds of all series of
First Preferred Shares.
Dividends: Dividends on the Series Z Preferred Shares are
payable at the rate of 8.45% per annum of the
liquidation preference (being an amount equal to
U.S.$84.50 per share), if, when and as declared by
the Board of Directors of the Bank. If declared,
dividends are payable quarterly in arrears on the
30th day of March, June, September and December in
each year, or, if such day is not a business day,
on the next business day. Dividends on the Series Z
8
<PAGE>
Preferred Shares are not cumulative and,
accordingly, if no dividend is declared on the
Series Z Preferred Shares by the Bank for a
quarterly dividend period, holders of the Series Z
Preferred Shares will have no right to receive a
dividend for that period, and the Bank will have
no obligation to pay a dividend for that period,
whether or not dividends are declared and paid for
any future period. See "Description of the Series
Z Preferred Shares--Dividends". The Bank's ability
to pay cash dividends is subject to regulatory and
other restrictions described herein.
Redemption: The Bank may not redeem the Series Z Preferred
Shares before September 3, 2007. After such date,
the Series Z Preferred Shares may be redeemed for
cash at the option of the Bank, in whole or in
part at any time and from time to time, at the
redemption prices set forth herein, plus the
quarterly accrued and unpaid dividends, if any,
thereon for the then-current dividend period to,
but excluding, the date fixed for redemption.
Redemption of the Series Z Preferred Shares will
be subject to compliance with applicable
regulatory and other restrictions, including the
requirement of the prior consent of the
Superintendent. See "Description of Series Z
Preferred Shares--Redemption".
Voting Rights: Holders of Series Z Preferred Shares will
not have any voting rights, except as expressly
provided herein. On any matter on which holders of
the Series Z Preferred Shares may vote, each
Series Z Preferred Share will be entitled to one
vote. See "Description of Series Z Preferred
Shares--Voting Rights".
Use of Proceeds: The Series Z Preferred Shares will only be issued,
if ever, upon the automatic exchange of the Old
Preferred Shares and/or New Preferred Shares
resulting from the Exchange Offer. The proceeds
from the sale of the Old Preferred Shares were
used by NB Capital Corporation to acquire a
portfolio of mortgage related assets. The
automatic exchange of the Old Preferred Shares
and/or New Preferred Shares into Series Z
Preferred Shares will produce no proceeds to the
Bank. See "Use of Proceeds".
Absence of a Public Market: There is currently no public market for
the Series Z Preferred Shares and such
shares will not be listed on any securities
exchange or for quotation through the National
Association of Securities Dealers Automated
Quotation System.
9
<PAGE>
CAPITALIZATION
The following table sets forth the actual capital of the Bank
at October 31, 1997 and as adjusted as of such date to give effect to the
automatic exchange of the Old Preferred Shares and/or New Preferred Shares into
Series Z Preferred Shares of the Bank. This table should be read in conjunction
with the Consolidated Financial Statements of the Bank and the notes thereto
included elsewhere in this Short Form Prospectus and in the documents
incorporated herein by reference.
<TABLE>
<CAPTION>
October 31, 1997
----------------
Actual As adjusted (1)
(in millions of Canadian dollars)
<S> <C> <C>
Liabilities
Deposits............................................................... $ 43,270 $ 43,270
Bankers acceptances.................................................... 2,273 2,273
Obligations related to securities sold short........................... 4,225 4,225
Securities sold under repurchase agreements............................ 9,038 9,038
Other liabilities...................................................... 3,134 3,134
----- -----
Non-controlling interest............................................... 61,940 61,940
----------- -----------
Bank debentures........................................................ 466 43
------------ ------------
Shareholders' equity 1,069 1,069
----------- -----------
First Preferred shares without par value:
Unlimited number of shares authorized, issued and outstanding:
286,610 Series 5 shares................................................ 29 29
422,633 Series 7 shares................................................ 10 10
789,638 Series 8 shares................................................ 20 20
3,680,000 Series 10 shares............................................. 92 92
4,000,000 Series 11 shares ............................................ 100 100
5,000,000 Series 12 shares............................................. 125 125
300,000 Series Z shares(2)............................................. -- 423
------------ ------------
Total ................................................................. 376 799
Common shares without par value:
Unlimited number of shares authorized .................................
170,461,483 shares issued and outstanding.............................. 1,309 1,309
Retained earnings ..................................................... 1,075 1,075
----------- -----------
2,760 3,183
----------- -----------
Total liabilities and shareholders' equity............................. 66,235 66,235
=========== ===========
Regulatory capital ratios
Assets to capital multiple............................................. 16.4 16.4
Tier 1 risk-based ..................................................... 8.1% 8.1%
Total risk-based ...................................................... 11.3% 11.3%
</TABLE>
(1) Adjusted to give effect to the automatic exchange of the Old Preferred
Shares and/or New Preferred Shares into Series Z Preferred Shares of
the Bank assuming that the limit on the amount of Preferred Shares
includable as core capital is applicable to the Series Z Preferred
Shares of the Bank.
(2) Exchange rate is 1.4084 Canadian dollars for 1 U.S. dollar.
10
<PAGE>
DESCRIPTION OF THE SERIES Z PREFERRED SHARES
The following is a summary of the rights, privileges,
restrictions and conditions of the First Preferred Shares as a class and of the
Series Z Preferred Shares as a series.
Certain Provisions of the First Preferred Shares as a Class
The authorized first preferred share capital of the Bank
consists of an unlimited number of First Preferred Shares, without par value,
which may be issued for a maximum aggregate consideration of $1,000,000,000 or
the equivalent thereof in foreign currencies. The Board of Directors of the Bank
may by resolution divide any unissued First Preferred Shares into series and fix
the number of shares in each series and determine the designation, rights,
privileges, restrictions and conditions thereof.
Priority
The First Preferred Shares of each series will rank on a
parity with First Preferred Shares of every other series and are entitled to
preference over the Common Shares, and any other shares of the Bank ranking
junior to the First Preferred Shares with respect to the payment of dividends
and upon any distribution of assets in the event of liquidation, dissolution or
winding-up of the Bank.
Restriction
The Bank will not, without the approval of the holders of the
First Preferred Shares, create or issue any shares ranking in priority to or
pari passu with the First Preferred Shares, nor create or issue any additional
series of First Preferred Shares, unless all cumulative dividends have been
declared and paid or set aside for payment and all declared and unpaid
non-cumulative dividends have been paid or set aside for payment.
Voting Rights
The Board of Directors is empowered to set voting rights for
each series. The holders of the First Preferred Shares are not entitled to any
voting rights as a class except as provided above or by law or with respect to
the right to vote on certain matters as specified under "Approval of the Holders
of the First Preferred Shares".
Approval of the Holders of the First Preferred Shares
The provisions with respect to First Preferred Shares will not
be deleted or modified except with a resolution carried by the affirmative vote
of not less than 66 2/3% of the votes cast at a meeting of holders of First
Preferred Shares at which a majority of the outstanding First Preferred Shares
is represented or, if no quorum is present at such meeting, at any adjourned
meeting at which no quorum requirements would apply.
Certain Provisions of the Series Z Preferred Shares as a Series
Issue Price
The Series Z Preferred Shares will have an issue price of
U.S.$1,000 per share.
11
<PAGE>
Dividends
Holders of Series Z Preferred Shares shall be entitled to
receive, if, when and as declared by the Board of Directors of the Bank out of
assets of the Bank legally available therefor, non-cumulative preferential cash
dividends at the rate of 8.45% per annum of the liquidation preference
(equivalent to U.S.$1,000 per share). If declared, dividends on the Series Z
Preferred Shares shall be payable quarterly in arrears on the 30th day of March,
June, September and December of each year, or, if such day is not a business
day, on the next business day. Each declared dividend shall be payable to
holders of record as they appear at the close of business on the share register
of the Bank on such record dates, not exceeding 45 days preceding the payment
dates thereof, as shall be fixed by the Board of Directors of the Bank.
If, within 21 days after the expiration of any financial year
of the Bank, the Board of Directors has not declared any dividend or part
thereof on the Series Z Preferred Shares for such year, then the right of the
holders of the Series Z Preferred Shares to such dividend or part thereof for
such year shall be extinguished.
Restrictions on Dividends and Retirement of Shares
As long as any of the Series Z Preferred Shares are
outstanding, the Bank shall not, without the prior approval of the holders of
such Series Z Preferred Shares given as specified below:
(a) declare or pay or set aside for payment any dividends
on any shares of any class of shares of the Bank
ranking junior to the Series Z Preferred Shares
(other than stock dividends ranking junior to the
Series Z Preferred Shares);
(b) call for redemption or redeem, call for purchase or
purchase, or otherwise retire or reduce or make any
return of capital in respect of shares of any class
of shares of the Bank ranking junior to the Series Z
Preferred Shares;
(c) call for redemption or redeem, call for purchase or
purchase, or otherwise retire or reduce or make any
return of capital in respect of part only of the
Series Z Preferred Shares; or
(d) call for redemption or redeem, call for purchase or
purchase, or otherwise retire or reduce or make any
return of capital in respect of any shares of any
class of shares of the Bank ranking pari passu with
the Series Z Preferred Shares, except in satisfaction
of an obligation to purchase or obligation in respect
of a sinking fund, of a right of retraction or of any
other mandatory redemption provision of any given
series of any preferred shares;
unless all dividends up to and including the dividend payment date for the last
completed period for which dividends shall be payable shall have been declared
and paid or set apart for payment in respect of each series of cumulative first
preferred shares then issued and outstanding and on all other cumulative shares
ranking on a parity with the First Preferred Shares and there shall have been
paid or set apart for payment all declared dividends in respect of each series
of non-cumulative First Preferred Shares (including the Series Z Preferred
Shares) then issued and outstanding and on all other non-cumulative shares
ranking on a parity with the First Preferred Shares.
12
<PAGE>
Redemption
The Series Z Preferred Shares will not be redeemable prior to
September 3, 2007. On or after such date, but subject to the provisions of the
Bank Act, including the requirements of the prior consent of the Superintendent,
the Series Z Preferred Shares will be redeemable at the option of the Bank, 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 following redemption prices (expressed as a
percentage of the $1,000 per share liquidation preference), if redeemed during
the 12-month period beginning September 3 of the years indicated below, plus the
quarterly accrued unpaid dividend to the date of redemption, if any, thereon:
Year Redemption Price
- ---- ----------------
2007....................................................... 104.2550%
2008....................................................... 103.8025
2009....................................................... 103.3800
2010....................................................... 102.9575
2011....................................................... 102.5350
2012....................................................... 102.1125
2013....................................................... 101.6900
2014....................................................... 101.2675
2015....................................................... 100.8450
2016....................................................... 100.4225
and thereafter at a redemption price of $1,000 per share, plus the quarterly
accrued and unpaid dividend to the redemption date, if any, thereon.
If there are any accrued and unpaid dividends on any Series Z
Preferred Shares, no Series Z Preferred Shares shall be redeemed unless all
outstanding Series Z Preferred Shares are redeemed and the Bank shall not
purchase or otherwise acquire any Series Z Preferred Shares; provided, however,
that the Bank may purchase or acquire Series Z Preferred Shares pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
Series Z Preferred Shares.
In the event that fewer than all the outstanding Series Z
Preferred Shares are to be redeemed, the number of Series Z 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 proportionately 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.
Voting Rights
The holders of the Series Z Preferred Shares as such will not
be entitled to receive notice of or to attend or to vote at any meeting of the
shareholders of the Bank unless and until the first time at which the rights of
such holders to any undeclared dividends have become extinguished as described
under "Dividends".
In that event, the holders of the Series Z Preferred Shares
will be entitled to receive notice of, and to attend, meetings of shareholders
at which directors are elected and will be entitled to one vote for each share
held. The voting rights of the holders of the Series Z Preferred Shares shall
forthwith cease upon payment by the Bank of the first quarterly dividend on the
Series Z Preferred Shares to which the holders are entitled subsequent to the
time such voting rights first arose. At such time as the rights of such holders
to any undeclared dividends on the Series Z Preferred Shares have again become
extinguished, such voting rights shall become effective again and so on from
time to time.
13
<PAGE>
Rights Upon Liquidation
In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Bank, the holders of the Series Z Preferred
Shares at the time outstanding will be entitled to receive out of assets of the
Bank legally available for distribution to shareholders, under applicable law,
before any distribution of assets is made to holders of Common Shares or any
other class of shares ranking junior to the Series Z Preferred Shares upon
liquidation, and subject to the rights of the holders of any class or series of
equity securities having preference with respect to distribution upon
liquidation and the rights of the Bank's general creditors, an amount of $1,000
per share, plus the quarterly accrued and unpaid dividend thereon, if any, to,
but excluding, the date of liquidation.
After payment of the full amount of said amount to which they
are entitled, the holders of Series Z Preferred Shares will have no right or
claim to any of the remaining assets of the Bank. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding-up, the
available assets of the Bank are insufficient to pay the amount of the
liquidation distributions on all outstanding Series Z Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of share
capital of the Bank ranking on a parity with the Series Z Preferred Shares in
the distribution of assets upon any liquidation, dissolution or winding-up of
the affairs of the Bank, then the holders of the Series Z Preferred Shares and
such other classes or series of share capital shall share ratably in any such
distribution of assets in proportion to the full liquidation distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Bank
with or into any other entity, or the sale, lease or conveyance of all or
substantially all of the property or business of the Bank, shall not be deemed
to constitute liquidation, dissolution or winding-up of the Bank.
Taxation
To the extent that dividends on the Series Z Preferred Shares
are subject to Canadian non-resident withholding tax, the Bank will pay such
additional amounts as may be necessary in order that the net amounts received by
U.S. holders of the Series Z Preferred Shares shall equal the amounts which
would have been received thereon in the absence of such tax.
COMMON SHARES
The authorized Common Share capital of the Bank consists of an
unlimited number of Common Shares without par value, issuable for a maximum
aggregate consideration of $3 billion, of which 170,461,483 Common Shares were
outstanding as at October 31, 1997.
The holders of Common Shares are entitled to receive dividends
as and when declared by the Board of Directors of the Bank, subject to the
preference of holders of First Preferred Shares. Subject to the restrictions set
forth in "Restraints on Bank Shares under the Bank Act", a holder of Common
Shares is entitled to one vote for each share at all meetings of shareholders
except meetings at which only holders of a specified class or series are
entitled to vote. In the event of the liquidation, dissolution or winding-up of
the Bank, after payment of all outstanding debts and subject to the preference
of the holders of First Preferred Shares, the remaining assets of the Bank would
be distributed proportionately to the holders of Common Shares.
14
<PAGE>
USE OF PROCEEDS
The Series Z Preferred Shares are to be issued only, if ever,
in connection with the automatic exchange of the Old Preferred Shares and/or New
Preferred Shares into which the Old Preferred Shares are exchangeable pursuant
to the Exchange Offer. The proceeds from the sale of the Old Preferred Shares
were used by NB Capital Corporation to acquire a portfolio of mortgage related
assets. The automatic exchange of Old Preferred Shares and/or New Preferred
Shares into Series Z Preferred Shares will produce no proceeds to the Bank.
15
<PAGE>
THE EXCHANGE OFFER
Simultaneously with the filing of this short form prospectus
by the Bank, NB Capital Corporation, a 100% controlled subsidiary of the Bank,
is offering to exchange (the "Exchange Offer") up to 300,000 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A (the "New Preferred
Shares") for up to all of its outstanding 8.35% Noncumulative Exchangeable
Preferred Stock, Series A (the "Old Preferred Shares") at the rate of one New
Preferred Share for each Old Preferred Share tendered. The issuance of the New
Preferred Shares is intended to satisfy certain obligations of NB Capital
Corporation contained in the Registration Rights Agreement.
REGISTRATION RIGHTS AGREEMENT
The Old Preferred Shares were sold by NB Capital Corporation
on September 3, 1997 to Merrill Lynch, Pierce, Fenner & Smith Incorporated as
initial purchaser (the "Initial Purchaser") pursuant to the purchase agreement
among NB Capital Corporation, the Bank and the Initial Purchaser (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, NB Capital Corporation and the
Initial Purchaser entered into the Registration Rights Agreement on September 3,
1997. Pursuant to the Registration Rights Agreement, the Bank and NB Capital
Corporation agreed to each file a registration statement within a certain time
period and to use their best efforts to cause such registration statements to
become effective within an additional time period with respect to the Exchange
Offer. If certain events do not permit NB Capital Corporation to effect the
Exchange Offer on the terms set forth therein, the Bank and NB Capital
Corporation will use their best efforts to cause to become effective shelf
registration statements with respect to the resale of the Old Preferred Shares
and of the Series Z Preferred Shares and to keep the shelf registration
statements effective until two (2) years after the issue date of the Old
Preferred Shares or such shorter period ending when all of the Old Preferred
Shares have been sold thereunder.
AUTOMATIC EXCHANGE
The Series Z Preferred Shares are to be issued, if ever, in
connection with an automatic exchange of the Old Preferred Shares and/or New
Preferred Shares into which the Old Preferred Shares are exchangeable pursuant
to the Exchange Offer. The Old Preferred Shares and/or New Preferred Shares are
subject to an automatic exchange in whole and not in part, on a share-for-share
basis, into Series Z Preferred Shares (i) immediately prior to such time, if
any, at which the Bank fails to declare and pay or set aside for payment when
due any dividend on any issue of cumulative First Preferred Shares or the Bank
fails to pay or set aside for payment when due any declared dividend on any
non-cumulative First Preferred Shares, (ii) in the event that the Bank has a
Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital
ratio of less than 8.0%, (iii) in the event that the Superintendent takes
control of the Bank pursuant to the Bank Act, or proceedings are commenced for
the winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange.
BANK ACT RESTRICTIONS AND APPROVALS
Under the Bank Act, the Bank cannot redeem or purchase any of
its shares, including the Series Z Preferred Shares, unless the consent of the
Superintendent has been obtained. In addition, the Bank Act prohibits the
payment to purchase or redeem any shares or the payment of a dividend if there
are reasonable grounds for believing that the Bank is, or the payment would
cause the Bank to be, in contravention of the Bank Act requirement to maintain,
in relation to its operations, adequate capital and appropriate forms of
liquidity and to comply with any regulations or directions of the Superintendent
in relation thereto. Currently these limitations do not restrict the payment of
dividends on or the redemption or purchase of the Series Z Preferred Shares.
16
<PAGE>
RESTRAINTS ON BANK SHARES UNDER THE BANK ACT
The Bank Act contains restrictions on the issue, transfer,
acquisition, beneficial ownership and voting of all shares of a bank. By way of
summary, no person is permitted to have a significant interest in any class of
shares of a Schedule I bank, including the Bank. For purposes of the Bank Act, a
person has a significant interest in a class of shares of a bank where the
aggregate of any shares of that class beneficially owned by that person, by
entities controlled by that person and by any person associated or acting
jointly or in concert with that person (as contemplated by the Bank Act) exceeds
10% of all of the outstanding shares of that class of shares of the Bank.
In addition, these restrictions do not permit Schedule I
banks, including the Bank, to issue or transfer shares of any class to Her
Majesty in right of Canada or of a province, an agent of Her Majesty or a
foreign government or any agent of a foreign government.
Purchasers of the Series Z Preferred Shares may be required to
furnish declarations relative to certain of the foregoing matters in a form
prescribed by the Bank.
REGULATION
Canada
The Bank Act
The Bank is a Schedule 1 bank under the Bank Act, and the Bank
Act is its charter. See "The Canadian Banking Industry". In accordance with the
Bank Act, the Bank may engage in and carry on such business generally as
appertains to the business of banking. The Bank Act grants banks broad powers of
investment in the securities of other corporations and entities, but imposes
limits upon banks' substantial investments. A bank has a substantial investment
in a body corporate when (i) the voting shares beneficially owned by the Bank
and by entities controlled by the Bank exceed 10% of the outstanding voting
shares of the body corporate or (ii) the total of the shares of any class of the
body corporate that are beneficially owned by the Bank and entities controlled
by the Bank exceed 25% of the total shareholders' equity of the body corporate.
A bank is entitled to have a substantial investment in a body corporate that is
one of the following, provided that the Bank controls the body corporate and, in
certain cases, the Bank obtains the prior approval of the Minister of Finance of
Canada: a financial institution; a factoring corporation; a financial leasing
corporation; a specialized financing corporation; and a financial holding
corporation, provided that the financial holding corporation does not have a
substantial investment that the Bank may not have. In addition, a bank may have
a substantial investment which can, but need not be, a controlling interest in
the following types of corporations or in any corporation that engages in any
combination of the following: an information services corporation; an investment
counseling and portfolio management corporation; a mutual fund corporation; a
mutual fund distribution corporation; a real property brokerage corporation; a
real property corporation; a service corporation; and a body corporate whose
activities are ancillary to the business of the Bank or of a financial
institution that is a subsidiary of the Bank. Unlike under the former banking
legislation, the investments of Schedule 1 banks in foreign bodies corporate are
now generally subject to the same rules applicable to investments in Canadian
bodies corporate. A bank may not, without the prior approval of the
Superintendent, create a security interest in any of its property to secure an
obligation of the Bank.
Inspection
The Bank Act also contemplated the appointment of the
Superintendent who administers the Bank Act under the authority granted to him
by the Minister of Finance of Canada. Among other things, the Superintendent is
required under the Bank Act, at least once in each calendar year, to examine and
inquire into the business and affairs of each bank to the extent necessary or
expedient to determine that the provisions of the
17
<PAGE>
Bank Act are being observed and that each bank is in a sound financial
condition. Reports of these examinations and inquiries are submitted to the
Minister of Finance of Canada. Outside of Canada, a bank's branches, agencies,
subsidiaries and associates are also subject to local regulatory requirements
applicable in the countries in which it conducts business.
Auditors
Under the Bank Act, the financial statements of the Bank may
be audited by either one or two firms of chartered accountants. During the five
fiscal years ended October 31, 1997, the firm of Raymond, Chabot, Martin, Pare,
a general partnership, served in 1995 and 1996, the firm of Price Waterhouse
served in 1993, 1996 and 1997, the firm of Samson Belair/Deloitte & Touche, a
general partnership, served in 1993, 1994 and 1997 and the firm of Mallette
Maheu, a general partnership, served in 1994 and 1995. The auditors are
independent of the Bank as required by all applicable securities legislation of
all the provinces of Canada and the Bank Act. These rules differ from those in
the United States. The firms that served as auditors for the fiscal year ended
October 31, 1997 have informed the Bank that they were independent under U.S.
rules.
United States
The Bank's only United States branch is located in New York
(the "Branch") and is licensed by the New York Superintendent under the Banking
laws of the State of New York (the "NYBL"). The Branch is examined by the New
York State Banking Department and is subject to banking laws and regulations
applicable to a foreign bank that operates a New York branch. Under the NYBL,
the Bank must maintain with approved banks or trust companies in the State of
New York specified types of interest-bearing governmental obligations, U.S.
dollar deposits, investment grade commercial paper, obligations of certain
international financial institutions and other specified obligations in an
aggregate amount to be determined by the New York Superintendent as security for
the benefit of depositors and other creditors of the Branch. This amount is
currently set at the greater of (i) 5% of the liabilities of the Branch
(excluding liabilities to other offices and certain affiliates of the Bank and
liabilities of the Branch that are booked at its international banking
facility), (ii) 1% of the liabilities of the Branch (excluding liabilities to
other offices and certain affiliates of the Bank) and (iii) $1 million. Under
the NYBL, the New York Superintendent is also empowered to require foreign banks
operating a New York branch to maintain in New York specified assets equal to
such percentage of the branch's liabilities payable at or through the branch as
the New York Superintendent may designate. At present, the New York
Superintendent has set this percentage at 0% for such branches (including the
Branch), although specific asset maintenance requirements may be imposed by the
New York Superintendent on a case-by-case basis.
The banking laws of the State of New York authorize the New
York Superintendent to take possession of the business and property of a New
York branch of a foreign bank under circumstances similar to those which would
permit the New York Superintendent to take possession of the business and
property of a New York state-chartered bank. These circumstances include the
violation of any law, unsafe business procedures, capital impairments, the
suspension of payment of obligations and the initiation of liquidation
proceedings against the foreign bank at its domicile or elsewhere or the
existence of reason to doubt the ability or willingness of such bank to pay in
full the claims of holders of accepted claims specified in the Banking laws of
the State of New York. Pursuant to Section 606.4 of the NYBL, in liquidating or
dealing with the branch's business after taking possession of the branch, only
the claims of creditors which arose out of transactions with the branch are to
be accepted by the New York Superintendent for payment out of the business and
property of the foreign bank in the State of New York.
Under the NYBL, the Branch is generally subject to the same
lending limits to a single borrower, expressed as a ratio of capital, that apply
to a New York state-chartered bank, except that for the Branch such limits are
based on the capital of the Bank.
18
<PAGE>
Under Section 4(j) of the International Banking Act of 1978
(the "IBA"), if the Bank were to open a federally licensed branch or agency in
the United States and such federally licensed branch or agency were subsequently
to be closed by the U.S. Comptroller of the Currency, the Comptroller of the
Currency could appoint a receiver for all the property and assets of the Bank in
the United States, including the property and assets of the Branch. In that
case, the liquidation of the Branch's business would be administered by a
federal receiver applying United States federal law, which provides that claims
arising out of transactions with any branch or agency of the Bank located in any
State in the United States shall be paid out of all the properties and assets of
the Bank in the United States.
In addition to being subject to New York State laws and
regulations, the Bank and the Branch are also subject to federal regulation
under the IBA and the Bank is subject to federal regulation under the Bank
Holding Company Act of 1956 (the "BHCA"). Under the IBA, United States branches
of foreign banks, such as the Branch, are subject to reserve requirements on
deposits held by such branches and to restrictions on the payment of interest on
demand deposits pursuant to regulations of the Board of Governors of the Federal
Reserve System (the "Board"). Because the Branch engages in a wholesale banking
business, its deposits are not insured by the Federal Deposit Insurance
Corporation.
Under the IBA and BHCA, the Bank is subject to certain
restrictions with respect to opening new U.S. domestic deposit-taking branches
in states outside its "home state," which is New York. Recently enacted U.S.
Federal law has generally removed restrictions on acquisitions of banks outside
the home state of the acquiring bank or holding company. These laws and related
regulations also contain certain restrictions on the Bank's ability to engage,
directly or through subsidiaries, in non-banking activities in the United
States.
The BHCA also generally prohibits the Bank from, directly or
indirectly, acquiring more than 5% of the voting shares of any company engaged
in non-banking activities in the United States unless the Board has determined,
by order or regulation, that such proposed activities are so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
addition, the BHCA requires the Bank to obtain the prior approval of the Board
before acquiring, directly or indirectly, the ownership or control of more than
5% of the voting shares of any United States bank or bank holding company.
Federal law also imposes limitations on the ability of the Bank and its
subsidiaries to engage in certain aspects of the securities business in the
United States.
The Foreign Bank Supervision Enhancement Act of 1991 (the
"FBSEA"), enacted December 19, 1991, increased the degree of United States
Federal bank regulation of and supervision over United States branches of
foreign banks. The FBSEA provides, among other things, that the Board may
examine such a branch and provides that each branch of a foreign bank shall be
examined at least once during each 12-month period in an on-site examination.
The FBSEA also provides that the Board may order a foreign bank that operates a
state branch to terminate the activities of such branch if the Board finds that
the foreign bank is not subject to comprehensive supervision or regulation on a
consolidated basis by the appropriate authorities in its home country, or that
there is reasonable cause to believe that such foreign bank, or any affiliate of
such foreign bank, has committed a violation of law or engaged in an unsafe or
unsound banking practice in the United States, and, as a result of such
violation or practice, the continued operation of the branch would not be
consistent with the public interest or with the IBA, the BHCA or the Federal
Deposit Insurance Act. A foreign bank so required to terminate activities
conducted at a branch in the United States must comply with the requirements of
applicable United States Federal and state law with respect to procedures for
the closure or dissolution thereof. The FBSEA also provides that a state branch
of a foreign bank may not engage in any type of activity that is not permissible
for a United States Federal branch of a foreign bank unless the Board has
determined that such activity is consistent with sound banking practice.
19
<PAGE>
THE CANADIAN BANKING INDUSTRY
Canadian banks are a vital force in Canada's economy,
facilitating the flow of a large part of the nation's savings into various
`productive uses. As at September 30, 1997, there were 53 banks in Canada, of
which eleven were domestic banks and 42 were Canadian subsidiaries of
foreign-owned banks. The Banks as a group are the largest financial
intermediaries in Canada. As at September 30, 1997, Canadian banks had total
assets of some $1,205 billion, of which the largest six banks, including the
Bank, accounted for over 91%. Other important financial institutions include
investment dealers, property and casualty insurance companies, life insurance
companies, trust companies, pension funds and credit unions.
ASSET COVERAGE
As at October 31, 1997, after giving effect to the automatic
exchange and taking into account the items mentioned below, the adjusted net
tangible assets of the Bank available to cover all the outstanding First
Preferred Shares and debentures were as follows:
<TABLE>
<CAPTION>
As at
October 31, 1997
----------------
(unaudited)
(in millions of Canadian dollars)
<S> <C> <C>
Total Assets.................................................................... $ 66,235
Deduct: Deposit liabilities.................................................... $ 43,270
Other liabilities...................................................... 19,136
Deferred income taxes.................................................. 172
Goodwill .............................................................. 154 (62,732)
---------- ----------
Net Tangible Assets............................................................. 3,503
Add: Proceeds of the automatic exchange......................................... --
--
Adjusted net tangible assets before deduction of debentures..................... 3,503
Deduct: Debentures.............................................................. (1,069)
-----------
Adjusted net tangible assets available for First Preferred Shares............... $ 2,434
=========
</TABLE>
The adjusted net tangible assets available for the outstanding
First Preferred Shares of the Bank amounted to approximately 3.1 times the
aggregate issue price for the outstanding First Preferred Shares (including the
proceeds of the automatic exchange in the case of the Series Z Preferred
Shares). The adjusted net tangible assets (before deduction of debentures)
amounted to 1.9 times the sum of the principal amount of such debentures and the
aggregate issue price of the First Preferred Shares.
DIVIDEND AND INTEREST COVERAGE
Based on an annual dividend rate on the Series Z Preferred
Shares of 8.45% and assuming an average prime rate of 5.75%, the annual dividend
requirement of the Series Z Preferred Shares, of the First Preferred Shares
Series 5 (286,610 shares), Series 7 (422,633 shares), Series 8 (789,638 shares),
Series 10 (3,680,000 shares), Series 11 (4,000,000 shares) and Series 12
(5,000,000 shares) outstanding of the Bank (collectively, the "First Preferred
Shares"), would amount to $62.3 million. The Bank's net income, after income
taxes and non-controlling interest, for the twelve months ended October 31, 1997
was $342 million. This amount is 5.5 times such annual dividend requirement.
The annual interest requirement on all debentures of the Bank
outstanding as at October 31, 1997 amounts to $76.5 million, assuming a six
month London interbank offered rate (LIBOR, of 5.8125% on floating rate
debentures and assuming the following exchange rates: Cdn. $1.4084 per US$1.00;
Cdn. $0.0117
20
<PAGE>
per (Y) 1; Cdn. $2.3570 per (pound) 1.00; and Cdn. $1.0134 per AUD$1.00, being
the closing rates of the Bank of Canada at October 31, 1997.
The Bank's net income, before income taxes and
non-controlling interest and before deduction of interest on outstanding
debentures for the twelve months ended October 31, 1997, amounted to $680
million. This amount is 8.9 times the total amount of $76.5 million required for
total payment of interest on outstanding debentures.
Taking into account the items described above, the annual
dividend requirement for the First Preferred Shares would amount to $103.8
million grossed up on a pre-tax equivalent basis assuming an effective marginal
tax rate of 40%. The Bank's net income before income taxes and non-controlling
interest and before deduction of interest on the outstanding debentures, for the
twelve months ended October 31, 1997 of $680 million, is equal to 3.8 times the
aggregate interest on the outstanding debentures and grossed-up dividend
requirements totalling $180.3 million.
CHANGES IN SHARE AND LOAN CAPITAL
Since October 31, 1997, the only material changes in the share
and loan capital of the Bank have been the issue of 78,513 Common Shares for a
consideration of $1,562,515 under the Bank's Dividend Reinvestment and Share
Purchase Plan.
RATING
The outstanding non-cumulative First Preferred Shares of the
Bank are rated P-3 (high) by Canadian Bond Rating Service Inc. ("CBRS"), the
third highest of the five categories used by CBRS.
The outstanding non-cumulative First Preferred Shares of the
Bank are rated Pfd-2 (low) by Dominion Bond Rating Service Limited ("DBRS"), the
second highest of five categories of rating used by DBRS for preferred shares.
In certain cases, preferred shares may have a "low" characterization to reflect
an issuer's relative strength within a rating category.
Neither of the foregoing ratings should be construed as a
recommendation to buy, sell or hold securities, including the Series Z Preferred
Shares. The foregoing ratings are effective as of the date of this short form
prospectus. Either of the foregoing ratings may be revised or withdrawn at any
time by the respective rating organization and, as a consequence, may not be the
same if and when an automatic exchange for the Series Z Preferred Shares takes
place, as contemplated under "Automatic Exchange" in this short form prospectus.
LEGAL MATTERS
The legality of the securities offered by this short form
prospectus has been passed upon for the Bank by Desjardins Ducharme Stein
Monast, a general partnership, Montreal, Canada. Gerard Coulombe, who is a
member of that firm, is a director of the Bank since February 3, 1994. The
partners and associates of Desjardins Ducharme Stein Monast, as a group,
beneficially owned, directly or indirectly, less than one percent of any class
of outstanding securities of the Bank.
TRANSFER AGENT AND REGISTRAR
General Trust of Canada, at its principal transfer office in
Montreal, will be the transfer agent and registrar for the Series Z Preferred
Shares. The Bank of Nova Scotia Trust Company of New York, at its principal
office in New York, will act as co-agent in the United States.
21
<PAGE>
- ------------------------------------------------------------
No dealer, salesman or other person has been authorized to
give any information or to make any representations other
than those contained or incorporated by reference in this
Short Form Prospectus and, if given or made, such
information or representations must not be relied upon as
having been authorized by the Bank. This Short Form
Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security in any
jurisdiction in which or to any person to whom it is
unlawful to make such offer or solicitation. Neither the
delivery of this Short Form Prospectus nor any sale made
hereunder shall under any circumstances create an
implication that there has been no change in the affairs of
the Bank since the date hereof.
---------------------------
TABLE OF CONTENTS
Page
THE DATE OF THIS SHORT FORM
PROSPECTUS IS FEBRUARY __, 1998....................1
ENFORCEMENT OF LIABILITIES AND
SERVICE OF PROCESS.................................2
TRANSLATION OF FOREIGN
CURRENCY...........................................2
DOCUMENTS INCORPORATED BY
REFERENCE..........................................3
SHORT FORM PROSPECTUS SUMMARY......................4
THE OFFERING.......................................7
CAPITALIZATION.....................................9
DESCRIPTION OF THE SERIES Z
PREFERRED SHARES..................................10
COMMON SHARES.....................................13
USE OF PROCEEDS...................................13
THE EXCHANGE OFFER................................13
REGISTRATION RIGHTS AGREEMENT.....................13
AUTOMATIC EXCHANGE ...............................13
BANK ACT RESTRICTIONS AND
APPROVALS ........................................14
RESTRAINTS ON BANK SHARES
UNDER THE BANK ACT................................14
REGULATION........................................14
THE CANADIAN BANKING INDUSTRY.....................17
ASSET COVERAGE....................................17
DIVIDEND AND INTEREST COVERAGE....................17
CHANGES IN SHARE AND LOAN
CAPITAL...........................................18
RATING............................................18
LEGAL MATTERS.....................................18
TRANSFER AGENT AND REGISTRAR......................18
---------------------------
[LOGO NBC]
NATIONAL BANK OF CANADA
---------------------
SHORT FORM PROSPECTUS
---------------------
Short Form Prospectus dated February __, 1998
- -------------------------------------------------------------
<PAGE>
AMENDMENT NO. 3 TO
FORM S-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Indemnification under Maryland Law and under the Company's
Charter and Bylaws
The Maryland General Corporation Law ("MGCL") permits a
Maryland corporation to include in its charter a provision limiting the
liability of the corporation's directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. The Charter contains such a provision which
eliminates such liability to the maximum extent permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of the Company. The Bylaws of the
Company (the "Bylaws") obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary
II-1
<PAGE>
for indemnification by the Company and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Item 21. Exhibits and Financial Statement Schedules
3(i) -- Articles of Incorporation and Articles of Amendment and
Restatement and Articles Supplementary of NB Capital
Corporation
3(ii) -- By-Laws of NB Capital Corporation*
4.1 -- Registration Rights Agreement dated as of September 3, 1997
by and among NB Capital Corporation, National Bank of Canada
and Merrill Lynch, Pierce, Fenner & Smith Incorporated*
5.1 -- Opinion letter of Ballard, Spahr, Andrews & Ingersoll as
Special Counsel to NB Capital Corporation and its Consent*
8.1 -- Tax Opinion of Shearman & Sterling and its Consent
10.1 -- Advisory Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Capital Corporation*
10.2 -- Servicing Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Finance, Ltd.**
10.3 -- Loan Agreement dated as of September 3, 1997 between NB
Finance, Ltd. and NB Capital Corporation*
10.4 -- Custodial Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Capital Corporation*
23.1 -- Consent of Deloitte & Touche*
23.2 -- Consent of Desjardins Ducharme Stein Monast, Special Counsel
to the Bank
23.3 -- Consent of Conyers Dill & Pearman, Special Bermuda Counsel
to the Company
23.4 -- Consent of Osler, Hoskin & Harcourt, Canadian Counsel to the
Initial Purchaser
99.1 -- Letter of Transmittal*
99.2 -- Notice of Guaranteed Delivery*
99.3 -- Opinion letter of Desjardins Ducharme Stein Monast
99.4 -- Opinion letter of Conyers Dill & Pearman
99.5 -- Opinion letter of Osler, Hoskin & Harcourt
- --------------------------
* Previously filed.
** To be filed by amendment.
II-2
<PAGE>
Item 22. Undertakings
(a) The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this
section do not apply if the registration statement is on Form S-3,
Form S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to
include any financial statements required by ss. 210.3-19 of
this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided that the registrant
includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure
that all other information in the prospectus is at least as
current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration
statements on Form F-3, a post-effective amendment need not
be filed to include financial statements and information
required by Section 10(a)(3) of the Act or ss. 210.3-19 of
this chapter if
II-3
<PAGE>
such financial statements and information are contained in
periodic reports filed with or furnished to the Commission
by the registrant pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the Form F-3.
(b) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the 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 being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to provide
to the underwriter at the closing specified in the underwriting
agreements certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(d) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply
by means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was
not the subject of and included in the registration statement when it
became effective.
II-4
<PAGE>
AMENDMENT NO. 2 TO
FORM F-9
PART II
INFORMATION NOT REQUIRED
TO BE DELIVERED TO OFFEREES OR PURCHASERS
Indemnification of Directors and Officers
Under the Bank Act, the Bank may indemnify a present or former
director or officer or another person who acts or acted at the Bank's request as
a director or officer of another entity of which the Bank is or was a
shareholder or creditor, and his heirs or personal representatives, against all
costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by the person in respect of any civil,
criminal or administrative action or proceeding to which he is made a party by
reason of such person's position with the Bank or such other corporation, except
for actions or proceedings brought by or on behalf of the Bank or such entity,
to procure a judgment in its favour, and provided that the director or officer
acted honestly and in good faith with a view to the best interests of the Bank
and, in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, had reasonable grounds for believing that the
person's conduct was lawful. Such indemnification may be made in connection with
a derivative action only with court approval. Such a director or officer or
person is entitled to indemnification from the Bank as a matter of right if such
person was substantially successful on the merits and fulfilled the conditions
set forth above.
In accordance with the Bank Act, the by-laws of the Bank
provide that the Bank shall indemnify out of its funds a director or officer, a
former director or officer, or a person who acts or acted at the Bank's request
as a director or officer of an entity of which the Bank is or was a shareholder
or creditor and the assigns, heirs and personal representatives of such person,
from and against all costs, charges and expenses, including amounts paid to
settle an action or satisfy a judgment reasonably incurred by the person in
respect of any civil, criminal or administrative action or proceeding to which
the person is made a party by reason of being or having been director or officer
of the Bank or such entity, except for actions or proceedings brought by or on
behalf of the Bank or such entity, to procure a judgment in its favour, if the
person acted honestly and in good faith with a view to the best interest of the
Bank and in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for believing that
his conduct was lawful. Such indemnification may be made in connection with a
derivative action only with court approval. Such person is also entitled to
indemnification from the Bank for all of its costs, charges and expenses
reasonably incurred during or as a result of business as a director or officer
of the Bank or of the entity. No indemnification is available, however, for
costs, charges and expenses resulting from the person's own fault, negligence or
willful omission.
A policy of directors and officers' liability insurance is
maintained by the Bank which insures directors and officers of the Bank and its
subsidiaries for losses as a result of claims based upon the acts or omissions
as directors and officers of the Bank and also reimburses the Bank for payments
made pursuant to the indemnity provisions under the Bank Act.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Bank pursuant to the foregoing provisions, the Bank has been
informed that in the opinion of the U.S. Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
II-1
<PAGE>
Exhibits.
Exhibit
Number
- ------
4.1(i) Annual Report for the year ended October 31, 1996*
4.1(ii) Annual Report for the year ended October 31, 1997*
4.2(i) Annual Information Form dated December 19, 1996 (included in Exhibit
4.1(i)hereto)*
4.2(ii) Annual Information Form dated December 23, 1997 (included in Exhibit
4.1(ii) hereto)*
4.3(i) Management's Discussion and Analysis of Operating Results and
Financial Condition dated December 19, 1996 (included in Exhibit
4.1(i) hereto)*
4.3(ii) Management's Discussion and Analysis of Operating Results and
Financial Condition dated December 23, 1997 (included in Exhibit
4.1(ii) hereto)*
4.4 Audited Consolidated Financial Statements of the Bank for the year
ended October 31, 1997, together with the Auditors' Report thereon,
which include comparative audited consolidated financial statements
for the year ended October 31, 1996 (included in Exhibit 4.1(i)
hereto)*
4.5(i) Management Circular dated January 16, 1997*
4.5(ii) Management Circular dated December 23, 1997*
5.1 Consent of Raymond, Chabot, Martin, Pare, a general partnership, Price
Waterhouse and Samson Belair / Deloitte & Touche, a general
partnership*
5.2 Consent of Desjardins Ducharme Stein Monast, a general partnership
6.1 Power of Attorney (contained on the signature page of the Registration
Statement of Form F-9)*
99.1 Form F-X of National Bank of Canada*
- ---------------
* Previously filed.
II-2
<PAGE>
AMENDMENT NO. 2 TO
FORM F-9
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
Item 1. Undertaking
The registrant undertakes to make available, in person or by
telephone, representatives to respond to inquiries made by the Commission staff,
and to furnish promptly, when requested to do so by the Commission staff,
information relating to the securities registered pursuant to Form F-9 or to
transactions in said securities.
Item 2. Consent to Service of Process.
The registrant is concurrently filing with the Commission a
written irrevocable consent and power of attorney on Form F-X.
Any change to the name or address of the agent for service of
the F-X referencing the file number of the relevant registration statement.
III-1
<PAGE>
AMENDMENT NO. 3 TO
FORM S-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on February 17, 1998.
NB CAPITAL CORPORATION
By: /s/ John Richter
------------------------
John Richter
Chairman of the Board;
Chief Executive Officer;
President
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John Richter Chairman of the Board; Chief Executive February 17, 1998
- --------------------- Officer; President and Director
John Richter (Principal Executive Officer)
/s/ Tom Doss Chief Financial Officer, February 17, 1998
- --------------------- Treasurer and Director
Tom Doss (Principal Financial Officer
and Principal Accounting Director)
/s/ Pierrette Lacroix Vice President and Director February 17, 1998
- ---------------------
Pierrette Lacroix
/s/ Michael Hanley Director February 17, 1998
- ---------------------
Michael Hanley
/s/ Alain Michel Director February 17, 1998
- ---------------------
Alain Michel
</TABLE>
<PAGE>
AMENDMENT NO. 2 TO
FORM F-9
SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of
1993 (the "Securities Act", as amended), the registrant certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form F-9 and has duly caused this registration statement and the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Montreal, Country of Canada, on February 17,
1998.
NATIONAL BANK OF CANADA
By: *
-------------------------------------------
Name: Jean Turmel
Title: Senior Executive Vice President,
Treasury, Brokerage and
Corporate Banking
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board and Chief February 17, 1998
- ------------------------------------ Executive Officer and Director
Andre Berard (Principal Executive Officer)
* Director February 17, 1998
- ------------------------------------
Leon Courville
* Director February 17, 1998
- ------------------------------------
Maurice J. Closs
* Director February 17, 1998
- ------------------------------------
Gerard Coulombe
* Director February 17, 1998
- ------------------------------------
Shirley A. Dawe
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
* Director February 17, 1998
- ------------------------------------
Jean Douville
* Director February 17, 1998
- ------------------------------------
Donald M. Green
* Director February 17, 1998
- ------------------------------------
Suzanne Leclair
* Director February 17, 1998
- ------------------------------------
Gaston Malette
* Director February 17, 1998
- ------------------------------------
Leonce Montambault
* Director February 17, 1998
- ------------------------------------
J.-Robert Ouimet
* Director February 17, 1998
- ------------------------------------
Robert Parizeau
Director February 17, 1998
- ------------------------------------
Lino Saputo
* Senior Executive Vice-President, February 17, 1998
- ------------------------------------ Treasury, Brokerage and
Jean Turmel Corporate Banking
(Principal Financial Officer)
* Vice-President and Chief February 17, 1998
- ------------------------------------ Accounting Officer
Jean Dagenais (Principal Accounting Officer)
* By: /s/ Francoise Bureau
-----------------------------
As Attorney-in-Fact
</TABLE>
<PAGE>
Pursuant to the requirements of Section 6(a) of the Securities
Act of 1933, the undersigned has signed this Registration Statement, solely in
the capacity of the duly authorized representative of National Bank of Canada in
the United States, in the City of New York, State of New York, on this 17th day
of February, 1998.
By: NB Capital Corporation
Authorized Representative in the United States
125 West 55th Street
New York, New York 10019
By: /s/ John Richter
---------------------------------
Name: John Richter
Title: Chairman of the Board;
Chief Executive Officer;
President
<PAGE>
AMENDMENT NO. 3 TO
FORM S-4
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
3(i) Articles of Incorporation and Articles of Amendment and Restatement
and Articles Supplementary of NB Capital Corporation
3(ii) By-Laws of NB Capital Corporation*
4.1 Registration Rights Agreement dated as of September 3, 1997 by and
among NB Capital Corporation, National Bank of Canada and Merrill
Lynch, Pierce, Fenner & Smith Incorporated*
5.1 Opinion letter of Ballard, Spahr, Andrews & Ingersoll as Special
Counsel to NB Capital Corporation and its Consent*
8.1 Tax Opinion of Shearman & Sterling and its Consent
10.1 Advisory Agreement dated as of September 3, 1997 between National
Bank of Canada and NB Capital Corporation*
10.2 Servicing Agreement dated as of September 3, 1997 between National
Bank of Canada and NB Finance, Ltd.**
10.3 Loan Agreement dated as of September 3, 1997 between NB Finance,
Ltd. and NB Capital Corporation*
10.4 Custodial Agreement dated as of September 3, 1997 between National
Bank of Canada and NB Capital Corporation*
23.1 Consent of Deloitte & Touche*
23.2 Consent of Desjardins Ducharme Stein Monast, Special Counsel to the
Bank
23.3 Consent of Conyers Dill & Pearman, Specal Bermuda Counsel to the
Company
23.4 Consent of Osler, Hoskin & Harcourt, Canadian Counsel to the Initial
Purchaser
99.1 Letter of Transmittal*
99.2 Notice of Guaranteed Delivery*
99.3 Opinion letter of Desjardins Ducharme Stein Monast
99.4 Opinion letter of Conyers Dill & Pearman
99.5 Opinion letter of Osler, Hoskin & Harcourt
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE>
AMENDMENT NO. 2 TO
FORM F-9
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
4.1(i) Annual Report for the year ended October 31, 1996*
4.1(ii) Annual Report for the year ended October 31, 1997*
4.2(i) Annual Information Form dated December 19, 1996 (included in
Exhibit 4.1(i) hereto)*
4.2(ii) Annual Information Form dated December 23, 1997 (included in
Exhibit 4.1(ii) hereto)*
4.3(i) Management's Discussion and Analysis of Operating Results and Financial
Condition dated December 19, 1996 (included in Exhibit 4.1(i) hereto)*
4.3(ii) Management's Discussion and Analysis of Operating Results and Financial
Condition dated December 23, 1997 (included in Exhibit 4.1(ii) hereto)*
4.4 Audited Consolidated Financial Statements of the Bank for the year
ended October 31, 1997, together with the Auditors' Report thereon,
which include comparative audited consolidated financial statements for
the year ended October 31, 1996 (included in Exhibit 4.1(i) hereto)*
4.5(i) Management Circular dated January 16, 1997*
4.5(ii) Management Circular dated December 23, 1997*
5.1 Consent of Raymond, Chabot, Martin, Pare, a general partnership, Price
Waterhouse and Samson Belair / Deloitte & Touche, a general
partnership*
5.2 Consent of Desjardins Ducharme Stein Monast, a general partnership
6.1 Power of Attorney (contained on the signature page of the Registration
Statement of Form F-9)*
99.1 Form F-X of National Bank of Canada*
</TABLE>
- ---------------------
* Previously filed.
NB CAPITAL CORPORATION
ARTICLES OF INCORPORATION
THIS IS TO CERTIFY THAT:
FIRST: The undersigned, James J. Hanks, Jr., whose address is
300 East Lombard Street, Baltimore, Maryland 21202, being at least eighteen (18)
years of age, does hereby form a corporation under the general laws of the State
of Maryland.
SECOND: The name of the corporation (which is hereinafter
called the "Corporation") is:
NB Capital Corporation
THIRD: The Corporation is formed for the purpose of carrying
on any lawful business.
FOURTH: The address of the principal office of the Corporation
in this State is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street,
Baltimore, Maryland 21202, Attention: James J. Hanks, Jr.
FIFTH: The name and address of the resident agent of the
Corporation are James J. Hanks, Jr., c/o Ballard Spahr Andrews & Ingersoll, 300
East Lombard Street, Baltimore, Maryland 21202. The resident agent is a citizen
of and resides in the State of Maryland.
SIXTH: The total number of shares of stock which the
Corporation has authority to issue is 1,000 shares, $.01 par value per share,
all of one class. The aggregate par value of all authorized shares having a par
value is $10.00.
SEVENTH: The Corporation shall have a board of one director
unless the number is increased or decreased in accordance with the Bylaws of
the-Corporation. However, the number of directors shall never be less than the
minimum number required by the Maryland General Corporation Law. The initial
director is:
Real Raymond
EIGHTH: (a) The Corporation reserves the right to make any
amendment of the charter, now or hereafter authorized by law, including any
amendment which alters the contract rights, as expressly set forth in the
charter, of any shares of outstanding stock.
(b) The Board of Directors of the Corporation may
authorize the issuance from time to time of shares of its stock of any class,
whether now or hereafter
<PAGE>
-2-
authorized, or securities convertible into shares of its stock of any class,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable, subject to such restrictions or limitations, if
any, as may be set forth in the Bylaws of the Corporation.
(c) The Board of Directors of the Corporation may, by
articles supplementary, classify or reclassify any unissued stock from time to
time by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of the stock.
NINTH: No holder of shares of stock of any class shall have
any preemptive right to subscribe to or purchase any additional shares of any
class, or any bonds or convertible securities of any nature; provided, however,
that the Board of Directors may, in authorizing the issuance of shares of stock
of any class, confer any preemptive right that the Board of Directors may deem
advisable in connection with such issuance.
TENTH: To the maximum extent that Maryland law in effect from
time to time permits limitation of the liability of directors and officers, no
director or officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this
Article, nor the adoption or amendment of any other provision of the charter or
Bylaws inconsistent with this Article, shall apply to or affect in any respect
the applicability of the preceding sentence with respect to any act or failure
to act which occurred prior to such amendment, repeal or adoption.
IN WITNESS WHEREOF, I have signed these Articles of
Incorporation and acknowledge the same to be my act, on this 20th day of August,
1997.
/s/ James J. Hanks, Jr.
----------------------------
James J. Hanks, Jr.
<PAGE>
NB CAPITAL CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: NB 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
INCORPORATION
The undersigned, James J. Hanks, Jr., whose address is c/o
Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland
21202, being at least 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:
NB 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(d)
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,
<PAGE>
2
Subtitle 5 of the Maryland General Corporation Law (the "MGCL") relating to
forfeiture of the charter of a corporation and expiration of corporate
existence.
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 Ballard Spahr Andrews Ingersoll, 300 East Lombard
Street, Baltimore, Maryland 21202, Attention: James J. Hanks, Jr. The name of
the resident agent of the Corporation in the State of Maryland is James J.
Hanks, Jr., whose post address is c/o Ballard Spahr Andrews & Ingersoll, 300
East Lombard Street, Baltimore, Maryland 21202. 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 five, which number
may be increased or decreased pursuant to 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:
Michael Hanley
Alain Michel
Real Raymond
Francois Bourassa
Roger Smock
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
<PAGE>
3
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.
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 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 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 precedecessor of the Corporation.
Section 5.6 Determinations by Board. The determination as to
any of the following matters, made in good faith by or pursuant tothe 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
<PAGE>
4
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 such
reserves or charges shall 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).
<PAGE>
5
ARTICLE VI
STOCK
Section 6.1 Authorized Shares. Subject to the last sentence of
this paragraph, the Corporation has authority to issue 10,001,000 shares of
stock, consisting of 1,000 shares of Common Stock, $.01 par value per share
("Common Stock"), and 10,000,000 shares of Preferred Stock, $.01 par value per
share ("Preferred Stock"), of which 300,000 shares are classified as 8.35%
Noncumulative Exchangeable Preferred Stock, Series A (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 set forth in Section 6.6; and 1,000
shares are classified as Adjustable Rate Cumulative Senior Preferred Stock (the
"Senior 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 set forth in Section
6.7. The aggregate par value of all authorized shares of stock having par value
is $100,010. 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
<PAGE>
6
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.
Section 6.6.1 Liquidation Value and Rank. Each Series A
Preferred Share shall have a stated liquidation value of $1,000.00 per share,
plus an amount per share equal to the quarterly accrued and unpaid dividend, if
any, thereon to the date of liquidation, without interest. The Series A
Preferred Shares shall rank prior to all classes or series of common stock of
the Corporation (collectively, "Common Stock") and to all other classes and
series of equity securities of the Corporation now or hereafter authorized,
issued or outstanding (the Common Stock and such other classes and series of
equity securities of the Corporation are collectively referred to herein as the
"Junior Stock"), other than any class or series of equity securities of the
Corporation expressly designated as ranking on a parity with (the "Parity
Stock") or senior to (the "Senior Stock") the Series A Preferred Shares as to
dividend rights and rights upon voluntary or involuntary liquidation, winding up
or dissolution of the Corporation. The Series A Preferred Shares shall be junior
to the Senior Preferred Shares and the creditors of the Corporation. The Series
A Preferred Shares shall be subject to the creation of Senior Stock, Parity
Stock and Junior Stock to the extent not expressly prohibited by the Charter.
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 8.35% of the $1,000.00 stated
liquidation preference per share ($83.50 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
<PAGE>
7
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 September 3, 1997
and shall end on and include December 31, 1997.
The amount of dividends payable on each share outstanding on a
Record Date for the Series A Preferred Shares for each full Dividend Period
shall be $20.875. 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
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
of 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 authorized,
declared and paid, or authorized, 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
<PAGE>
8
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) authorized, declared and
paid for three consecutive dividend periods and (ii) authorized, declared and
paid or authorized, 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 and any Parity Stock, dividends authorized and declared on the
Series A Preferred Shares and Parity Stock shall be authorized and declared pro
rata so that the amount of dividends authorized and declared per Series A
Preferred Share and such Parity 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 Parity Stock bear to each other.
No dividend shall be paid or set aside for holders of Series A
Preferred Shares for any Dividend Period unless full dividends have been paid or
set aside for the holders of each class or series of equity securities of the
Corporation, if any, ranking prior to the Series A Preferred Shares as to
dividends for such Dividend Period.
(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.
(a) General. The Series A Preferred Shares are not subject to
mandatory redemption, and except as hereinafter provided in Section 6.6.3(b),
are not subject to optional redemption by the Corporation prior to September 3,
2007. On or after September 3, 2007, the Series A Preferred Shares may be
redeemed by the Corporation or its successor or any acquiring or resulting
entity with respect to the Corporation (including by any parent or subsidiary of
the Corporation, any such successor, or any such acquiring or resulting entity),
as applicable, at its option, in whole or in part, at any time or from time to
time, upon notice as provided in subsection (c) of this Section 6.6.3, at the
redemption prices (expressed as a percentage of the $1,000.00 per share
liquidation preference) set forth below in cash, plus the
quarterly accrued and unpaid dividend, if any, thereon to the date fixed for
redemption, without interest:
<PAGE>
9
If Redeemed During Redemption Price Per
the 12-month Period Share of the Series A
Beginning September 3, Preferred Shares
- ---------------------- ---------------------
2007................................................. 104.1750%
2008................................................. 103.7575
2009................................................. 103.3400
2010................................................. 102.9225
2011................................................. 102.5050
2012................................................. 102.0875
2013................................................. 101.6700
2014................................................. 101.2525
2015................................................. 100.8350
2016................................................. 100.4175
2017 and thereafter.................................. 100.0000
The aggregate redemption price payable to each holder of
record of Series A Preferred Shares to be redeemed shall be rounded to the
nearest cent ($.01).
If less than all of the outstanding Series A Preferred Shares
are to be redeemed, the Corporation will select those shares to be redeemed pro
rata, by lot or by such other methods as the Board of Directors in its sole
discretion determines 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.
Any such redemption must comply with applicable capital
distribution regulations of The Office of the Superintendent of Financial
Institutions of Canada (the "Superintendent"), which may prohibit a redemption
and will require the Superintendent's prior written approval. Unless full
dividends on the Series A Preferred Shares have been, or contemporaneously are,
authorized, declared and paid or authorized and declared and a sum sufficient
for the payment thereof 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.
If redemption is being effected by the Corporation, on and
after the date fixed for redemption, dividends shall cease to accrue on the
Series A Preferred Shares called for redemption, and such shares shall be deemed
to cease to be outstanding, provided that the redemption price (including the
quarterly accrued and unpaid dividends, if any, thereon to the date fixed for
redemption, without interest) has been duly paid or provided for. If redemption
<PAGE>
10
is being effected by an entity other than the Corporation, on and as of the date
fixed for redemption, such entity shall be deemed to own the Series A Preferred
Shares being redeemed for all purposes of this Charter, provided that the
redemption price (including the amount of any authorized and declared but unpaid
dividends to the date fixed for redemption, without interest) has been duly paid
or provided for.
(b) Tax Event. The Corporation will have the right, on or
after September 3, 2002 and prior to September 3, 2007, at any time upon the
occurrence of a Tax Event (as defined herein), to redeem the Series A Preferred
Shares, in whole, but not in part, upon notice as provided in subsection (c) of
this Section 6.6.3, at a redemption price per share equal to the sum of (i) the
quarterly accrued and unpaid dividend to the date of redemption plus (ii) the
Make-Whole Amount (as defined herein). Any such redemption must comply with
applicable capital contribution regulations of the Superintendent, which may
prohibit a redemption and will require the Superintendent's prior written
approval.
"Adjusted Treasury Rate" means, with respect to any Redemption
Date, the rate per annum equal to the semi-annual equivalent yield to maturity
of the Comparable Treasury Issue (as defined herein), assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price (as defined herein) for such prepayment
date plus 0.50%.
"Comparable Treasury Issue" means the United States Treasury
security selected by the Quotation Agent (as defined herein) as having a
maturity comparable to the Make- Whole Term (as defined herein) that would be
utilized, at the time of selection and -in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the Make-Whole Term.
"Comparable Treasury Price" means, with respect to any
Redemption Date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third Business Day preceding such Redemption Date, as set forth in the
daily statistical release published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotation for U.S. Government Securities" (or
any successor release) or (ii) if such release is not published or does not
contain such prices on such Business Day, (a) the average of the Reference
Treasury Dealer Quotations for such Redemption Date, after excluding the highest
and lowest such Reference Treasury Dealer Quotations, or (b) if the Corporation
obtains fewer than three such Reference Treasury Dealer Quotations, the average
of all such Quotations.
"Make-Whole Amount" means, with respect to a Series A
Preferred Share, the greater of (i) 100% of the Maturity Amount of such Series A
Preferred Share and (ii) the sum of the present values of the remaining
scheduled payments of dividends on such Series A Preferred Share to September 3,
2007, plus the present value of the Maturity Amount at
<PAGE>
11
September 3, 2007, discounted to the date fixed for redemption of such Series A
Preferred Share (the "Redemption Date") on a quarterly basis (assuming a 360-day
year consisting of 30- day months), computed using a discount rate equal to the
Adjusted Treasury Rate.
"Make-Whole Term" means the period from the Redemption Date to
September 3, 2007.
"Maturity Amount" means the liquidation preference of the
Series A Preferred Shares.
"Quotation Agent" means the Reference Treasury Dealer (as
defined herein) appointed by the Corporation.
"Reference Treasury Dealer" means (i) Merrill Lynch Government
Securities, Inc. and their respective successors; provided, however, that if the
foregoing shall cease to be a primary U.S. Government securities dealer in New
York City (a "Primary Treasury Dealer"), the Corporation shall substitute
therefor another Primary Treasury Dealer, and (ii) any other Primary Treasury
Dealer selected by the Corporation.
"Reference Treasury Dealer Quotation" means, with respect to
each Reference Treasury Dealer and any Redemption Date, the average, as
determined by the Corporation, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Corporation by such Reference Treasury Dealer at 5:00
p.m., New York City time, on the third Business Day preceding such Redemption
Date.
"Tax Event" means the receipt by the Corporation of an opinion
of a nationally recognized legal counsel to the Corporation, 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 Canada, 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 or intent to adopt such procedures or
regulations) (each, an "Administrative Action") or (iii) any amendment to,
clarification of, or change in the official position or the interpretation of
any such Administrative Action or any interpretation or pronouncement that
provides for a position with respect to any 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 August 22, 1997, there is more than an
insubstantial risk that (A) dividends paid or to be paid by the Corporation with
respect to the stock of the
<PAGE>
12
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 and shall include an assessment by the Internal Revenue
Service that (a) dividends paid or to be paid by the Corporation with respect to
the 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.
(c) Notice of Optional Redemption. Notice of any optional
redemption, setting forth (i) the date and place fixed for said redemption, (ii)
the redemption price and (iii) a statement that dividends on the Series A
Preferred Shares (A) to be redeemed by the Corporation will cease to accrue on
such redemption date, or (B) to be redeemed by an entity other than the
Corporation will thereafter accrue solely for the benefit of such entity, shall
be mailed at least 30 days, but not more than 60 days, prior to said date fixed
for redemption to each holder of record of Series A Preferred Shares to be
redeemed at his or her address as the same shall appear on the stock ledger of
the Corporation. If less than all of the Series A Preferred Shares owned by such
holder are then to be redeemed, such notice shall specify the number of shares
thereof that are to be redeemed and the numbers of the certificates representing
such shares. Notice of any redemption shall be given by first class mail,
postage prepaid. Neither failure to mail such notice, nor any defect therein or
in the mailing thereof, to any particular holder shall affect the sufficiency of
the notice or the validity of the proceedings for redemption with respect to the
other holders. Any notice which was mailed in the manner herein provided shall
be conclusively presumed to have been duly given whether or not the holder
receives such notice.
If such notice of redemption shall have been so mailed, and
if, on or before the date fixed for redemption specified in such notice, all
funds necessary for such redemption shall have been set aside by the Corporation
(or other entity as provided in subsection (a) of this Section 6.6.3) separate
and apart from its other funds in trust for the account of the holders of Series
A Preferred Shares to be redeemed (so as to be and continue to be available
therefor) or delivered to the redemption agent with irrevocable instructions to
effect the redemption in accordance with the relevant notice of redemption,
then, on and after said redemption date, notwithstanding that any certificate
for Series A Preferred Shares so called for redemption shall not have been
surrendered for cancellation or transfer, the Series A Preferred Shares (i) so
called for redemption by the Corporation shall be deemed to be no longer
outstanding and all rights with respect to such Series A Preferred Shares so
called for redemption shall forthwith cease and terminate, or (ii) so called for
redemption by an entity other than the Corporation shall be deemed owned for all
purposes of this Charter by such entity, except in each case for the right of
the holders thereof to receive, out of the funds so set aside in trust, the
amount payable on redemption thereof, but without interest, upon surrender (and
endorsement or assignment for transfer, if required by the Corporation or such
other entity) of their certificates.
<PAGE>
13
In the event that holders of Series A Preferred Shares that
shall have been redeemed shall not within two years (or any longer period if
required by law) after the redemption date claim any amount deposited in trust
with a bank or trust company for the redemption of such shares, such bank or
trust company shall, upon demand and if permitted by applicable law, pay over to
the Corporation (or other entity that redeemed the shares) any such unclaimed
amount so deposited with it, and shall thereupon be relieved of all
responsibility in respect thereof, and thereafter the holders of such shares
shall, subject to applicable escheat laws, look only to the Corporation (or
other entity that redeemed the shares) for payment of the redemption price
thereof, but without interest from the date fixed for redemption.
(d) Status of Shares Redeemed. 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
(the "Automatic Exchange") for one newly issued share of 8.45% Noncumulative
First Preferred Shares, Series Z, without par value (a "Bank Preferred Share"),
of National Bank of Canada (the "Bank"). The issuance of the Bank Preferred
Shares has been duly authorized by the Board of Directors of the Bank. The
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of the
Bank Preferred Shares shall be as set forth in the resolutions adopted by the
Board of Directors of the Bank on August 15, 1997, which have been filed with
the Superintendent. All corporate action necessary for the Bank to issue the
Bank Preferred Shares as of the Time of Exchange was completed prior to or
immediately following completion of the offering of the Series A Preferred
Shares.
(b) Conditions of Exchange. The Automatic Exchange will occur
(i) immediately prior to such time, if any, at which the Bank fails to declare
and pay or set aside for payment when due any dividend on any issue of its
cumulative First Preferred Shares or the Bank fails to pay or set aside for
payment when due any declared dividend on any of its non-cumulative First
Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based
capital ratio, as defined in guidelines issued by the Superintendent, of less
than 4.0% or a total risk- based capital ratio of less than 8.0%, (iii) in the
event that the Superintendent takes control of the Bank pursuant to the Bank Act
(Canada), as amended (the "Bank Act"), or proceedings are commenced for the
winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange (each, an "Exchange Event").
<PAGE>
14
(c) Surrender of Certificates. Upon 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 held by 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.
(d) Effectiveness of and Procedure for Exchange. The Automatic
Exchange shall occur as of 8:00 a.m. Eastern Time on the effective date of an
Exchange Event as set forth in the requirements of the Superintendent, or, if
such date is not set forth in such requirements, as of 8:00 a.m. Eastern Time on
the earliest possible date such exchange could occur consistent with such
requirements (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 on
the part of the Corporation or any other Person, all rights of the holders of
the Series A Preferred Shares as stockholders of the Corporation shall cease,
and such persons shall thereupon and thereafter be deemed to be and shall be for
all purposes the holders of Bank Preferred Shares. Notice of the occurrence of
the Exchange Event shall be given by first-class mail, postage prepaid, mailed
within 30 days of such event, to each holder of record of the Series A Preferred
Shares, at such holder's address as the same appears on the stock register of
the Corporation. Each such notice shall indicate the place or places where
certificates for the Series A Preferred Shares are to be surrendered by the
holders thereof, and the Bank shall deliver to each such holder certificates for
Bank Preferred Shares upon surrender of certificates for the Series A Preferred
Shares. Until such replacement share certificates are delivered (or in the event
such replacement certificates are not delivered), certificates previously
representing the Series A Preferred Shares shall be deemed for all purposes to
represent Bank Preferred Shares.
(e) 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 Liquidation Value.
(a) Liquidating Distributions. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of Series A Preferred shares shall be entitled to
receive for each share thereof, out of the assets of the Corporation legally
available for distribution to stockholders under applicable law, or the proceeds
thereof, before any payment or distribution of the assets shall be made to
holders of shares of Common Stock or any other Junior Stock (subject to the
rights of the holders of any class or series of equity securities having
preference with respect to distributions upon
<PAGE>
15
liquidation and the Corporation's general creditors), liquidating distributions
in the amount of $1,000.00 per share, plus an amount per share equal to the
quarterly accrued and unpaid dividend, if any, thereon to the date of
liquidation, without interest.
If the amounts available for distribution in respect of Series
A Preferred Shares and any outstanding Parity Stock upon any such voluntary or
involuntary liquidation, dissolution or winding up are not sufficient to satisfy
the full liquidation rights of all of the outstanding Series A Preferred Shares
and such Parity Stock, then the holders of such outstanding shares shall share
ratably in any such distribution of assets in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of Series A Preferred Shares will not be entitled to any further participation
in any liquidating distribution of any remaining assets by the Corporation. All
distributions made in respect of Series A Preferred Shares in connection with
such a liquidation, dissolution or winding up of the Corporation shall be made
pro rata to the holders entitled thereto.
(b) Consolidation, Merger or Certain Other Actions. Neither
the consolidation, merger or other business combination of the Corporation with
or into any other person, nor the sale of all or substantially all of the assets
of the Corporation shall be deemed to be a liquidation, dissolution or winding
up of the Corporation for purposes of this Section 6.6.5.
Section 6.6.6 Voting Rights.
(a) General. Except as expressly provided in this Section
6.6.6, 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 failed to authorize and declare and set aside
for payment a quarterly dividend on any series of Preferred Stock of the
Company, including the Series A Preferred Shares, the maximum authorized number
of directors of the Corporation shall thereupon be increased by two if not
already increased by two pursuant to this Section 6.6.6(b). Subject to
compliance with any requirement for regulatory approval of (or non-objection to)
persons serving as directors, the holders of Series A Preferred Shares, voting
together as a class with the holders of outstanding shares of each series of
Preferred Stock entitled to vote on the matter, shall have the exclusive right
to elect the two additional directors (each a "Preferred Director") to serve on
the Board of Directors at each such annual meeting. Each Preferred Director
elected by the holders of shares of the Preferred Stock shall continue to serve
as a director until the later of (i) the full term for which he or she shall
have been elected or (ii) the payment of one quarterly dividend on the Preferred
Stock, including the Series A Preferred Shares. Any Preferred Director may
<PAGE>
16
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 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 and Parity Stock 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 two-thirds of the outstanding shares of each series of
Preferred Stock, including the Series A Preferred Shares, will be required (i)
to create any class or series of stock, other than the Senior Preferred Shares,
which shall, as to dividends or distribution of assets, rank prior to or on a
parity with any outstanding series of Preferred Stock other than a series which
shall not have any right to object to such creation or (ii) to alter or change
the provisions of the Charter (including the terms of the Series A Preferred
Shares) so as to adversely affect the preferences, conversion, exchange or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemptions of the
holders of a series of Preferred Stock to any material extent; provided that if
such amendment shall not adversely affect all series of Preferred Stock, such
amendment need only be approved by at least two-thirds of the holders of shares
of all series of Preferred Stock adversely affected thereby.
(d) Notwithstanding the provisions of Section 6.6.6(c), the
holders of Series A Preferred Shares shall have no voting rights in connection
with the Board of Directors' exercise of its authority pursuant to Section 6.7
to set the preferences, conversion, exchange or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption of the Senior Preferred Shares.
Section 6.6.7 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
<PAGE>
17
a current officer or employee of the Corporation or a current director, officer
or 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 on a parity
with the Series A Preferred Shares as to dividend rights and rights upon
voluntary or involuntary liquidation, winding up or dissolution of the
Corporation, (ii) the modification of the Corporation's general distribution
policy or the authorization of any distribution in respect of the 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,"
as defined in Section 857(b)(2) of the Code (excluding capital gains), for such
year plus net capital gains of the Corporation for that year, (iii) the
acquisition of Mortgage Assets other than obligations which are comparable to
the Initial Mortgage Assets, Mortgage Loans, interests in Mortgage Loans and
Partnership Interests, (iv) the redemption of any shares of Common Stock, (v)
the renewal, termination or modification of the Advisory Agreement or the
Servicing Agreement or the subcontracting of any duties thereunder to third
parties unaffiliated with the Bank, and (vi) the determination to revoke the
Corporation's status as a real estate investment trust under Sections 856
through 860 of the Code. So long as the number of Independent Directors is two,
the foregoing actions must be approved by both of the Independent Directors.
"Initial Mortgage Assets" means Mortgage Assets consisting of
obligations issued by NB Finance, Ltd., a corporation formed under the laws of
Bermuda that is a wholly owned subsidiary of the Bank, that are recourse only to
the Initial Mortgage Loans and that are secured by real property that is located
in Canada.
"Initial Mortgage Loans" means Mortgage Loans acquired from
the Bank.
"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 or interests in other REITs.
"Mortgage Loans" means loans consisting of Canada Mortgage and
Housing Corporation insured residential first mortgages.
"Partnership Interests" means limited partnership interests
which the Corporation may from time to time acquire in partnerships the only
activities of which are the purchase and ownership of Mortgage Loans.
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18
(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 6.6.8 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 6.6.9 No Sinking Fund. No sinking fund shall be
established for the retirement or redemption of Series A Preferred Shares.
Section 6.6.10 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 6.6.11 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 6.6.12 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.
Section 6.7 Senior Preferred Shares. The Board of Directors
may, prior to the issuance of Senior Preferred Shares, (i) set or change,
subject to the provisions of Article VII, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of the Senior Preferred
Shares; and (ii) cause the Corporation to file articles supplementary relating
thereto with the State Department of Assessments and Taxation of Maryland
("SDAT").
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19
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.
Charter. The term "Charter" shall mean the charter of the
Corporation, as that term is defined in the MGCL.
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 mean 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.
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20
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.
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 National Association of Securities Dealers,
Inc. Automated Quotation System or, if such system is no longer in use,
the principal other automated quotation system that may then be in use
or, if such 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.
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
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21
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.
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.
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22
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 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
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23
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
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 Required 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
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24
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.
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
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25
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 Sections
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.
(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:
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26
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.
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.
<PAGE>
27
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 Charitable Beneficiaries. Such transfer to the Trustee
shall be deemed to be effective as of 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 and 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 to 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
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29
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.
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 VIII
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 the 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 this 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.
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30
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.
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, $.01 par value per share, all of one class. The
aggregate par value of all shares of stock having par value was $10.00.
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 10,001,000, consisting of 1,000 shares of Common
Stock, $.01 par value per share, and 10,000,000 shares of Preferred Stock, $.01
par value per share, of which 300,000 shares are classified as Series A
Preferred Shares, and 1,000 shares are classified as Senior Preferred Shares.
The aggregate par value of all authorized shares of stock having par value is
$100,010.
NINTH: The amendment to and restatement of the charter as
hereinabove set forth shall be effective as of 9:00 a.m., New York City time, on
Wednesday, September 3, 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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31
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 Vice-President - Legal and Secretary on
this 28th day of August, 1997.
ATTEST: NB CAPITAL CORPORATION
/s/ Francois Bourassa By:/s/ Martin Ouellet ((SEAL)
- ------------------------------------ --------------------------
Francois Bourassa Martin Ouellet
Vice-President - Legal and Secretary Vice-President
<PAGE>
NB CAPITAL CORPORATION
ARTICLES SUPPLEMENTARY
1,000 SHARES
ADJUSTABLE RATE CUMULATIVE SENIOR PREFERRED STOCK
NB Capital Corporation, a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: Under a power contained in Section 6.7 of the charter
of the Corporation (the "Charter"), the Board of Directors of the Corporation
(the "Board of Directors"), by unanimous written consent dated December 17,
1997, set the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption for the 1,000 shares of
Adjustable Rate Cumulative Senior Preferred Stock, $.01 par value per share (the
"Senior Preferred Shares"), as follows, which, upon any restatement of the
Charter shall be made part of Article VI, with any necessary or appropriate
changes to the enumeration or lettering of sections or subsections hereof.
ADJUSTABLE RATE CUMULATIVE SENIOR PREFERRED STOCK
Section 1. Liquidation Value and Rank. Each Senior Preferred
Share shall have a state liquidation value of $3,000 per share, plus any accrued
and unpaid dividends thereon, if any, to the date of liquidation, without
interest. The Senior Preferred Shares shall rank prior to the Series A Preferred
Shares, the Common Stock and to all other classes and series of equity
securities of the Corporation now or hereafter authorized, issued or outstanding
(the Common Stock and such other classes and series of equity securities of the
Corporation are collectively referred to herein as the "Senior Preferred Junior
Stock"), other than any class or series of equity securities of the Corporation
expressly designated as ranking on a parity with (the "Senior Preferred Parity
Stock") or senior to (the "Senior Preferred Senior Stock") the Senior Preferred
Shares as to dividend rights and rights upon voluntary or involuntary
liquidation, winding up or dissolution of the Corporation. The Senior Preferred
Shares shall be junior to the creditors of the Corporation. The Senior Preferred
Shares shall be subject to the creation of Senior Preferred Senior Stock, Senior
Preferred Parity Stock and Senior Preferred Junior Stock to the extent not
expressly prohibited by the Charter, including the terms of the Senior Preferred
Shares.
Section 2. Dividends.
(a) Payment of Dividends. Holders of the Senior 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, cumulative cash dividends at an annual rate
<PAGE>
2
of 10% of the $3,000 liquidation value thereof for the initial dividend period
ending December 30, 1997. For each quarterly period thereafter, dividends on the
Senior Preferred Shares will be at the rate per annum, adjusted annually, equal
to the sum of (i) the CMT Rate (as defined herein) and (ii) 4.00% per annum, of
the liquidation preference thereof. Such cumulative cash dividends shall be
payable, if authorized and declared, quarterly in arrears on the 30th day of
March, June, September and December (or, if such day is not a Business Day (as
defined herein), on the next succeeding Business Day) of each year (each such
date, a "Senior Preferred Dividend Payment Date"), at such annual rate,
commencing March 30, 1998. Each authorized and declared dividend shall be
payable to holders of record of the Senior 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 10 calendar days preceding
the Senior Preferred Dividend Payment Date therefor, as determined by the Board
of Directors (each such date, a "Senior Preferred Record Date"). Quarterly
dividend periods (each, a "Senior Preferred Dividend Period") shall commence on
and include the last day of any calendar quarter, and shall end on and include
the day preceding the last day, of the calendar quarter in which the
corresponding Senior Preferred Dividend Payment Date occurs.
The CMT Rate applicable to the Senior Preferred Shares shall
be reset on December 30 of each year (or if such day is not a Business Day, on
the next succeeding Business Day) (the "Reset Date"), commencing December 30,
1997, and such rate shall remain in effect for each quarterly period commencing
from and including the Reset Sate until but excluding the next succeeding Reset
Date. The CMT Rate to be reset on each Reset Date shall be determined as of the
second Business Day preceding such Reset Date (the "Determination Date").
The amount of dividends payable for any Senior Preferred
Dividend Period which, as to a Senior Preferred Share (determined by reference
to the issuance date and the redemption or retirement date thereof), is greater
or less than a full Senior Preferred Dividend Period shall be computed on the
basis of the number of days elapsed in the 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 Senior
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 Senior 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 Senior Preferred Shares authorized and
declared by the Board of Directors which may unpaid. Any dividend payment made
on the Senior Preferred Shares shall first be credited against the earliest
authorized and declared but unpaid cash dividend with respect to the Senior
Preferred Shares.
<PAGE>
3
The term "Business Day" shall mean each Monday, Tuesday,
Wednesday, Thursday and Friday which is not a day on which banking institutions
in New York, New York are authorized or required by law, regulation or executive
order to close.
The term "CMT Rate," on any Determination Date, shall mean per
annum yield-to-maturity values, adjusted to constant maturities of one year,
(i) as most recently published by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") in its Statistical Release H.15 (519),
"Selected Interest Rates" (the "FRB Release"), which average yield to maturity
values currently are set forth in such statistical release under the caption
"U.S. Government Securities--Treasury Constant Maturities," under the column
heading "Week Ending" applicable to the week immediately preceding the date of
the FRB Release, or (ii) if the FRB Release is not then published, as published
by the Federal Reserve Board in any release comparable to its FRB Release or
(iii) if the Federal Reserve Board shall not be publishing a comparable release,
as published in any official publication or release of any other United States
government department of agency. However, if the CMT Rate cannot be determined
as provided above, then the CMT Rate shall mean the arithmetic average (rounded
to the nearest basis point) of the per annum yields to maturity for each of five
business days preceding such date of determination of all of the issues of
actively traded marketable United States Treasury fixed-interest rate securities
with a maturity which is not less than nine months nor more than fifteen months
(excluding all such securities which can be surrendered at the option of the
holder at face value in payment of any Federal estate tax, which provide tax
benefits to the holder or which were issued at a substantial discount) (1) as
published in all editions of The Wall Street Journal printed for distribution in
the United States or (2) if The Wall Street Journal shall cease such
publication, based on average asked prices (or yields) as quoted by each of
three United States government securities dealers of recognized national
standing selected by the Board of Directors of the Corporation for such purpose.
(b) Dividends Cumulative. The right of holders of Senior
Preferred Shares to receive dividends is cumulative. Accordingly, if the Board
of Directors does not authorize or declare a dividend payable in respect of any
Senior Preferred Dividend Period, holders of Senior Preferred Shares shall have
the right to receive a dividend in respect of such Senior Preferred Dividend
Period.
(c) Priority as to Dividends. If full dividends on the Senior
Preferred Shares for any dividend period shall not have been authorized,
declared and paid, or authorized, 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 Senior
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 Senior Preferred Shares as to dividends or amounts upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any monies be paid to or made available for a sinking fund for the
redemption
<PAGE>
4
of any such stock) by the Corporation (except by conversion into or exchange for
other stock of the Corporation ranking junior to the Senior Preferred Shares as
to dividends and amount upon liquidation), until such time as dividends on all
outstanding Senior Preferred Shares have been (i) authorized, declared and paid
for three consecutive dividend periods and (ii) authorized, declared and paid or
authorized, 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 so set apart) for any Senior Preferred Dividend Period
on the Senior Preferred Shares and any Senior Preferred Parity Stock, all
dividends authorized and declared on the Senior Preferred Shares and Senior
Preferred Parity Stock shall be authorized and declared pro rata so that the
amount of dividends authorized and declared per Senior Preferred Share and such
Senior Preferred Parity Stock shall in all cases bear to each other the same
ratio that full dividends, including accumulations per Senior Preferred Share
(which shall not include any accumulation in respect of unpaid dividends for
prior Senior Preferred Dividend Periods) and full dividends, including required
or permitted accumulations, if any, on such Senior Preferred Parity Stock bear
to each other.
No dividend shall be paid or set aside for holders of Senior
Preferred Shares for any Senior Preferred Dividend Period unless full dividends
have been paid or set aside for the holders of each class or series of equity
securities of the Corporation, if any, ranking prior to the Senior Preferred
Shares as to dividends for such Dividend Period.
(d) Any reference to "dividends" or "distributions" in this
Section 3 shall not be deemed to include any distribution made in connection
with any merger or voluntary or involuntary dissolution, liquidation or winding
up of the Corporation.
Section 3. Optional Redemption.
(a) General. The Senior Preferred Shares may be redeemed by
the Corporation or its successor or any acquiring or resulting entity with
respect to the Corporation (including by any parent or subsidiary of the
Corporation, any such successor, or any such acquiring or resulting entity), as
applicable, at its option, in whole, but not in part, at any time or from time
to time, upon notice as provided in subsection (b) of this Section 3, at a
redemption price equal to the liquidation preference thereof, plus authorized,
declared and unpaid dividends, if any, thereon to the date fixed for redemption,
without interest. Each holder of the Senior Preferred Shares may require the
Corporation to purchase such holder's Senior Preferred Shares on December 30th
following each ten year anniversary of the date hereof at the same price. In
addition, upon the occurrence of an Redemption Event (as herein defined), the
Senior Preferred Shares shall be redeemed automatically following such
Redemption Event at a redemption price equal to the liquidation preference
thereof, plus authorized, declared and unpaid dividends, if any, thereon to the
date fixed for redemption, without interest.
<PAGE>
5
The aggregate redemption price payable to each holder of
record of Senior Preferred Shares to be redeemed shall be rounded to the nearest
cent ($.01).
Any such redemption must comply with applicable capital
distribution regulations of The Office of the Superintendent of Financial
Institutions Canada (the "Superintendent"), which may prohibit a redemption and
will require the Superintendent's prior written approval. Unless full dividends
on the Senior Preferred Shares have been, or contemporaneously are, authorized,
declared and paid or authorized and declared and a sum sufficient for the
payment thereof set apart for payment for the then-current Senior Preferred
Dividend Period, no Senior Preferred Shares shall be redeemed unless all
outstanding Senior Preferred Shares are redeemed and the Corporation shall not
purchase or otherwise acquire any Senior Preferred Shares; provided, however,
that the Corporation may purchase or acquire Senior Preferred Shares pursuant to
a purchase or exchange offer made on the same terms to holders of all
outstanding Senior Preferred Shares.
If redemption is being effected by the Corporation, on and
after the date fixed for redemption, dividends shall cease to accumulate on the
Senior Preferred Shares called for redemption, and they shall be deemed to cease
to be outstanding, provided that the redemption price (including the authorized,
declared and unpaid dividend, if any, thereon to the date fixed for redemption,
without interest) has been duly paid or provided for. If redemption is being
effected by an entity other than the Corporation, on and as of the date fixed
for redemption, such entity shall be deemed to own the Senior Preferred Shares
being redeemed for all purposes of this Charter, provided that the redemption
price (including the amount of any authorized and declared but unpaid dividends
to the date fixed for redemption, without interest) has been duly paid or
provided for.
(b) Notice of Optional Redemption. Notice of any optional
redemption, setting forth (i) the date and place fixed for said redemption, (ii)
the redemption price and (iii) a statement that dividends on the Senior
Preferred Shares (A) to be redeemed by the Corporation will cease to accumulate
on such redemption date, or (B) to be redeemed by an entity other than the
Corporation will thereafter accumulate solely for the benefit of such entity,
shall be mailed at least 30 days, but not more than 60 days, prior to said date
fixed for redemption to each holder of record of Senior Preferred Shares to be
redeemed at his or her address as the same shall appear on the stock ledger of
the Corporation. Notice of any redemption shall be given by first class mail,
postage prepaid. Neither failure to mail such notice, nor any defect therein or
in the mailing thereof, to any particular holder shall affect the sufficiency of
the notice of the validity of the proceedings for redemption with respect to any
other holder. Any notice which was mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives such notice.
If such notice of redemption shall have been so mailed, and
if, on or before the date fixed for redemption specified in such notice, all
funds necessary for such redemption shall
<PAGE>
6
have been set aside by the Corporation (or other entity as provided in
subsection (a) of this Section 3) separate and apart from its other funds in
trust for the account of the holders of Senior Preferred Shares to be redeemed
(so as to be and continue to be available therefor) or delivered to the
redemption agent with irrevocable instructions to effect the redemption in
accordance with the relevant notice of redemption, then, on and after said
redemption date, notwithstanding that any certificate for Senior Preferred
Shares so called for redemption shall not have been surrendered for cancellation
or transfer, the Senior Preferred Shares (i) so called for redemption by the
Corporation shall be deemed no longer outstanding and all rights with respect to
such Senior Preferred Shares so called for redemption shall forthwith cease and
terminate, or (ii) so called for redemption by an entity other than the
Corporation shall be deemed owned for all purposes of this Charter by such
entity, except in each case for the right of the holders thereof to receive, out
of the funds so set aside in trust, the amount payable on redemption thereof,
but without interest, upon surrender (and endorsement or assignment for
transfer, if required by the Corporation or such other entity) of their
certificates.
In the event that holders of Senior Preferred Shares that
shall have been redeemed shall not within two years (or any longer period if
required by law) after the redemption date claim any amount deposited in trust
with a bank or trust company for the redemption of such shares, such bank or
trust company shall, upon demand and if permitted by applicable law, pay over to
the Corporation (or other entity that redeemed the shares) any such unclaimed
amount so deposited with it, and shall thereupon be relieved of all
responsibility in respect thereof, and thereafter the holders of such shares
shall, subject to applicable escheat laws, look only to the Corporation (or
other entity that redeemed the shares) for payment of the redemption price
thereof, but without interest from the date fixed for redemption.
(c) Status of Shares Redeemed. Senior Preferred Shares
redeemed pursuant to this Section 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 Senior
Preferred Shares.
Section 4. Automatic Redemption.
(a) General. Subject to the terms and conditions of this
Section 4, each Senior Preferred Share will be redeemed automatically (the
"Automatic Redemption") by the Corporation at a redemption price (the "Automatic
Redemption Price") equal to the liquidation preference thereof plus any accrued
and unpaid dividends thereon, if any, to the redemption date.
(b) Conditions of Redemption. The Automatic Redemption will
occur (i) immediately prior to such time, if any, at which the National Bank of
Canada (the "Bank") fails to declare and pay or set aside for payment when due
any dividend on any issue of its
<PAGE>
7
cumulative First Preferred Shares or the Bank fails to pay or set aside for
payment when due any declared dividend on any of its non-cumulative First
Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based
capital ratio, as defined in guidelines issued by the Superintendent, of less
than 4.0% or a total risk-based capital ratio of less than 8.0%, (iii) in the
event that the Superintendent takes control of the Bank pursuant to the Bank Act
(Canada), as amended (the "Bank Act"), or proceedings are commenced for the
winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange (each, an "Automatic Redemption Event").
(c) Surrender of Certificates. Upon an Automatic Redemption
Event, each holder of Senior Preferred Shares shall be unconditionally obligated
to surrender to the Bank the certificates representing each Senior Preferred
Share held by such holder, and the Bank shall be unconditionally obligated to
pay for each such Senior Preferred Share the Automatic Redemption Price in cash.
(d) Effectiveness of and Procedure for Redemption. The
Automatic Redemption shall occur as of 8:00 a.m. Eastern Time on the effective
date of such redemption (the "Time of Automatic Redemption"), as evidenced by
the issuance by the Corporation of a press release prior to such time. As of the
Time of Automatic Redemption, all of the Senior Preferred Shares will be deemed
canceled without any further action on the part of the Corporation or any other
Person, and all rights of the holders of the Senior Preferred Shares as
stockholders of the Corporation shall cease. Notice of the occurrence of an
Automatic Redemption Event shall be given by first-class mail, postage prepaid,
mailed within 30 days of such event, to each holder of record of the Senior
Preferred Shares, at such holder's address as the same appears on the stock
register of the Corporation. Each such notice shall indicate the place or places
where certificates representing the Senior Preferred Shares are to be
surrendered by the holders thereof, and the Bank shall pay for each such Senior
Preferred Stock surrendered the Automatic Redemption Price in cash.
(e) Status of Shares Redeemed; Treatment of Dividends. Any
Senior Preferred Shares redeemed by the Corporation in accordance with Section 4
hereof prior to the Time of Redemption shall not be deemed outstanding and shall
not be subject to the Automatic Redemption.
Section 5. Liquidation Value.
(a) Liquidating Distributions. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of Senior Preferred Shares at the time outstanding
shall be entitled to receive for each share thereof, out of the assets of the
Corporation legally available for distribution to stockholders under applicable
law, or the proceeds thereof, before any payment or distribution of the assets
shall be made to holders of shares of Common Stock, any other Senior Preferred
Junior Stock or any other class of stock
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8
ranking junior to the Senior Preferred Shares now existing or created in the
future (subject to the rights of the holders of any class or series of equity
securities having preference with respect to distributions upon liquidation and
the Corporation's general creditors), liquidating distributions in the amount of
$3,000.00 per share, plus an amount per share equal to the accumulated and
unpaid dividend, if any, thereon to the date of liquidation, without interest.
If the amounts available for distribution in respect of Senior
Preferred Shares and any outstanding shares of Senior Preferred Parity Stock
upon any such voluntary or involuntary liquidation, dissolution or winding up
are not sufficient to satisfy the full liquidation rights of all of the
outstanding shares of Senior Preferred Shares and Senior Preferred Parity Stock,
then the holders of such outstanding shares shall share ratably in any such
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of Senior Preferred Shares
will not be entitled to any further participation in any liquidating
distribution of any remaining assets by the Corporation. All distributions made
in respect of Senior Preferred Shares in connection with such a liquidation,
dissolution or winding up of the Corporation shall be made pro rata to the
holders entitled thereto.
(b) Consolidation, Merger or Certain Other Actions. Neither
the consolidation, merger or other business combination of the Corporation with
or into any other person, nor the sale, lease or conveyance of all or
substantially all of the assets, property or business of the Corporation shall
be deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 5.
Section 6. Voting Rights.
(a) General. Except as expressly provided in this Section 6,
holders of Senior Preferred Shares shall have no voting rights. When the holders
of Senior Preferred Shares are entitled to vote, each Senior 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 failed to authorize and declare and set aside
for payment a quarterly dividend on any series of Preferred Stock of the
Company, including the Senior Preferred Shares, the maximum authorized number of
directors of the Corporation shall thereupon be increased by at least two (if
not already increased by two by operation of this Section 6). Subject to
compliance with any requirement for regulatory approval of (or non-objection to)
persons serving as directors, the holders of Senior Preferred Shares, voting
together as a single class with the holders of all other series of Preferred
Stock, shall have the exclusive right to elect the two additional directors
(each, a "Preferred Director") to serve on the Board of Directors at each such
annual meeting. Each Preferred Director elected by the holders of shares of the
Preferred Stock shall continue to serve as a director until the earlier of (i)
the full term for which he or she shall have been
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9
elected or (ii) the payment of one quarterly dividend on the Preferred Stock,
including the Senior 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 shares of Senior Preferred Shares and Senior Preferred Parity Stock
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 Senior Preferred Shares
and Senior Preferred Parity Stock so entitled to vote thereon, called for that
purpose. As long as dividends on the Senior 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 individual identified in 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 shares of Senior Preferred Shares and
Senior Preferred Parity Stock 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.
(c) Certain Voting Rights. The affirmative vote or consent of
the holders of at least two-thirds of the outstanding shares of each series of
Preferred Stock, including the Senior Preferred Shares voting separately, will
be required (i) to create any class or series of stock (other than the Senior
Preferred Shares) which shall, as to dividends or distribution of assets, rank
prior to or on a parity with any outstanding series of Preferred Stock other
than a series which shall not have any right to object to such creation or (ii)
to materially and adversely alter or change the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption of a series
of Preferred Stock (including the Senior Preferred Shares) to any material
extent; provided that if such amendment shall not adversely affect all series of
Preferred Stock, such amendment need only be approved by at least two-thirds of
the holders of shares of all series of Preferred Stock materially adversely
affected thereby.
Section 7. Restrictions on Transfer. In addition to the
restrictions contained in Article VII of the Charter, no holder of the Senior
Preferred Shares is permitted to sell, transfer, assign, pledge, hypothecate or
otherwise dispose of (each, a "Transfer") the Senior Preferred Shares, except:
(i) a Transfer upon the death of such holder or any Permitted
Transferee (as defined below) to its respective executors, administrators,
testamentary trustee, legatees or beneficiaries (the "Estate");
(ii) a Transfer made in compliance with the federal and all
applicable state securities laws to such holder's spouse, parents or direct
lineal descendants or to a trust, the
<PAGE>
10
beneficiaries of which, or to a corporation or partnership, the stockholders or
limited or general partners of which, include only such holder and spouse,
parents and/or direct lineal descendants (a "Trust"), or a Transfer made by such
a Trust to such holder; provided that no Transfer shall be given effect on the
books of the Company unless and until the transferee shall agree in writing, in
form and substance satisfactory to the Company, to become, and becomes, bound by
the representations and warranties and restrictions on transfer applicable to a
holder of the Senior Preferred Shares. The Estate, any Trust and each person to
whom the Senior Preferred Shares may be transferred is hereinafter sometimes
referred to as a "Permitted Transferee";
(iii) a Transfer to a person other than a Permitted Transferee
may be made with the prior consent of the Company, which consent shall not be
unreasonably withheld, provided that (A) such Transfer is exempt from the
registration requirements of the Securities Act and any applicable state
securities laws, (B) if the Company so requests, the Company receives from the
transferor an unqualified opinion of counsel that such Transfer may be effected
without registration under the Securities Act and any applicable state
securities laws, and (C) the transferee shall agree in writing, in form and
substance satisfactory to the Company, to become, and becomes, bound by the
representations and warranties and restrictions on Transfer applicable to a
holder of the Senior Preferred Shares; or
(iv) a transfer to the Corporation.
Notwithstanding the foregoing, (i) any Transfer of the Senior
Preferred Shares which would cause such shares to be owned by fewer than 100
persons shall be null and void and the intended transferee will acquire no
rights to such shares and (ii) any transfer by a holder of Senior Preferred
Shares resident in Canada must also comply with applicable provincial securities
laws.
Section 8. No Conversion Rights. The holders of Senior
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 9. No Sinking Fund. No sinking fund shall be
established for the retirement or redemption of Senior Preferred Shares.
Section 10. Preemptive or Subscription Rights. No holder of
Senior Preferred Shares shall have any preemptive or subscription rights in
respect of any shares of the Corporation that may be issued or any other
securities of the Corporation convertible into or carrying rights or options to
purchase any such shares.
Section 11. No Other Rights. The Senior Preferred Shares
shall not have any designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as
<PAGE>
11
to dividends or other distributions, qualifications or terms or conditions of
redemption except as set forth in the Charter or as otherwise required by law.
SECOND: The Senior Preferred Shares have been classified and
designated by the Board of Directors under the authority contained in the
Charter.
THIRD: These Articles Supplementary have been approved by the
Board of Directors in the manner and by the vote required by law.
FOURTH: The undersigned President of the Corporation
acknowledges these Articles Supplementary to be the corporate act of the
Corporation and, as to all matters or facts required to be verified under oath,
the undersigned 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.
IN WITNESS WHEREOF, the Corporation has caused these Articles
Supplementary to be created under seal in its name and on its behalf by its
President and attested to by its secretary on this 29th day of December, 1997.
ATTEST: NB CAPITAL CORPORATION
/s/ Francois Bourassa By:/s/ Roger Smock (SEAL)
- ---------------------------- ----------------------
Francois Bourassa, Secretary Roger Smock, President
[FORM OF SHEARMAN & STERLING TAX OPINION]
February __, 1998
NB Capital Corporation
125 West 55th Street
New York, New York 10019
National Bank of Canada
National Bank Tower
600 de La Gauchetiere Street West
Montreal, Quebec H3B 4L2
NB Capital Corporation
8.35% Noncumulative Exchangeable Preferred Stock, Series A
----------------------------------------------------------
Ladies and Gentlemen:
We hereby confirm that, as of the date hereof, the statements
set forth under the caption "United States Federal Income Tax Considerations" in
the Prospectus dated February __, 1998 contained in the Registration Statement
on Form S-4 (Registration No. 333- 41009), as amended, of NB Capital
Corporation, to the extent that they constitute a summary of legal matters or
legal conclusions, are accurate in all material respects.
Very truly yours,
[Letterhead of Desjardins Ducharme Stein Monast]
Montreal, Quebec, Canada, February 17, 1998
BY EDGAR
SECURITIES AND EXCHANGE COMMISSION
Dear Sirs/Mesdames:
Re: $300,0000,000
NB CAPITAL CORPORATION
(300,000 Shares)
8.35% Noncumulative Exchangeable Preferred Stock, Series A
----------------------------------------------------------
We have acted as counsel to NB Capital Corporation in
connection with the offering of 300,000 shares of its 8.35% Noncumulative
Exchangeable Preferred Stock, Series A (the "Series A Preferred Shares"). In
connection with the registration of the Series A Preferred Shares pursuant to a
Registration Statement on Form S-4/Registration Statement on Form S-1 (the "Form
S-4/Form S-1"), we hereby consent to the use of, and reference to, our name
under the heading "United States Federal Income Tax Considerations" in each
prospectus forming a part of the Form S-4/Form S-1 and to the inclusion of our
opinion as an exhibit thereto.
In giving this consent, we do not thereby concede that we come
within the category of persons whose consent is required by the Securities Act
of 1933 as amended, or the general rules and regulations promulgated thereunder.
yours truly,
/s/ DESJARDINS DUCHARME STEIN MONAST
[Letterhead of Conyers Dill & Pearman]
February 11, 1998
Desjardins Ducharme Stein Monast
600, rue de la Gauchetiere West
Bureau 2400, Montreal
Quebec
Canada H3B 4LN
Dear Sir:
Consent
We hereby consent to the filing of our opinion, dated 3 September, 1997, as an
exhibit to NB Capital Corporation's Registration Statement on Form
S-4/Registration Statement on Form S-1, dated on or above the date hereof, and
to the reference to our firm under the Caption "United States Federal Income Tax
Considerations" contained in the prospectuses forming parts thereof.
yours faithfully,
/s/ CONYERS DILL & PEARMAN
[Letterhead of Osler, Hoskin & Harcourt]
February 11, 1998
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
U.S.A.
Re: Consent
-------
Dear Sirs and Mesdames:
We hereby consent to the filing of our opinion, dated September 3, 1997, as an
exhibit to NB Capital Corporation's Registration Statement on Form S-4
Registration Statement on Form S-1, dated on or above the date hereof, and to
the reference to our firm under the caption "United States Federal Income Tax
Consideration" contained in the prospectuses forming parts thereof.
Very truly yours,
/s/ OSLER, HOSKIN & HARCOURT
[DESJARDINS DUCHARME STEIN MONAST LETTERHEAD]
September 3, 1997
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Shearman & Sterling
Citicorp Center
153 East 53rd Street
New York, New York 10022
Osler, Hoskin & Harcourt
1 First Canadian Place
Toronto, Ontario
M5X 1B8
Ladies and Gentlemen:
Re: NB Capital Corporation
Offering of 300,000 Shares of 8.35%
Noncumulative Exchangeable Preferred Stock, Series A
We have acted as counsel to National Bank of Canada (the
"Bank"), a bank formed under the Bank Act (Canada) (the "Bank Act") in
connection with the sale by NB Capital Corporation (the "Company") and the
purchase by the Initial Purchaser named in the Purchase Agreement referred to
below (the "Initial Purchaser") of 300,000 shares of the Company's
<PAGE>
2
8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Series A
Preferred Shares"). Each share of the Series A Preferred Shares is exchangeable,
on the terms set forth in the Company's Articles of Amendment and Restatement,
into one share of the Bank's 8.45% Noncumulative First Preferred Shares, Series
Z (the "Bank Preferred Shares").
The Series A Preferred Shares are being issued pursuant to a
purchase agreement dated August 22, 1997 (the "Purchase Agreement") among the
Company, the Bank and the Initial Purchaser. Capitalized terms used and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Purchase Agreement.
The Bank Preferred Shares will be subject to the registration
rights set forth in the Registration Rights Agreement, dated as of September 3,
1997 (the "Registration Rights Agreement"), among the Bank, the Company and the
Initial Purchaser.
This opinion is furnished to the Initial Purchaser pursuant to
Section 5(b) of the Purchase Agreement.
A. DOCUMENTS EXAMINED
We have participated in the preparation of the Offering
Memorandum in connection with the issuance and sale of the Series A Preferred
Shares. In addition, for purposes of rendering our opinion, we have examined
originals or certified copies of the following documents and instruments:
(i) the Purchaser Agreement;
(ii) the Offering Memorandum;
(iii) a blueprint of the specimen of the form of Bank Preferred
Share;
(iv) the Bank Act (Canada), being the charter of the Bank;
(v) the By-laws of the Bank, as amended through the date hereof\
(the "By-laws"), as certified by the Secretary of the Bank as
of the date hereof;
(vi) the resolutions of the Board of Directors of the Bank adopted
at a meeting of the Board of Directors held on August 15,
1997, (the "Bank Resolutions"), as certified by the Secretary
of the Bank as of the date hereof;
<PAGE>
3
(vii) a certificate of confirmation dated August 25, 1997 issued by
the Superintendent of Financial Institutions (Canada) (the
"Superintendent") as to the incorporation of the Bank;
(viii) a letter dated August 15, 1997 and issued by the Canada
Deposit Insurance Corporation (the "CDIC") as to the insurance
of the Bank's eligible deposits by the CDIC;
(ix) a certificate of officers of the Bank as to certain matters
(the "Officers' Certificate");
(x) the Registration Rights Agreement;
(xi) a certificate of the Secretary of the Bank dated the date
hereof delivered by the Bank to the Initial Purchaser at the
Closing;
(xii) the mortgage loan purchase agreement executed before Mtre
Bertrand Ducharme, on September 3, 1997, between the Bank and
NB Finance, Ltd. ("NB Finance"), a Bermuda corporation, with
respect to the Initial Mortgage Loans as this expression is
more fully described therein (the "Mortgage Loan Purchase
Agreement");
(xiii) the loan agreement between NB Finance and the Company dated as
of September 3, 1997 under the terms of which the Company has
agreed to lend to NB Finance an aggregate amount of
U.S.$476,588,453 (the "Loan Agreement") and the promissory
notes of NB Finance evidencing its indebtedness thereunder.
(xiv) sixteen mortgage loan assignment agreements between NB
Finance, the Company and the Bank dated as of September 3,
1997 (the "Mortgage Loan Assignment Agreements");
(xv) the Foreign Opinions as this expression is hereinafter
defined;
(xvi) powers of attorney by the Bank in favour of the Company and
powers of attorney by NB Finance in favour of the Company
(collectively, the "Powers of Attorney");
(xvii) the advisory agreement dated September 3, 1997 between the
Bank and the Company (the "Advisory Agreement");
<PAGE>
4
(xviii) the assignment of the Servicing Agreement dated September 3,
1997 between NB Finance and the Company and to which the Bank
intervened (the "Assignment of Servicing Agreement"); and
(xix) a letter addressed to the undersigned on September 3, 1997, by
Shearman & Sterling relating to the mortgagors' rights and
recourses in general under U.S. law (the "S&S Letter").
We also have examined the originals or copies, certified or
otherwise identified to our satisfaction, of all such records of the Bank and
all such agreements, certificates of public officials, certificates of officers
or representatives of the Bank and others, and such other documents,
certificates and corporate or other records, as we have deemed necessary or
appropriate as a basis for the opinions set forth herein. In our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents.
B. DEFINITIONS
In addition to the terms defined in the Purchase Agreement,
the following terms are defined, in this opinion, as follows:
1. "Applicable Laws" means those laws, rules and regulations of
Canada and all the provinces of Canada which, in our
experience, are normally applicable to transactions of the
type contemplated by the Purchase Agreement and the
Transaction Agreements, but without having made any special
investigation concerning any other laws, rules or regulations;
2. "Applicable Orders" means any administrative order or decree
of any court or governmental authority or agency having
jurisdiction over the Bank, the existence of which has been
specifically disclosed to us by the Bank as listed in Schedule
I;
3. "Governmental Approval" means any consent, approval, license,
authorization or validation of, or filing, qualification or
registration with, any Governmental Authority pursuant to
Applicable Laws;
4. "Governmental Authorities" means any provincial or federal
executive, legislative, judicial, administrative or regulatory
body of Canada;
5. "Material Adverse Effect" means any material adverse change in
the condition, financial or otherwise, or in the earnings,
business affairs or business prospects
<PAGE>
5
of the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business;
6. "NHA" means the National Housing Act (Canada), as amended from
time to time, and the regulations promulgated thereunder;
7. The Purchase Agreement, the Registration Rights Agreement, the
Mortgage Loan Purchase Agreement, the Loan Agreement, the
Mortgage Loan Assignment Agreements, the Advisory Agreement,
the Servicing Agreement and the Assignment of Servicing
Agreement are sometimes hereinafter collectively referred to
as the "Transaction Agreements"; and
8. The Tory Opinion, the Stewart Opinion, the Thompson Opinion,
the Bennett Opinion, the McDougall Opinion, the Lawson
Opinion, the Ballard Opinion and the S&S Opinion as these
expressions are hereinafter defined, are sometimes hereinafter
collectively referred to as the "Foreign Opinions".
C. ASSUMPTIONS AND FACT RELIANCE
In making our examination of documents executed by parties
other than the Bank, we have assumed that such parties had the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the enforceability
of such documents by parties other than the Bank. As to any facts material to
our opinions expressed herein which were not independently established or
verified, we have relied upon certificates of public officials and written
statements and representations of officers and other representatives of the Ban,
the Company, NB Finance and others.
As to matters referred to in paragraphs 1 (second sentence),
4, 9 and 11 of Section D hereof, we have made no independent investigation but
rely in that respect upon the opinion of the Vice President - Legal Affairs and
Secretary of the Bank, copies of which opinion have been addressed and delivered
to you. As to those of the Transactions Agreements governed by the laws of a
jurisdiction other than the Province of Quebec, we have relied, without
verification on our part, on the Foreign Opinions. As to matters referred to in
paragraph 23, we have also, without verification on our part, relied on the S&S
Letter.
We have not undertaken any due diligence with respect to (i)
the Initial Mortgage Loans and, in particular, as to the title of the Bank, any
restriction or requirement or the need for consents of notice with respect to
the Initial Mortgage Loans, which may affect the validity of any purported
transfer or assignment of the Initial Mortgage Loans and (ii) the qualification
<PAGE>
6
of the Bank as an approved lender under the NHA, relying exclusively with
respect thereto on the Officers' Certificate.
D. OPINIONS
Based upon and subject to the limitations, qualifications and
exceptions set forth herein, we are of the opinion that:
1. The Bank has been duly organized and is validly existing as a
Canadian chartered bank under the Bank Act, with full power (corporate and
other) and authority to own, lease and operate its properties and to conduct its
business as described in the Offering Memorandum, and to enter into and perform
its obligations under the Purchase Agreement and each of the Transaction
Agreements to which it is a party. The Bank is duly licensed and qualified as a
foreign corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where
failure to so qualify or to be in good standing would not result in a Material
Adverse Effect.
2. All of the outstanding shares of capital stock of the Bank have been
duly authorized and validly issued and are fully paid and non-assessable.
3. The Bank is a Schedule I bank under the Bank Act in good standing
and CDIC has duly issued a letter stating that the Bank is an institution with
eligible deposits insured by the CDIC as provided in the CDIC Act and by-laws
thereunder, and, to our knowledge, no proceedings for the termination or
revocation of such insurance are pending or currently threatened.
4. The activities of each of the Bank's subsidiaries, as described in
the Offering Memorandum and the documents incorporated by reference therein, are
permitted to subsidiaries of a bank under Applicable Laws.
5. The Purchase Agreement has been duly authorized, executed and
delivered by the Bank.
6. Each of the Transaction Agreements to which the Bank is a party has
been duly authorized, executed and delivered by the Bank and constitutes a valid
and binding obligation of the Bank and is enforceable against the Bank in
accordance with its terms, except to the extent that enforcement of such
agreement may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law).
<PAGE>
7
7. The blueprint of the specimen of the Bank Preferred Shares is in the
form contemplated by the Offering Memorandum and the Bank Preferred Shares have
been duly authorized by the Bank and (assuming the conformity of the Bank
Preferred Shares with the blueprint of the specimen thereof examined by us), if
and when executed and delivered by the Bank pursuant to the terms and conditions
set forth in the Bank Resolutions, the Bank Preferred Shares will be duly
issued, fully paid and non-assessable.
8. The blueprint of the specimen of the Bank Preferred Shares conforms
in all material respects to the descriptions thereof contained in the Offering
Memorandum and such description conforms to the rights set forth in the Bank
Resolutions; furthermore, the issuance of the Bank Preferred Shares is not
subject to pre-emptive or other similar rights of any securityholder of the
Bank.
9. The Bank and its subsidiaries have all Governmental Approval
necessary to own or lease, as the case may be, and to operate their respective
properties and to carry on their respective businesses as presently conducted,
except where the failure to obtain such Governmental Approval would not have a
Material Adverse Effect.
10. The descriptions in the Offering Memorandum of Canadian statutes
and Canadian banking laws and regulations are accurate in all material aspects.
11. Except as disclosed in the Offering Memorandum, there are no
actions, suits, proceedings or investigations pending or threatened against or
affecting the Bank or its subsidiaries, or their respective properties or
businesses, at law or in equity, before any court in Canada or before any
governmental or administrative body or agency in Canada or Quebec, which, alone
or in the aggregate, could have a Material Adverse Effect or challenge the
right, power, authority or ability of the Bank to carry out the transactions
contemplated in the Offering Memorandum, the Purchase Agreement and each of the
Transaction Agreements to which it is a party.
12. No Governmental Approval is required for the issuance and sale of
the Series A Preferred Shares by the Company or the Bank Preferred Shares by the
Bank, the performance by the Bank of its respective obligations under the
Purchase Agreement and each of the Transaction Agreements to which it is a party
or consummation of the transactions contemplated thereby, except such as have
been obtained and made or as required pursuant to the terms of such Transaction
Agreements.
13. The execution and delivery by the Bank of the Purchase Agreement
and each of the Transaction Agreements to which the Bank is a party and the
consummation of the transactions contemplated thereby and in the Offering
Memorandum (including the issuance and sale of the Series A Preferred Shares by
the Company and the issuance of Bank Preferred Shares by the Bank), and the
performance by the Bank of its obligations under the Purchase Agreement
<PAGE>
8
and each of the Transaction Agreements to which it is a party, each in
accordance with its terms, do not conflict with the Bank Act, being the charter
of the Bank, or By-laws of the Bank.
14. The issue and sale of the Bank Preferred Shares by the Bank, the
execution and delivery of the Purchase Agreement and the Transaction Agreements
to which the Bank is a party, the compliance by the Bank with all of the
provisions of the Bank Preferred Shares, the Purchase Agreement, and the
Transaction Agreements to which it is a party, and the consummation by the Bank
of the transactions therein contemplated will comply with Applicable Laws and
Applicable Orders.
15. The information in the Offering Memorandum under "Canadian Federal
Income Tax Considerations" and Annex II to the Offering Memorandum to the extent
that it constitutes matters of law, summaries of legal matters, the Bank Act and
By-laws, legal proceedings or legal conclusions, has been reviewed by us and
fairly present the information disclosed therein in all material respects.
In addition, we have participated in conferences with officers
and representatives of the Bank and the Company, in-house counsel to the Bank
and the Company, Bermuda counsel to NB Finance, counsel to the Initial
Purchaser, representatives of the independent accountants for the Company and
the Bank and the Initial Purchaser at which the contents of the Offering
Memorandum and related matters were discussed. Although we are not passing upon,
and do not assume any responsibility for, the accuracy, completeness or fairness
of the statements contained in the Offering Memorandum and have made no
independent check or verification thereof (other than to the extent specified in
paragraph 10 above), on the basis of the foregoing, no facts have come to our
attention that have led us to believe that the Offering Memorandum (including
the annexes thereto), as of the date of the Offering Memorandum and as of the
date hereof, contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that we express no belief with respect to the financial
statements, schedules and other financial data included or incorporated by
reference therein or excluded therefrom.
16. The Mortgage Loan Purchase Agreement constitutes a legal, valid and
binding agreement as between the Bank and NB Finance transferring to NB Finance
such right, title and interest in and to the Initial Mortgage Loans as the Bank
had prior to transfer, including all interest accrued on the Initial Mortgage
Loans as of the date of the Mortgage Loan Purchase Agreement and the Bank's
rights under the CMHC insurance policies covering losses sustained as a result
of defaults under the said Initial Mortgage Loans.
17. The Mortgage Loan Purchase Agreement will not require compliance
with any bulk sales or similar legislation in Canada.
<PAGE>
9
18. The Initial Mortgage Assets (as defined in the Offering Memorandum)
conform in all material respects to the descriptions thereof contained in the
Offering Memorandum.
19. Pursuant to the Mortgage Loan Purchase Agreement, NB Finance has
been assigned, amongst other, the right to:
(a) physical possession of the documents evidencing the Initial
Mortgage Loans;
(b) the income derived from the Initial Mortgage Loans, together
with the capital falling due thereon and the right to give a
valid discharge thereof;
(c) institute in its own name (subject to compliance with various
procedural formalities) proceedings in recovery of the Initial
Mortgage Loans, including hypothecary recourses consisting of
taking the real property securing the Initial Mortgage Loans
in payment upon default of the mortgagor (hypothecary debtor)
or of having such real property sold by judicial authority
upon default of the said mortgagor (hypothecary debtor);
(d) have its interest in the Initial Mortgage Loans registered
(subject to compliance with various procedural formalities)
against the real properties underlying the Initial Mortgage
Loans; and
(e) dispose of the Initial Mortgage Loans.
20. Each of the Mortgage Loan Assignment Agreements constitutes a
legal, valid and binding agreement as between NB Finance and the Company
assigning to the Company, subject to an equitable right of redemption, such
right, title and interest in and to the Initial Mortgage Loans transferred
thereby as NB Finance had prior to such assignments.
21. Pursuant to the Mortgage Loan Assignment Agreements, the Company
has the right, amongst others, subject to an equitable right of redemption, to:
(a) physical possession of the documents evidencing the Initial
Mortgage Loans, which documents are to be held by the Bank as
agent of the Company;
(b) collect the income derived from the Initial Mortgaged Loans,
together with the capital falling due thereon and give a valid
discharge thereof;
(c) institute in its own name (subject to compliance with various
procedural formalities) proceedings in recovery of the Initial
Mortgage Loans, including hypothecary recourses consisting of
taking the real property securing the Initial Mortgage Loans
in payment upon default of the mortgagor (hypothecary debtor)
<PAGE>
10
or of having such real property sold by judicial authority
upon default of the said mortgagor (hypothecary debtor);
(d) have its interest in the Initial Mortgage Loans registered
(subject to compliance with various procedural formalities)
against the real properties underlying the Initial Mortgage
Loans;
(e) dispose of any Initial Mortgage Loan upon the occurrence of an
event of default under such Mortgage Loan; and
(f) make a claim under the CMHC insurance policy in respect of an
Initial Mortgage Loan, to the same extent as the Bank would
have been entitled to do.
22. The Initial Mortgage Assets will be secured by, and will constitute
an interest in, the Initial Mortgage Loans and the real property underlying the
Initial Mortgage Loans.
23. The legal rights, title and interest created in favor of the
Company pursuant to the Transaction Agreements are comparable to the legal
rights, title and interest which a mortgagee would obtain pursuant to a mortgage
under the laws in the United States.
24. The rights and powers conferred on the Company by virtue of the
Mortgage Loan Purchase Agreement, the Mortgage Loan Assignment Agreements and
the Powers of Attorney are sufficient to allow the Company, upon receipt of the
information with respect to the Initial Mortgage Loans to which the Company is
entitled pursuant to the Mortgage Loan Assignment Agreements, to prepare and
register assignments or transfers of such Initial Mortgage Loans in the land
registry or land titles offices in Canada in order to have the Company's
interest in the Initial Mortgage Loans as assignee thereof registered against
the real properties underlying the Initial Mortgage Loans.
25. The Powers of Attorney are irrevocable and cannot be revoked,
rescinded, or modified by any action of the Bank or NB Finance.
26. Except for registration in the land registry or land titles offices
in Canada, no further registration, recording or filing is currently required
under the laws of Canada to preserve, perfect or protect (to the extent capable
of preservation, perfection or protection by registration) the interest of the
Company in the Initial Mortgage Loans to the extent that such interest
constitutes an interest in real property.
E. QUALIFICATIONS
The opinion expressed herein is subject to the following
qualifications:
<PAGE>
11
1. Enforcement proceedings with respect to any of the mortgages and
hypothecs forming part of the Initial Mortgage Loans must be commenced in the
province of Canada in which the real property subject to the mortgage or
hypothec is located and then only in accordance with the rules and procedural
formalities in effect in such province.
2. In an action brought before a court of competent jurisdiction in
Quebec in respect of the Mortgage Loan Assignment Agreements, such court would
look at the laws of Bermuda, being the jurisdiction in which NB Finance had its
domicile at the time of the execution of such Mortgage Loan Assignment
Agreements, and such laws, to the extent specifically pleaded and proved as a
matter of a fact by expert evidence, would be recognized and applied by such
court to all issues relating to the creation, validity and perfection of the
rights constituted by the Mortgage Loan Assignment Agreements. Such court would
look at the laws of the country in which NB Finance is domiciled at the time the
Company exercises its rights under the Mortgage Loan Assignment Agreements, and
such laws, to the extent specifically pleaded and proved as a matter of a fact
by expert evidence, would be recognized and applied by such court to all issues
relating to the publication of the rights constituted by the Mortgage Loan
Assignment Agreements and its effects. The courts of Quebec will not apply those
laws of Bermuda or the laws of the country in which NB Finance is domiciled, as
the case may be, (i) which it characterizes as being of a revenue, penal or
public law nature, (ii) which relate to matters of a procedural nature or (iii)
the application of which would be inconsistent with public policy, as that term
is applied by the courts in Quebec. In addition, a court of competent
jurisdiction in Quebec may reserve to itself an inherent power to decline to
hear any such action if it is contrary to public policy for it to do so, or if
it is not the proper forum to hear such an action, or if concurrent proceedings
in respect of such matter are being brought elsewhere. Based on the nature of
the transactions contemplated by, and of the rights created pursuant to, the
Transaction Agreements, it is unlikely that a Quebec court would not give effect
to the Transaction Agreements on the basis of the foregoing grounds.
3. In any proceedings taken in a court of competent jurisdiction in
Quebec for the enforcement of the Mortgage Loan Assignment Agreements, any final
and conclusive judgment in personam for a sum certain obtained in Bermuda would
be recognized and enforced in Quebec except in the following cases: (i) the
foreign authority had no jurisdiction according to the provisions of the Civil
Code of Quebec, (ii) the decision is subject to ordinary remedy (such as an
appeal), or is not final (as opposed to provisional decisions) or enforceable at
the place where it was rendered, (iii) the decision was rendered in
contravention of the fundamental principles of procedure, (iv) a dispute between
the same parties, based on the same facts and having the same object has given
rise to a decision rendered in Quebec, whether it has acquired the authority of
a final judgment (res judicata) or not, or is pending before a Quebec authority,
in first instance, or has been decided by another foreign authority and the
decision meets the necessary conditions for recognition in Quebec, (v) the
outcome of the foreign decision is manifestly inconsistent with public order as
understood in international relations, or (vi) the decision enforces obligations
arising from the taxation laws of a foreign jurisdiction. A decision
<PAGE>
12
rendered by default may not be recognized or declared enforceable unless the
plaintiff proves that the act of procedure initiating the proceedings was duly
served on the defaulting party in accordance with the law of the place where the
decision was rendered. A Quebec court may refuse recognition or enforcement if
the defaulting party proves that, owing to the circumstances, it was unable to
learn of the act of procedure initiating the proceedings or was not given
sufficient time to offer its defense. In personal actions, the jurisdiction of a
foreign authority will be recognized under the Civil Code of Quebec when the
parties have submitted to the foreign authority disputes which have arisen or
which may arise between them in respect of a specific legal relationship or when
the defendant has recognized the jurisdiction of the foreign authority.
4. In the event that the Mortgage Loan Assignment Agreements are sought
to be enforced in any action or proceeding in the Province of Ontario in
accordance with the laws applicable thereto as chosen by the parties, namely the
laws of Bermuda, the courts of the Province of Ontario:
(a) would recognize the choice of laws provided that such choice
of laws is bona fide (in the sense that it was not made with a
view to avoiding the consequences of the laws of any other
jurisdiction) and is not contrary to public policy, as such
term is understood under the laws of the Province of Ontario;
and
(b) would apply the laws of Bermuda in any such action or
proceeding, upon appropriate evidence as to such laws being
adduced, provided that none of the provisions of the Mortgage
Loan Assignment Agreements or of the laws of Bermuda are
contrary to public policy, as such term is understood under
the laws of the Province of Ontario.
A court in the Province of Ontario has, however, an inherent
power to decline to hear such an action if it is contrary to public policy, as
such term is understood under the laws of the Province of Ontario, for it to do
so, or if it is not the proper forum to hear such action, or if concurrent
proceedings are being brought elsewhere.
5. The laws of the Province of Ontario permit an action to be brought
in a court of competent jurisdiction in Ontario on any final and conclusive
judgment in personam of a foreign jurisdiction, which is not impeachable as void
or voidable under the internal laws of such foreign jurisdiction, for a sum
certain if only:
(a) the court rendering such judgment had jurisdiction over the
judgment debtor, as recognized by the courts of the Province
of Ontario;
<PAGE>
13
(b) such judgment was not obtained by fraud or in a manner
contrary to natural justice and the enforcement thereof would
not be inconsistent with public policy, as such term is
understood under the laws of the Province of Ontario;
(c) the enforcement of such judgment does not constitute, directly
or indirectly, the enforcement of foreign revenue or penal
laws; and
(d) there has been compliance with the Limitations Act (Ontario),
which provides that any action to enforce a foreign judgment
must be commenced within six years of the date of the foreign
judgment.
6. Until the hypothecary debtors and mortgagors are properly notified
of the transfer and assignment of the Initial Mortgage Loans, such transfer and
assignment may not be set up against the said hypothecary debtors and mortgagors
and third persons, including a trustee in bankruptcy. Therefore, until such
proper notice is given, the mortgagors and hypothecary creditors under the
Initial Mortgage Loans may continue to discharge their respective payment
obligations under the Initial Mortgage Loans by making payment to the Bank.
Therefore, a hypothecary debtor (mortgagor) may set up against NB Finance and
the Company any payment made to the Bank before it has been notified of the
Mortgage Loan Purchase Agreement and the Mortgage Loan Assignment Agreements, as
well as any cause of extinction of its obligations under the Initial Mortgage
Loans which has occurred before it has been notified of the Mortgage Loan
Purchase Agreement and the Mortgage Loan Assignment Agreements. Under certain
circumstances, a hypothecary debtor (mortgagor) may also set up any payment made
in good faith to the apparent creditor.
7. In Quebec, until the Mortgage Loan Purchase Agreement and the
Mortgage Loan Assignment Agreements are registered at the registry offices where
the real properties securing the Initial Mortgage Loans are located and
certified statements of registration are furnished to the hypothecary debtors
(mortgagors) thereunder, such transfer and assignment may not be set up against
a subsequent assignee of the Initial Mortgage Loans who has observed these
formalities. This situation could only occur or be permitted to exist if:
(a) the representations and warranties of the Bank under the
Mortgage Loan Purchase Agreement were incorrect or if the Bank
were to breach its contractual obligations under the Mortgage
Loan Purchase Agreement; or
(b) the representations and warranties of NB Finance under the
Mortgage Loan Assignment Agreements were incorrect of if NB
Finance were to breach its contractual obligations under the
Mortgage Loan Assignment Agreements.
8. To the extent that the interest of the Company and NB Finance in the
Initial Mortgage Loans constitute interests in real property, such interests
will be subject to interests
<PAGE>
14
in the Initial Mortgage Loans acquired by any persons who register their
interests in the applicable land registry or land titles offices before the
Company and NB Finance register their respective interests in such offices.
However, the existence of such an intervening interest could only occur or be
permitted to exist if:
(a) the representations and warranties of the Bank under the
Mortgage Loan Purchase Agreement were incorrect of if the Bank
were to breach its contractual obligations under the Mortgage
Loan Purchase Agreement; or
(b) the representations and warranties of NB Finance under the
Mortgage Loan Assignment Agreements were incorrect or if NB
Finance were to breach its contractual obligations under the
Mortgage Loan Assignment Agreements.
9. Remedies such as specific performance and injunction may be granted
only in the discretion of a court of competent jurisdiction.
10. The ability to recover claims for certain costs or expenses may be
subject to judicial discretion.
11. Since the Servicing Agreement and the Advisory Agreement may be
considered by their nature to be contracts of successive performance within the
meaning of the Civil Code of Quebec, the company may be denied the right to
terminate such agreements, notwithstanding their terms and conditions, if the
default of the Bank is of minor importance, unless the default occurs
repeatedly, but the Bank would then be entitled to a proportional reduction of
its correlative obligations. Although there is no authority directly on point,
the Company should be able to terminate the Advisory Agreement and the Servicing
Agreement in accordance with their respective terms.
12. Under Article 1474 of the Civil Code of Quebec, a person may not
exclude or limit his liability for material injury caused to another through an
intentional or gross fault.
13. As to matters governed by the laws of Bermuda, the laws of the
provinces of Canada, excluding the province of Quebec, and the laws of the
United States of America, we have relied upon the hereinafter mentioned
opinions, copies of which have been addressed and delivered to you:
(a) an opinion dated September 3, 1997 by Conyers Dill & Pearman
(herein referred to as the "CD&P Opinion");
(b) an opinion dated September 3, 1997 by Tory Tory DesLauriers
and Binnington (herein referred to as the "Tory Opinion");
<PAGE>
15
(c) an opinion dated September 3, 1997 by Stewart McKelvey
Stirling Scales (herein referred to as the "Stewart Opinion");
(d) an opinion dated September 3, 1997 by Thompson Dorfman,
Sweatman (herein referred to as the "Thompson Opinion");
(e) an opinion dated September 3, 1997 by Bennett Jones Vercheres
(herein referred to as the "Bennett Opinion");
(f) an opinion dated September 3, 1997 by McDougall Ready (herein
referred to as the "McDougall Opinion");
(g) an opinion dated September 3, 1997 by Lawson Lundell Lawson
and McIntosh (herein referred to as the "Lawson Opinion");
(h) an opinion dated September 3, 1997 by Ballard Spahr Andrews &
Ingersoll (herein referred to as the "Ballard Opinion"); and
(i) an opinion dated September 3, 1997 by Shearman & Sterling
(herein referred to as the "S&S Opinion").
To the extent that each of these opinions is based upon any
assumption or is made subject to any limitation, qualification or exception, our
opinion given in reliance thereon is based upon such assumption and is subject
to such limitation, qualification or exception.
14. The CMHC insurance policies in respect of the Initial Mortgage
Loans will cease to be in force if any Initial Mortgage Loan is sold to a person
other than an approved lender (as this expression is defined in the NHA) unless
such Initial Mortgage Loan continues to be administered by CMHC or an approved
lender.
15. We express no opinion as to title of the Bank and NB Finance to any
property nor as to the rank or priority of any security interest, mortgage,
charge or assignment constituted by any of the Transaction Agreements.
16. The obligation of the parties to the Transaction Documents may be
affected by a case of "force majeure".
Members of our firm are admitted to the bar in the Province of
Quebec, and we express no opinion as to the laws of any jurisdiction other than
(i) the laws of Quebec and (ii) the laws of Canada to the extent specifically
referred to herein.
<PAGE>
16
Without express permission, this opinion letter may not be
used, circulated, quoted or otherwise referred to for any purpose except as
stated therein, except that reference may be made to this letter in the list of
closing documents pertaining to the offering of the Bank Preferred Shares.
Except as agreed by us in writing, the opinions expressed herein are solely for
the benefit of the addressees hereof, and may be relied upon solely by such
addressees for the purposes for which this letter is being furnished. Skadden,
Arps, Slate, Meagher & Flom LLP, counsel to the Initial Purchaser, Shearman &
Sterling, counsel to the Company, counsel to NB Finance, may rely on the
opinions expressed herein as if this opinion letter were addressed and delivered
to such counsel on the date hereof by the undersigned.
Yours very truly,
DESJARDINS DUCHARME STEIN MONAST
cc: National Bank of Canada
<PAGE>
SCHEDULE I
APPLICABLE ORDERS
1. Order from the Superintendent of Financial Institutions Canada (the
"Superintendent") dated September 2, 1997 permitting the National Bank
of Canada (the "Bank") to acquire NB Finance, Ltd.
2. Order from the Superintendent dated September 2, 1997 permitting the
Bank to acquire NB Capital Corporation.
[LETTERHEAD OF CONYERS DILL & PEARMAN]
RBX/ss/310589/d.360208 3 September 1997
Desjardins Ducharme Stein Monast
600, rue de la Gauchetiere Ouest
Bureau 2400, Montreal
Quebec
Canada H3B 4LB
Dear Sirs
NB Finance, Ltd. (the "Company")
We have acted as special legal counsel in Bermuda to the Company in connection
with a loan agreement dated 3 September, 1997 made between the Company as
borrower and NB Capital Corporation, a Maryland corporation, as lender ("NB
Capital") and the sale of certain mortgage loans by National Bank of Canada (the
"Bank") to the Company and the assignment of those mortgage loans, as security
for the obligations of the Company under the Loan Agreement (referred to below),
by the Company to NB Capital.
For the purposes of giving this opinion, we have examined and relied upon the
following documents:
(a) an executed copy of a deed of sale of mortgage loans dated 3 September,
1997 made between the Bank and the Company providing, inter alia, for
the purchase by the Company from the Bank of the mortgage loans
described therein (the "Mortgage Loans") (the "Mortgage Purchase
Agreement");
(B) an executed copy of a loan agreement dated 3 September, 1997 made
between the Company as borrower and NB Capital as lender providing,
inter alia, for sixteen loans in the aggregate principal amount of
US$476,588,453.00 to enable the Company to purchase the Mortgage Loans
pursuant to the Mortgage Purchase Agreement (the "Loan Agreement");
(c) executed copies of sixteen promissory notes each dated 3 September,
1997 made by the Company for the benefit of NB Capital evidencing each
of the sixteen loans made under the Loan Agreement (each, a "Note" and
together, the "Notes");
<PAGE>
2
(d) executed copies of sixteen mortgage loan assignment agreements each
dated 3 September, 1997 made between the Company as assignor and NB
Capital as assignee providing, inter alia, for the assignment by the
Company to NB Capital of the Mortgage Loans as security for the
Company's obligations under the Notes (together, the "Assignments").
(e) an executed copy of a power of attorney dated as of 3 September, 1997
by which the Company appoints NB Capital as its attorney-in-fact (the
"Power of Attorney");
(f) an executed copy of an assignment of servicing agreement dated as of 3
September, 1997 made by the Company, NB Capital and the Bank pursuant
to which the Company assigns and NB Capital assumes the Company's
rights and obligations under the Servicing Agreement dated as of 3
September, 1997 made by the Bank and the Company with respect to the
Mortgage Loans (the "Assignment of Servicing Agreement").
The Mortgage Purchase Agreement, the Loan Agreement, the Notes, the Assignments,
the Power of Attorney and the Assignment of Servicing Agreement are herein
sometimes collectively referred to as the "Documents".
We have also reviewed a copy of the Memorandum of Association and the Bye-laws
of the Company, resolutions of the Company's Board of Directors dated 3
September, 1997 and such other documents and made such enquiries as to questions
of law as we have deemed necessary in order to render the opinions set forth
below.
We have assumed:
(i) the genuineness and authenticity of all signatures and the conformity
to the originals of all copies (whether or not certified) of all
documents examined by us and the authenticity and completeness of the
originals from which such copies were taken.
(ii) the capacity, power and authority of each of the parties to the
Documents, other than the Company, to enter into and perform its
respective obligations under the Documents;
(iii) the due execution and delivery of the Documents by each of the parties
thereto, other than the Company;
(iv) the correctness, accuracy and completeness of all factual
representations made in the Documents and in the other documents which
we have reviewed;
(v) that there is no provision of the law of any jurisdiction, other than
Bermuda, which would have any implication in relation to the opinions
expressed herein;
<PAGE>
3
(vi) the validity and binding effect under the laws of the Province of
Quebec (the "Foreign Laws") of the Mortgage Purchase Agreement which is
expressed to be subject to such Foreign Laws in accordance with its
terms; and
(vii) the validity under the Foreign Laws of the submission by the Company
pursuant to the Mortgage Purchase Agreement to the non-exclusive
jurisdiction of the provincial courts of Canada (the "Foreign Courts").
(viii) that, pursuant to the Mortgage Purchase Agreement, the Company has
obtained legal title to the Mortgage Loans;
(ix) that, pursuant to the Mortgage Purchase Agreement, the Company will
upon demand be able to obtain physical possession of the documents
evidencing the Mortgage Loans;
(x) that, pursuant to the Mortgage Purchase Agreement, the Company will be
able to collect the revenues produced by the Mortgage Loans, together
with the capital falling due thereon and give a valid discharge
thereof; and
(xi) that, pursuant to the Mortgage Purchase Agreement, the Company will in
its own name be able to institute proceedings in recovery of the
Mortgage Loans.
We express no opinion as to the validity or the binding effect of obligations to
make any payment at an increased rate on overdue amounts or on the happening of
an event of default.
We express no opinion as to the validity or binding effect of obligations to pay
a specified rate of interest on the amount of a judgment after the date of
judgment.
We express no opinion as to the effectiveness of any provision which refers to
the deletion or severance of any other provision in any of the Documents if any
such other provision in the Documents is determined by a court to be illegal,
invalid or otherwise unenforceable.
Any provision providing that certain statements, calculations or certificates
will be conclusive and binding may not be effective if such statements,
calculations or certificates are incorrect on their face or fraudulent and will
not necessarily prevent judicial enquiry into the merits of a claim of an
aggrieved party.
The obligations of the Company under the Documents:
(i) will be subject to the laws from time to time in effect relating to
bankruptcy, insolvency, liquidation, possessory liens, rights of set
off, reorganisation, amalgamation, moratorium or any other laws or
legal procedures, whether of a similar nature or otherwise, generally
affecting the rights of creditors.
<PAGE>
4
(ii) will be subject to statutory limitation of the time within which
proceedings may be brought;
(iii) will be subject to general principles of equity and, as such, specific
performance and injunctive relief, being equitable remedies, may not be
available; and
(iv) may not be given effect to by a Bermuda court, whether or not it was
applying the Foreign Laws, if and to the extent they constitute the
payment of an amount which is in the nature of a penalty and not in the
nature of liquidated damages.
A Bermuda court may stay any proceedings commenced in Bermuda against the
Company under the Documents if there are other proceedings in respect of those
Documents simultaneously under way against the Company in another jurisdiction.
We have made no investigation of and express no opinion in relation to the laws
of any jurisdiction other than Bermuda. This opinion is to be governed by and
construed in accordance with the laws of Bermuda and is limited to and is given
on the basis of the current law and practice in Bermuda. This opinion is issued
solely for your benefit with respect to the matters referred to herein and is
not to be relied upon by any other person, firm or entity or in respect of any
other matter without our express written consent.
On the basis of and subject to the foregoing, we are of the opinion that:
1. The Company has been duly incorporated, is validly existing and in good
standing (meaning that it has not failed to make any filing with any
Bermuda governmental authority or to pay any Bermuda government fee or
tax which might make it liable to be stuck off the Register of
Companies and thereby cease to exist under the laws of Bermuda) under
the laws of Bermuda.
2. The Company has the necessary corporate power and authority to enter
into and perform its obligations under the Documents. The execution and
delivery of the Documents by the Company and the performance by the
Company of its obligations under the Documents in accordance with their
respective terms will not violate the Memorandum of Association or
Bye-laws of the Company or any applicable law, regulation, order or
decree in Bermuda.
3. The Company has taken all corporate action required to authorise its
execution and delivery of the Documents and the performance of its
obligations under the Documents in accordance with their respective
terms. The Documents have been duly executed by or on behalf of the
Company and upon delivery will constitute the valid and binding
obligations of the Company enforceable in accordance with the terms
thereof.
<PAGE>
5
4. The registered office of the Company is Clarendon House, 2 Church
Street, Hamilton, Bermuda and the bye-laws of the Company provide that
the Company shall have a head office in Bermuda.
5. The Company has, pursuant to the Assignments assigned to NB Capital,
without recourse to the Company, all its right, title and interest to
the Mortgage Loans and NB Capital may therefore:
(a) obtain legal title to the Mortgage Loans subject to the right
of redemption of the Company upon the satisfaction of the
obligations of the Company under the applicable Note;
(b) upon demand obtain physical possession of the documents
evidencing the Mortgage Loans;
(c) collect the revenues produced by the Mortgage Loans, together
with the capital falling due thereon and give a valid
discharge thereof; and
(d) in its own name institute proceedings in recovery of the
Mortgage Loans.
6. No order, consent, approval, license, authorisation or validation of or
exemption by any government or public body or authority of Bermuda or
any sub-division thereof is required to authorise or is required in
connection with the execution and delivery by the Company of the
Documents or the performance and enforcement of its obligations
thereunder.
7. It is not necessary or advisable, in order to ensure their
enforceability in Bermuda, that the Documents be registered in any
register kept by, or filed with, any governmental authority or
regulatory body in Bermuda. However, it may be desirable, in order to
ensure their priority in Bermuda, that the Assignments and any document
which creates a mortgage or charge (a "Security Document") be
registered in the Register of Charges in accordance with Section 55 of
the Companies Act 1981. Upon registration the Security Document will
have priority in Bermuda over any unregistered charge created after
11th July, 1984 and over any subsequently registered charge in respect
of the assets which are the subject of the Security Document. A
registration fee of BD$425 will be payable in respect of the
registration of each Security Document so registered.
8. There is no income or other tax of Bermuda imposed by withholding or
otherwise on any payment to be made to or by the Company under the
Documents. The Documents will not be subject to ad valorem stamp duty
in Bermuda and no registration, documentary, recording, transfer or
other similar tax, fee or charge is payable in connection with the
<PAGE>
6
execution, delivery, filing, registration or performance of the
Documents other than as stated in paragraph 7 hereof.
9. Neither the Bank nor NB Capital will be deemed to be resident,
domiciled or carrying on business in Bermuda by reason only of their
execution, performance or enforcement of the Documents.
10. The Bank and NB Capital each have standing to bring an action or
proceedings before the appropriate courts in Bermuda for the
enforcement of the Documents. It is not necessary or advisable in order
for the Bank or NB Capital to enforce its rights under the Documents,
including the exercise of remedies thereunder, that it be licensed,
qualified or otherwise entitled to carry on business in Bermuda.
11. The choice of the Foreign Laws as the governing law of the Mortgage
Purchase Agreement is a valid choice of law and would be recognised and
given effect to in any action brought before a court of competent
jurisdiction in Bermuda, except for those laws (i) which such court
considers to be procedural in nature, (ii) which are revenue or penal
laws or (iii) the application of which would be inconsistent with
public policy, as such term is interpreted under the laws of Bermuda.
12. The submission by the Company under the Mortgage Purchase Agreement to
the non-exclusive jurisdiction of the Foreign Courts is valid and
binding upon the Company.
13. A Bermuda court would recognise as a valid judgment, a final and
conclusive judgement in personam obtained in the Foreign Courts against
the Company based upon the Documents under which a sum of money is
payable (other than a sum of money payable in respect of multiple
damages, taxes or other charges of a like nature or in respect of a
fine or other penalty) and would give a judgment based thereon provided
that (a) such courts had proper jurisdiction over the parties subject
to such judgment, (b) such courts did not contravene the rules of
natural justice of Bermuda, (c) such judgment was not obtained by
fraud, (d) the enforcement of the judgment would not be contrary to the
public policy of Bermuda, (e) no new admissible evidence relevant to
the action is submitted prior to the rendering of the judgment by the
courts of Bermuda and (f) there is due compliance with the correct
procedures under the laws of Bermuda.
14. The Documents are in an acceptable legal form under the laws of Bermuda
for enforcement therefore in Bermuda.
Yours faithfully
[OSLER, HOSKIN & HARCOURT LETTERHEAD]
September 3, 1997
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
North Tower
World Financial Center
New York, New York 10281-1209
Dear Sirs and Mesdames:
Re: NB Capital Corporation
Public Offering of 300,000 Shares of 8.35%
Noncumulative Exchangeable Preferred Stock, Series A
----------------------------------------------------
We have acted as Canadian counsel to Merrill Lynch & Co. and Merrill Lynch,
Pierce, Fenner & Smith (the "Initial Purchaser") in connection with the sale by
NB Capital Corporation (the "Company") and the purchase by the Initial Purchaser
of 300,000 shares of the Company's 8.35% Noncumulative Exchangeable Preferred
Stock, Series A (the "Series A Preferred Shares"). The Series A Preferred Shares
are being issued pursuant to a purchase agreement dated August 22, 1997 (the
"Purchase Agreement") among the Company, the Bank and the Initial Purchaser. We
have been advised by the Initial Purchaser there were no sales of Series A
Preferred Shares in Canada.
This opinion letter is being provided pursuant to Section 5(d)(B) of the
Purchase Agreement. Capitalized terms used and not otherwise defined herein
shall have the meanings ascribed to such terms in the Purchase Agreement.
As Canadian counsel for the Initial Purchaser, we have examined the following
documents and agreements:
(a) the Offering Memorandum;
(b) an executed copy of the Purchase Agreement;
(c) resolutions of the Board of Directors of the Bank adopted at a
meeting of the Board of Directors held on August 15, 1997 (the
"Bank Resolutions"), as certified by the Secretary of the Bank
as of the date hereof;
<PAGE>
- 2 -
(d) a certificate of officers of the Bank as to certain matters
(the "Officers' Certificate");
(e) the registration rights agreement among the Company, NB
Finance, Ltd. ("NB Finance"), a Bermuda corporation and the
Bank, dated as of the Closing Date (the "Registration Rights
Agreement");
(f) the mortgage loan purchase agreement executed before Mtre
Bertrand Ducharme, on September 3, 1997, between the Bank and
NB Finance (the "Mortgage Loan Purchase Agreement");
(g) the loan agreement between NB Finance and the Company dated as
of September 3, 1997 pursuant to which the Company has agreed
to lend to NB Finance an aggregate amount of U.S.$476,588,453
(the "Loan Agreement") and the promissory notes of NB Finance
evidencing its indebtedness thereunder;
(h) the sixteen mortgage loan assignment agreements among NB
Finance, the Company and the Bank dated September 3, 1997 (the
"Mortgage Loan Assignment Agreements");
(i) the advisory agreement between the Bank and the Company, dated
September 3, 1997 (the "Advisory Agreement");
(j) the servicing agreement among the Bank, the Company and NB
Finance in respect of the Mortgage Loans (as such expression
is defined in the Offering Memorandum) dated September 3, 1997
(the "Servicing Agreement"); and
(k) the assignment of the Servicing Agreement dated September 3,
1997 between NB Finance and the Company (the "Assignment of
Servicing Agreement").
In this opinion, the following terms shall have the following meanings:
(a) "Applicable Laws" means those laws, rules and regulations of
the Provinces of Canada and the Federal Laws of Canada
applicable therein which are normally applicable to
transactions of the type contemplated in the Transaction
Agreements (defined below), but without having made any
special investigation concerning other laws, rules or
regulations;
(b) "Applicable Orders" means any administrative order or decree
of any court or government authority or agency having
jurisdiction over the Bank, the existence of which has been
specifically disclosed by the Bank in a Schedule to the
opinion of Desjardins Ducharme Stein Monast of even date
herewith;
<PAGE>
- 3 -
(c) "Government Approval" means any consent, approval, license,
authorization or validation of, or filing, qualification or
registration with, any Governmental Authority pursuant to
Applicable Law;
(d) "Government Authorities" means any provincial or federal
executive, legislative, judicial, administrative or regulatory
body of Canada;
(e) "NHA" means the National Housing Act (Canada), as amended from
time to time, and the regulations promulgated thereunder; and
(f) The Purchase Agreement, the Registration Rights Agreement, the
Mortgage Loan Purchase Agreement, the Loan Agreement, the
Mortgage Loan Assignment Agreements, the Advisory Agreement,
the Servicing Agreement and the Assignment of Servicing
Agreements are sometimes collectively referred to herein as
the "Transaction Agreements".
In connection with the opinions expressed in this opinion letter we have
examined such questions of law and such public and corporate records,
certificates and other documents and conducted such other examinations as we
have considered necessary. In such examinations we have assumed the legal
capacity of all individuals, the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity to authentic
original documents of all documents submitted to us as certified, conformed,
photostatic or facsimile copies.
In addition, we have not undertaken any due diligence with respect to (i) the
Initial Mortgage Loans and, in particular, as to the title of the Bank, any
restriction or requirement or the need for consents or notice with respect to
the Initial Mortgage Loans, which may affect the validity of any purported
transfer or assignment of the Initial Mortgage Loans and (ii) the qualification
of the Bank as an approved lender under the NHA, relying exclusively with
respect thereto on the Officers' Certificate and the opinion of Desjardins
Ducharme Stein Monast of even date herewith.
We are solicitors qualified to carry on the practice of law in the Province of
Ontario and, except to the extent that we rely upon opinions of other counsel as
herein set forth, we express no opinion as to any laws, or any matters governed
by any laws, other than the laws of the Province of Ontario and the federal laws
of Canada applicable therein.
On the basis of the foregoing and subject to the qualifications hereinafter
expressed, we are of the opinion that:
1. The Bank has been duly organized and is validly existing as a Canadian
chartered bank under the Bank Act (Canada) (the "Bank Act"), with full
power (corporate and other) and authority to own, lease and operate its
properties and to conduct its business as described
<PAGE>
- 4 -
in the Offering Memorandum, and to enter into and perform its
obligations under each of the Transaction Agreements to which it is a
party.
2. All of the outstanding shares of capital stock of the Bank have been
duly authorized and validly issued and are fully paid and
non-assessable.
3. Each of the Transaction Agreements to which the Bank is a party has
been duly authorized, executed and delivered by the Bank.
4. The Bank Preferred Shares have been duly authorized by the Bank and, if
and when executed and delivered by the Bank pursuant to the terms and
conditions set forth in the Bank Resolutions, the Bank Preferred Shares
will be duly issued, fully paid and non-assessable.
5. No Government Approval is required for the issuance and sale of the
Series A Preferred Shares by the Company or the Bank Preferred Shares
by the Bank except such that have been obtained and made.
6. No Government Approval is required in connection with the performance
by the Bank of its respective obligations under the Transaction
Agreements to which it is a party, or the consummation of the
transactions contemplated thereby, except such as have been obtained
and made.
7. (a) Provided there has been fulfilment of the procedural
requirements under the laws of the Province of Ontario and
there has been registration of the interest of NB Finance in
the Initial Mortgage Loans against the real properties
securing such Initial Mortgage Loans (by power of attorney
granted or otherwise in the Province of Ontario), NB Finance
may enforce its rights as if it were the original mortgagee
under such Initial Mortgage Loans, pursuant to the Mortgage
Loan Purchase Agreement.
(b) The choice of Quebec law as the governing law of the Mortgage
Loan Purchase Agreement will be upheld as a valid choice of
law by the courts of the Province of Ontario provided that
such choice of law is bona fide (in the sense that it was not
made with a view to avoiding the consequences of the law of
any other jurisdiction) and is not contrary to public policy
as this term is understood under the laws of the Province of
Ontario. In the event that such agreement is sought to be
enforced in the Province of Ontario, in accordance with the
laws of Quebec, the courts of competent jurisdiction of the
Province of Ontario would, subject to subparagraph (a) above,
recognize the choice of law and apply the laws of Quebec, upon
proof of those laws, except to the extent that the provisions
of such agreement or of the laws of Quebec are contrary to
public policy as that term is
<PAGE>
- 5 -
understood under Ontario laws, those laws are foreign revenue,
expropriatory or penal laws, or those laws deal with matters
which an Ontario court would consider procedural in nature.
(c) A final and conclusive civil judgment for a sum certain
obtained in a court of competent jurisdiction of Quebec
against the Bank in connection with any action arising out of
or relating to such agreement which judgment is not
impeachable as void or voidable under the laws of Quebec would
be recognized and could be sued upon in a court in the
Province of Ontario and such court would grant a judgment
which would be enforceable against the Bank in the Province of
Ontario provided that:
(i) the court of competent jurisdiction of Quebec has
jurisdiction over the Bank as recognized by the
courts of the Province of Ontario;
(ii) such judgment was not obtained by fraud or in any
manner contrary to natural justice and the
enforcement thereof would not be inconsistent with
public policy as such term is understood under the
laws of the Province of Ontario and the laws of
Canada applicable therein;
(iii) enforcement of such judgment does not constitute,
directly or indirectly, the enforcement of foreign
revenue, expropriatory or penal laws; and
(iv) there has been compliance with the Limitations Act
(Ontario).
(d) Provided there has been fulfilment of the procedural
requirements under the laws of the Province of Ontario and
there has been registration of the interest of the Company in
the Initial Mortgage Loans against the real properties
securing such Initial Mortgage Loans (by power of attorney
granted or otherwise in the Province of Ontario), the Company
may enforce its rights as if it were the original mortgagee
under such Initial Mortgage Loans, pursuant to the Mortgage
Loan Assignment Agreements.
(e) The choice of Bermuda law as the governing law of the Mortgage
Loan Assignment Agreements will be upheld as a valid choice of
law by the courts of the Province of Ontario provided that
such choice of law is bona fide (in the sense that it was not
made with a view to avoiding the consequences of the law of
any other jurisdiction) and is not contrary to public policy
as this term is understood under the laws of the Province of
Ontario. In the event that the such agreement is sought to be
enforced in the Province of Ontario, in accordance with the
laws of Bermuda, the courts of competent jurisdiction of the
Province of Ontario would, subject to subparagraph (d) above,
recognize the choice of law
<PAGE>
- 6 -
and apply the laws of Bermuda, upon proof of those laws,
except to the extent that the provisions of such agreement or
of the laws of Bermuda are contrary to public policy as that
term is understood under Ontario laws, those laws are foreign
revenue, expropriatory or penal laws, or those laws deal with
matters which an Ontario court would consider procedural in
nature.
(f) A final and conclusive civil judgment for a sum certain
obtained in a court of competent jurisdiction of Bermuda
against NB Finance in connection with any action arising out
of or relating to such agreement which judgment is not
impeachable as void or voidable under the laws of Bermuda
would be recognized and could be sued upon in a court in the
Province of Ontario and such court would grant a judgment
which would be enforceable against NB Finance in the Province
of Ontario provided that:
(i) the court of competent jurisdiction of Bermuda has
jurisdiction over NB Finance as recognized by the
courts of the Province of Ontario;
(ii) such judgment was not obtained by fraud or in any
manner contrary to natural justice and the
enforcement thereof would not be inconsistent with
public policy as such term is understood under the
laws of the Province of Ontario and the laws of
Canada applicable therein;
(iii) enforcement of such judgment does not constitute,
directly or indirectly, the enforcement of foreign
revenue, expropriatory or penal laws; and
(iv) there has been compliance with the Limitations Act
(Ontario).
8.
(a) In the event that:
(i) a liquidator of the Bank is appointed under the
Winding Up and Restructuring Act (Canada) (the "W-U
Act"), or
(ii) Canada Deposit Insurance Company ("CDIC") is
appointed the receiver of the Bank or assumes control
of the assets or shares and subordinated debt of the
Bank under an order made under the Canada Deposit
Insurance Act (the "CDIC Act"), or
<PAGE>
- 7 -
(iii) the Superintendent of Financial Institutions (the
"Superintendent") assumes control and management of
the Bank under the Bank Act,
the registration of its interest against any of the Initial
Mortgage Loans by NB Finance or the Company would not
constitute a preference under the W-U Act, the Bank Act, the
CDIC Act or under any Ontario law. The registration of such
interest by NB Finance or the Company against such mortgage
subsequent to the appointment of a liquidator, CDIC or the
Superintendent would be permitted.
(b) If a liquidator of any mortgagor of any of the Initial
Mortgage Loans under the W-U Act, or any such mortgagor is
declared a bankrupt or files a notice of intention or proposal
under the Bankruptcy and Insolvency Act (Canada) (the "BIA")
or proceedings are commenced by or against a mortgagor under
the Company Creditors Arrangement Act (the "CCAA"), the
registration of the interest of NB Finance or the Company
against any of such mortgages would not constitute a
preference under the W-U Act, the BIA, the CCAA or any other
Ontario law.
In addition, we have participated in conferences with officers and
representatives of the Bank, representatives of independent accountants of the
Bank and representatives of the Initial Purchaser at which the contents of the
Offering Memorandum and related matters were discussed and, although we are not
passing upon or assuming responsibility for the accuracy, completeness or
fairness of the statements contained or incorporated by reference in the
Offering Memorandum, on the basis of the foregoing, nothing has come to our
attention that would lead us to believe that the Offering Memorandum (except for
financial statements and schedules and other financial data included or
incorporated by reference therein or omitted therefrom, as to which we make no
statement), as of its date or on the date hereof, includes an untrue statement
of a material fact or omitted or omits to state a material fact necessary in
order to make the statements, in light of the circumstances in which they were
made, not misleading.
The foregoing opinions are subject to the following qualifications:
(a) The opinions set forth at paragraphs 7 and 8 hereof are
subject to the following qualification:
(i) Until a mortgagor has been given written notice of
any assignment of any Initial Mortgage Loans secured
by real property in the Province of Ontario (an
"Ontario Mortgage"), such mortgagor may continue to
pay the Bank in respect of such Ontario Mortgage;
<PAGE>
- 8 -
(ii) To the extent that the interest of the Company and NB
Finance in the Ontario Mortgages constitutes
interests in real property, such interests will be
subject to interests in the Ontario Mortgages
acquired by any persons who register their interests
in the applicable land registry or land titles
offices before the Company and NB Finance register
their respective interests in such offices;
(iii) Enforcement proceedings with respect to any of the
Ontario Mortgages forming part of the Initial
Mortgage Loans must be commenced in Ontario and then
only in accordance with the rules and procedural
formalities in effect in Ontario at that time;
(iv) Canada Mortgage Housing Corporation ("CMHC")
insurance will cease to be in force if any Initial
Mortgage Loan is sold to a person other than a lender
approved by CMHC unless such Initial Mortgage Loan
continues to be administered by CMHC or a lender
approved by CMHC; and
(v) We express no opinion as to the title of the Bank,
the Company and NB Finance to any property nor as to
the rank or priority of any security interest,
mortgage, charge or assignment constituted by any of
the Transaction Documents.
(b) In expressing the opinions set forth in paragraph 1 and 2 with
respect to the Bank, the opinions set forth in paragraphs 4, 5
and 6, insofar as they relate to matters governed by the laws
of the Province of Quebec and the federal laws of Canada
applicable therein, and the opinions set forth in paragraphs 3
and 4 with respect to certain matters pertaining to due
authorization, execution and delivery of agreements and
instruments by the Bank and the due issuance of the Series A
Preferred Shares, we have relied, with your consent, solely on
the opinion of Desjardins Ducharme Stein Monast, dated the
date of this opinion letter and addressed to you.
(c) In expressing the opinions set forth in paragraphs 5 and 6, we
are not expressing any opinion as to the laws of any Provinces
(or the Federal laws applicable in such Provinces) other than
with respect to the Province of Quebec.
(d) In relying on the opinions of Desjardins Ducharme Stein Monast
and of counsel in each relevant jurisdiction dated the date
hereof and addressed to us and to Desjardins Ducharme Stein
Monast, our opinions are limited in scope to the matters upon
which such counsel have opined and are subject to the
assumptions, qualifications, restrictions and conditions
contained in the opinions of such
<PAGE>
- 9 -
counsel, and such assumptions, qualifications, restrictions
and conditions are incorporated herein by reference.
Except as set forth below, this opinion is given solely for the benefit of the
addressees and may not be relied upon, shown or distributed in whole or in part
to any other person, by any other person. Notwithstanding the foregoing,
Skadden, Arps, Slate, Meagher & Flom LLP and Shearman & Sterling may rely on
paragraphs 7 and 8 of this opinion letter as if it was addressed to them.
Yours very truly,
Osler, Hoskin & Harcourt
SS/RL/RC/JL/FT
Exhibit 5.2 to
FORM F-9
DESJARDINS DUCHARME STEIN MONAST
GENERAL PARTNERSHIP
BARRISTERS & SOLICITORS
Montreal, Quebec, Canada, December 19, 1997
BY EDGAR
SECURITIES AND EXCHANGE COMMISSION
Dear Sirs/Mesdames:
Re: $300,000,000
NATIONAL BANK OF CANADA
(300,000 Shares)
8.45% Noncumulative First Preferred Shares, Series Z
We have acted as counsel to National Bank of Canada in
connection with the preparation of its (final) short form prospectus dated
December 11, 1997 (the "Prospectus") relating to the above-captioned potential
distribution.
We consent to the use of, and reference to, our name and
opinion under the heading "Legal Matters" in the Prospectus.
In giving this consent, we do not thereby concede that we come
within the category of persons whose consent is required by the Securities Act
of 1933 as amended, or the general rules and regulations promulgated thereunder.
Yours truly,
/s/ DESJARDINS DUCHARME STEIN MONAST
PYC/ds
