As filed with the Securities and Exchange Commission on February 17, 1998
Registration Statement No. 333
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
-------------------------------
Form F-9/Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
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Form F-9 Form S-1
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
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<CAPTION>
(Address, including postal code and telephone number, including area
code, of Registrant's principal executive offices)
<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
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(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of
Agent for Services in the United States)
Copies to:
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<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
Approximate date of commencement of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
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<PAGE>
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Form F-9 Form S-1
<S> <C>
(Principal jurisdiction regulating this If the securities being registered on
Form F-9 offering (if applicable) this Form are to be offered on
It is proposed that this filing shall become a delayed or continuous basis pursuant
effective (check appropriate box): to Rule 415 under the Securities Act
A. |_| upon filing with the of 1933, check the following box. |X|
Commission, pursuant to Rule 467(a)
(if in connection with an offering If this Form is filed to register
being made contemporaneously in the additional securities for an offering
United States and Canada). pursuant to Rule 462(b) under the
B. |x| at some future date (check the Securities Act, please check the following box
appropriate box below) and list the Securities Act registration
1. |_| pursuant to Rule 467(a) on statement number of the earlier
( ) at ( ) (designate a time effective registration statement for the
not sooner than 7 calendar same offering. |_|
days after filing).
2. |_| pursuant to Rule 467(b) on If this Form is a post-effective
( ) at ( ) (designate a time 7 amendment filed pursuant to Rule 462(c)
calendar days or sooner after under the Securities Act, check the
filing) because the securities following box and list the Securities
regulatory authority in the Act registration statement number of the
review jurisdiction has issued earlier registration statement for the same
a receipt or notification of offering. |_|
clearance on ( ).
3. |x| pursuant to Rule 467(b) as If this Form is a post-effective amendment
soon as practicable after pursuant to Rule 462(d) under the
notification of the Commission Securities Act, check the following box and
by the Registrant or the list the Securities Act registration statement
Canadian securities regulatory number of the earlier effective registration
authority of the review statement for the same offering. [_]
jurisdiction that a receipt or
notification of clearance has If delivery of the prospectus is expected
been issued with respect to be made pursuant to Rule 434 under the
hereto. Securities Act, please check the following
4. |_| after the filing of the box. [_]
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
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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
<C> <C> <C> <C> <C>
8.35% Noncumulative U.S.$61,600,000 U.S.$1,000 U.S.$61,600,000 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 (Registration Statement No.
333-41009) ("Form S-4") related to 300,000 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A ("Preferred Shares").
An amendment to Form S-4, filed separately on the date hereof, reduced the
number of Preferred Shares registered thereon by 61,600 shares. The 61,600
Preferred Shares are being registered pursuant to this Form S-1/Form F-9.
Accordingly, pursuant to Rule 457(b), no registration fee is due with
respect to the registration of 61,600 Preferred Shares hereunder since such
Preferred Shares were included in the calculation of the fee paid on
November 25, 1997 in connection with the filing of the Form S-4.
Each share of Preferred Stock 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 Form F-9.
** Solely with respect to Form S-1.
===========================================================================================================================
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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. Accordingly,
the Company and the Bank are filing this Registration Statement on Form
S-1/Registration Statement on Form F-9 and separately filing Amendment No. 3 to
Registration Statement on Form S-4/Amendment No. 2 to Registration Statement on
Form F-9 in order to respond to the Second Comment Letter.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY __, 1998
PRELIMINARY PROSPECTUS
61,600 Shares
NB Capital Corporation
8.35% Noncumulative Exchangeable Preferred Stock, Series A
(Liquidation preference US$1,000 per share)
Exchangeable into Preferred Shares of National Bank of Canada
This Prospectus relates to the offer of up to 61,600 shares
(the "Offer") of 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "Series A Preferred Shares"), of NB Capital
Corporation (the "Company"), a wholly owned subsidiary of National Bank of
Canada (the "Bank"). On September 3, 1997 (the "Issue Date"), 300,000 Series A
Preferred Shares were issued and sold (the "Original Offering") to Merrill
Lynch, Pierce, Fenner & Smith (the "Initial Purchaser") in a transaction not
registered under the Securities Act of 1933, as amended (the "Securities Act")
in reliance upon an exemption from the registration requirements thereof. The
Initial Purchaser simultaneously sold 238,400 Series A Preferred Shares in
transactions exempt from the registration requirements of the Securities Act in
the United States to persons reasonably believed by the Initial Purchaser to be
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act), to institutional "accredited investors" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act) and outside the United States to
non-United States persons in offshore transactions in reliance on Regulation S
under the Securities Act. The Initial Purchaser continues to hold up to 61,600
Series A Preferred Shares that may be offered and sold from time to time by the
Initial Purchaser pursuant to this Prospectus.
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 13 for a discussion of
certain factors that should be considered by potential holders of Series A
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 Series A
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. 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, the Company's only recourse will principally be
foreclosure on the real property securing the Initial Mortgage Assets
issued by NB Finance, and in certain circumstances, CMHC insurance may not
be available or receipt of payment thereof may be delayed.
o Dividends on the Series A 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 Series A
Preferred Shares for any particular quarterly dividend period, the holders
of the Series A Preferred Shares would not be entitled to recover such
dividend even if funds are, or subsequently become, available for payment
thereof.
ii
<PAGE>
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 Series A Preferred Shares. Consequently, the holders of Series A
Preferred Shares cannot preclude the Board of Directors from making such
amendments or revisions even though the ultimate effect to the holders of
Series A 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 Series A
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
Series A 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 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 Series A 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 Series A Preferred Shares or the sale
price thereof. Consequently, holders of Series A Preferred Shares may find
it difficult to sell their Series A Preferred shares or to sell their
Series A Preferred Shares at a price equivalent to the purchase price
thereof.
The 300,000 Series A Preferred Shares issued and sold on the
Issue Date bear legends restricting the transfer thereof. Pursuant to the
Registration Rights Agreement among the Company, the Bank and the Initial
Purchaser (the "Registration Rights Agreement"), the Company is obligated to
offer in exchange (the "Exchange Offer") for such Series A Preferred Shares, up
to 300,000 Series A Preferred Shares that do not bear such legends restricting
transfer. Accordingly, the Series A Preferred Shares issued in connection with
the Offer and the Exchange Offer are identical in all respects to the Series A
Preferred Shares issued and sold on the Original Issuance Date, except that such
Series A Preferred Shares will be freely transferrable. The Company has filed
with the Commission a Registration Statement on Form S-1, of which this
Prospectus constitutes a part, and a Registration Statement on Form S-4 to
satisfy its obligations under the Registration Rights Agreement.
--------------------
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.
iii
<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 Offer and 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 Series A 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.
iv
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.............................................................................................. 1
The Company............................................................................................ 1
The Bank .............................................................................................. 2
Summary Risk Factors................................................................................... 4
Business and Strategy.................................................................................. 5
Tax Status of the Company.............................................................................. 7
Series A Preferred Shares.............................................................................. 8
Selected Financial Data................................................................................ 12
RISK FACTORS.................................................................................................... 13
Interest Rate Risk and Maturity of Initial Mortgage Loans.............................................. 13
Currency Exchange Rate Risk............................................................................ 13
Real Estate Market Conditions.......................................................................... 13
Geographic Concentration of the Real Property Securing the Initial Mortgage Assets .................... 14
Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC Insurance...................... 14
Tax Risks.............................................................................................. 14
Dividends Not Cumulative............................................................................... 16
Dividends and Other Regulatory Restrictions on Operations of the Company............................... 17
Risk of Future Revisions in Policies and Strategies by Board of Directors.............................. 17
Balloon Payments....................................................................................... 17
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations with
Affiliates.................................................................................... 17
Relationship with the Bank and Its Affiliates; Conflicts of Interest................................... 18
Dependence upon the Bank............................................................................... 18
Absence of Public Market............................................................................... 18
Risks Associated with the Bank......................................................................... 19
Canadian Legal Considerations.......................................................................... 20
THE COMPANY..................................................................................................... 21
USE OF PROCEEDS................................................................................................. 21
CAPITALIZATION.................................................................................................. 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES..................................................................... 22
General .............................................................................................. 22
Liquidity and Capital Resources........................................................................ 23
Significant Accounting Policy.......................................................................... 23
BUSINESS AND STRATEGY........................................................................................... 23
General .............................................................................................. 23
Description of Dividend Policy......................................................................... 23
Description of the Company's Investment Policy......................................................... 24
Description of the Initial Mortgage Assets............................................................. 31
Description of the Initial Mortgage Loans.............................................................. 32
Effect of Interest Rate Fluctuation on Assets and Earnings............................................. 35
Servicing.............................................................................................. 36
Employees.............................................................................................. 37
Competition............................................................................................ 37
Legal Proceedings...................................................................................... 37
MANAGEMENT...................................................................................................... 38
Directors and Executive Officers....................................................................... 38
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v
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Compensation of Executive Officers..................................................................... 39
Options Exercised and Year-End Option/SAR Holdings..................................................... 40
Pension Plan........................................................................................... 41
Independent Directors.................................................................................. 41
Audit Committee........................................................................................ 41
Compensation of Directors and Officers................................................................. 42
Limitation of Liability and Indemnification of Directors and Officers.................................. 42
The Bank as Advisor.................................................................................... 43
DESCRIPTION OF THE SERIES A PREFERRED SHARES.................................................................... 43
General .............................................................................................. 43
Dividends.............................................................................................. 44
Automatic Exchange..................................................................................... 45
Ranking .............................................................................................. 46
Voting Rights.......................................................................................... 47
Redemption............................................................................................. 47
Rights upon Liquidation................................................................................ 50
Independent Director Approval.......................................................................... 50
REGISTRATION RIGHTS............................................................................................. 51
DESCRIPTION OF CAPITAL STOCK.................................................................................... 54
Common Stock........................................................................................... 54
Preferred Stock........................................................................................ 54
Power to Issue Additional Shares of Common Stock and Preferred Stock................................... 55
Restrictions on Ownership and Transfer................................................................. 56
Super-Majority Director Approval....................................................................... 57
Business Combinations.................................................................................. 57
Control Share Acquisitions............................................................................. 58
Form, Denomination, Book-Entry Procedures and Transfer................................................. 58
Depositary Procedures.................................................................................. 59
Certificated Series A Preferred Shares................................................................. 60
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS................................................................. 60
Qualification of the Company as a REIT................................................................. 61
Stock Ownership Tests.................................................................................. 62
Asset Tests............................................................................................ 62
Gross Income Tests..................................................................................... 62
Distribution Requirement............................................................................... 63
Taxation of the Company................................................................................ 63
Tax Treatment of Automatic Exchange.................................................................... 64
Taxation of Series A Preferred Shares.................................................................. 64
Taxation of Tax-Exempt Entities........................................................................ 65
State and Local Taxes.................................................................................. 65
Taxation of Bank Preferred Shares...................................................................... 65
Certain United States Federal Income Tax Considerations Applicable to Foreign Holders.................. 66
Information Reporting and Backup Withholding........................................................... 67
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS...................................................................... 67
Automatic Exchange..................................................................................... 67
Taxation of Dividends.................................................................................. 68
</TABLE>
vi
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Disposition of Bank Preferred Shares................................................................... 68
Redemption of Bank Preferred Shares.................................................................... 68
ERISA CONSIDERATIONS............................................................................................ 68
Status Under Plan Asset Regulations.................................................................... 68
Publicly-Offered Security Exception.................................................................... 69
Exemptions from Prohibited Transactions................................................................ 70
Unrelated Business Taxable Income...................................................................... 71
RATINGS ....................................................................................................... 71
INITIAL PURCHASER............................................................................................... 71
PLAN OF DISTRIBUTION............................................................................................ 72
LEGAL MATTERS................................................................................................... 72
EXPERTS ....................................................................................................... 73
ANNEX A
</TABLE>
-----------------------------
Until ____________, 1998, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligations of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
vii
<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.
viii
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus. The offering by NB
Capital Corporation (the "Company") of up to 61,600 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share
(the "Series A Preferred Shares") is referred to herein as the "Offer." The
offering by the Company of up to 300,000 shares of its Series A Preferred Stock
in exchange for up to all the outstanding shares of Series A Preferred Stock of
the Company is referred to herein as the "Exchange Offer." References to dollars
and US$ 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 Series A 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 currently 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$793 million. Accordingly, the Initial
Mortgage Assets issued by NB Finance are overcollateralized by US$ . 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 semiannually 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.
1
<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
2
<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 Series A 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 Series A 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 Series A
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 that the flow of Initial Mortgage Loans (footnote number 1) from
the Bank to NB Finance and the flow of Initial Mortgage Assets (footnote
3
<PAGE>
number 2) 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: Secured by residential real property and
recourse only to the Initial Mortgage Loans.
Footnote number 2: CMHC-insured residential first mortgages
originated by the Bank or acquired by the Bank from other
NHA-Approved Lenders (as defined).
Footnote number 3: Subject to automatic exchange of rhe 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.
4
<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 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 Loan." 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, 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 Series A 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 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
6
<PAGE>
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 Series A 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."
7
<PAGE>
Series A Preferred Shares
Issuer NB Capital Corporation, a Maryland corporation.
Securities Offered 61,600 Noncumulative Exchangeable Preferred
Shares, Series A.
Ranking The Series A 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 Series A Preferred
Shares may not be issued without the approval of
holders of at least two-thirds of the Series A
Preferred Shares. Additional shares of Preferred
Stock ranking on a parity with the Series A
Preferred Shares may not be issued without the
approval of a majority of the Board of Directors
and a majority of the Independent Directors.
Dividends Dividends on the Series A 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. Except for
the initial period, which shall commence on and
include , 1998 and end on , 1998,
dividends accrue in each quarterly period from the
first day of such period, whether or not dividends
were paid with respect to the preceding period.
Dividends on the Series A Preferred Shares are not
cumulative and, accordingly, if no dividend is
authorized and declared on the Series A Preferred
Shares by the Board of Directors for a quarterly
dividend period, holders of the Series A Preferred
Shares will have no right to receive a dividend
for that period, and the Company will have no
obligation to pay a dividend for that period,
whether or not dividends are authorized, declared
and paid for any future period with respect to
either the Series A Preferred Shares or the Common
Stock. If no dividend is paid on the Series A
Preferred Shares for a quarterly dividend period,
the payment of dividends on the Common Stock will
be prohibited for that period and at least the
following three quarterly dividend periods. See
"Description of Series A Preferred
Shares--Dividends."
8
<PAGE>
Liquidation Preference The liquidation preference for each of
the Series A Preferred Shares is US$1,000. Upon
liquidation, holders of the Series A 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 Series A
Preferred Shares--Rights Upon Liquidation."
Registration Rights
Agreement The Series A Preferred Shares were sold by the
Company on the Issue Date pursuant to the Purchase
Agreement dated 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. The Offer and
the Exchange Offer are intended to satisfy certain
rights under the Registration Rights Agreement,
which terminate upon the consummation of the Offer
and the Exchange Offer. The holders of the Series
A Preferred Shares are not entitled to any
exchange or registration rights with respect to
the Series A Preferred Shares. The Series A
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
Series A Preferred Shares The form and terms of the Series A Preferred
Shares issued by the Company pursuant to the Offer
and the Exchange Offer are the same as the form
and terms of the Series A Preferred Shares sold by
the Company on the Issue Date except that (i) such
Series A Preferred Shares issued by the Company
pursuant to the Offer and the Exchange Offer will
be registered under the Securities Act and
therefore will not bear legends restricting the
transfer thereof and (ii) holders thereof will not
be entitled to the registration rights available
under the Registration Rights Agreement, which
registration rights with respect to Series A
Preferred Shares will terminate upon the
consummation of the Offer and the Exchange Offer.
See "Description of the Series A Preferred
Shares."
Redemption The Series A Preferred Shares are not redeemable
prior to September 3, 2007 (except upon the
occurrence of a Tax Event, as defined in
"Description of Series A Preferred
Shares--Redemption," on or after September 3,
2002). On and after September 3, 2007, the Series
A Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at any
time and from time to time, at the 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 Series A
Preferred Shares in whole (but not in part) at a
redemption price equal to the Make-Whole Amount
(as defined in "Description of Series A 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 Series A Preferred
Shares--Redemption." The Series A Preferred Shares
are not subject to any sinking fund or mandatory
redemption and are not convertible into any other
securities of the Company.
9
<PAGE>
Automatic Exchange Each of the Series A Preferred Shares will be
exchanged automatically for one Bank Preferred
Share upon the occurrence of an Exchange Event.
See "Description of Series A Preferred
Shares--Automatic Exchange."
Voting Rights Holders of the Series A Preferred Shares
will not have any voting rights, except as
expressly provided herein. On any matter on which
holders of the Series A Preferred Shares may vote,
each of the Series A Preferred Shares will be
entitled to one vote. See "Description of Series A
Preferred Shares--Voting Rights."
Ownership Limits Beneficial ownership by any individual of
more than 5% of any outstanding series of
Preferred Stock, including the Series A Preferred
Shares offered hereby, is restricted in order to
preserve the Company's status as a REIT for United
States federal income tax purposes. See
"Description of Capital Stock--Restrictions on
Ownership and Transfer."
Ratings The Series A 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
Offer. The Initial Purchaser will receive all of
the net proceeds from the resale of the Series A
Preferred Shares.
ERISA Considerations Each holder of the Series A Preferred Shares will
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 Series A 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 Series A
Preferred Shares will not constitute a non-exempt
prohibited transaction under ERISA or the Code.
In addition, in the event that the Series A
Preferred Shares are not treated as
"publicly-offered securities" (within the meaning
of the above-referenced regulations) as of the
dates on which the Offer and the Exchange Offer
are consummated or (if no Exchange Offer is
consummated) is 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 such date and
ending on the date on which the Series A Preferred
Shares become "publicly-offered securities," each
Plan
10
<PAGE>
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 Series A Preferred Shares.
Any Plan fiduciary that proposes to cause a Plan
to invest in Series A 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
investment in Series A 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.
11
<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
September 30, 1997
------------------
<S> <C>
Statement of Income Data:
- -------------------------
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.
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RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before purchasing Series A Preferred Shares. 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. 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 Series A 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 Series
A 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 Series A
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, will remain at the levels existing on the dates of origination
of the Initial Mortgage Assets issued by NB Finance. 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 Series A
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.
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Geographic Concentration of the Real Property Securing the Initial Mortgage
Assets
All of the real property securing the Initial Mortgage Assets
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
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<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 Series A 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
Series A Preferred Shares, nor would it give the holders of the Series A
Preferred Shares the right to have their shares redeemed. See "Description of
Series A Preferred Shares--Redemption."
Notwithstanding 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 Series A Preferred Shares to revoke the Company's REIT
election. As long as any of the Series A Preferred Shares are outstanding, any
such determination by the Company may not be made without the approval of a
majority of the Independent Directors. 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."
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<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 Series A 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 Series A Preferred Shares any right to have such shares redeemed.
See "Description of Series A Preferred Shares--Redemption."
Automatic Exchange upon Occurrence of an Exchange Event.
Upon the occurrence of an Exchange Event, the outstanding
Series A Preferred Shares will be exchanged automatically on a one-for-one basis
for Bank Preferred Shares. See "Description of Series A Preferred
Shares--Automatic Exchange." The Automatic Exchange will be a taxable event.
Consequently, each holder of the Series A 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 Series A 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 Series A Preferred Shares.
Ownership of the Series A 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 Series A Preferred
Shares as the holder for U.S. federal income tax purposes of the Series A
Preferred Shares, distributions on the Series A 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
Series A Preferred Shares.
Dividends Not Cumulative
Dividends on the Series A 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 Series A 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 Series A Preferred Shares for a
quarterly dividend period, the holders of the Series A 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
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<PAGE>
95% of its "REIT taxable income" (not including capital gains) to stockholders.
See "--Tax Risks" below 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 Series A 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
Series A 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 Series A Preferred Shares
or give the holders thereof the right to have the Series A 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 Series A Preferred
Shares. Consequently, holders of the Series A 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 Series A 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 to 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 Offer or 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.
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<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."
Absence of Public Market
The Company is under no obligation, and currently has no
intention, to list the Series A Preferred Shares on a national exchange.
Additionally, there is no existing market for the Series A Preferred Shares and
there can be no assurance as to the liquidity of any markets that may develop
for the Series A Preferred Shares, the ability of the holders to sell their
Series A Preferred Shares or at what price holders of the Series A Preferred
Shares will be able to sell their Series A Preferred Shares. Future liquidity
and trading prices of the Series A Preferred Shares will
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<PAGE>
depend on many factors including, among other things, prevailing interest rates,
the Company's operating results, the market for similar securities and whether
the Series A 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 Series A 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 Exchange Offer
Registration Statement or the Shelf Registration Statement. Consequently,
holders of Series A Preferred Shares may find it difficult to sell their Series
A Preferred Shares or to sell their Series A Preferred Shares at a price
equivalent to the purchase price thereof.
Risks Associated with the Bank
Automatic Exchange.
The purchase of Series A Preferred Shares involves risks to
the holder of such 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 Series A 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 Series A Preferred Shares
would be required to exchange their Series A 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.
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 Series A Preferred Shares likely would receive, if anything,
substantially less than they would have received had the Series A 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 Series A 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 Series A 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
19
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Bank to declare and pay or set aside for payment, the Series A Preferred Shares
will be automatically exchanged for Bank Preferred Shares. See "Canadian Federal
Income Tax Considerations." Potential holders of the Series A 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.
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.
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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 Series A 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 SERIES A PREFERRED SHARES COULD BE
REQUIRED TO EXCHANGE THEIR SERIES A 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 Series A
Preferred Shares--Automatic Exchange."
USE OF PROCEEDS
There will be no proceeds to the Company from the Offer. The
Initial Purchaser will receive all of the net proceeds from the sale of the
Series A Preferred Shares.
21
<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>
Debt
Total long-term debt............................................................... US$ --
Stockholders' Equity
PreferredStock, 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 Original 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
Original 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 Original
Offering and the formation of the Company payable by the Company and
(ii) the full US$300,000,000 of proceeds of the Original 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$477 million to acquire the Initial Mortgage Assets
issued by NB Finance. In connection with its organization, the Company has
incurred significant legal and other advisory fees which will not be recurring.
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<PAGE>
Liquidity and Capital Resources
The Company's principal short-term and long-term liquidity
needs are to pay quarterly dividends on the Series A Preferred Shares, to pay
fees and expenses of the Bank pursuant to the Servicing Agreement and the
Advisory Agreement, and to pay franchise fees and expenses of advisors, if any,
to the Company. The Company does not have any indebtedness (current or
long-term), other material capital expenditures, balloon payments or other
payments due on other long-term obligations. No negative covenants have been
imposed on the Company.
The Company's revenues are derived from its Mortgage Assets.
As of September 30, 1997, the US$___ 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 Series A 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 principles 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.
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 Series A 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
23
<PAGE>
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 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 Series A 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 Series A Preferred Shares and none or no material portion of
the dividends on the Common Stock will constitute non-taxable returns of
capital.
Dividends will be 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 Series A Preferred Shares). First, under the
Company's current dividend policy, the Company may not make any distribution in
respect of the Common Stock 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 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 Series A 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 Series A 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 Series A 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 Series A 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.
24
<PAGE>
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 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.
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 and obligations that are
comparable to the Initial Mortgage Assets issued by NB Finance. The maturities
of the Initial Mortgage Assets issued by NB Finance 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 be
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 foreclose 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)).
25
<PAGE>
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 mortgage 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 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
26
<PAGE>
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.
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.
27
<PAGE>
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 Series A Preferred Shares. See also "--Dividend Policy"; "Risk
Factors--Risk of Future Revisions in Policies and Strategies by Board of
Directors."
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 Series A
Preferred Shares are not treated as "publicly-offered securities" as of the date
on which the Offer and the Exchange Offer are consummated, then during the
period commencing on such date and ending on the date on which the Series A
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
28
<PAGE>
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 each
subsequent taxable year. See "United States Federal Income Tax
Considerations--Stock Ownership Tests." The Company has issued 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 Series A 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 Series A Preferred Shares, and the
Company may not issue additional shares of Preferred Stock on a parity with the
Series A Preferred Shares either in the payment of dividends or in the
distribution of assets in liquidation without the approval of a majority of the
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
29
<PAGE>
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 Series A Preferred Shares that
certain actions of the Company be approved by a majority of the Independent
Directors is also intended to ensure fair dealings between the Company and the
Bank and its affiliates. However, there can be no assurance that any such
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
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 Offer
and the Exchange Offer the Company shall maintain its status as a reporting
company under the Exchange Act, for as long as any of the Series A Preferred
Shares are outstanding.
The Company currently has no intention to (a) invest in
securities of other issuers for the purpose of exercising control and (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 Series A 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.
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<PAGE>
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 issued by NB Finance
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 are
overcollateralized by the Initial Mortgage Loans. The aggregate amount of the
overcollateralization is, as of December 31, 1997, US$ million.
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.
The following table summarizes the Initial Mortgage Assets:
<TABLE>
<CAPTION>
Initial Mortgage Assets
Outstanding Maturity Interest Monthly
Amount Date Rate* Interest Payments
-------------------- -------------------- --------------------- -------------------
<S> <C> <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
31
<PAGE>
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, which amount would
be applied to reduce the outstanding principal amount of the Initial Mortgage
Assets issued by NB Finance. 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 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 downpayment 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.
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.
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%.
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
32
<PAGE>
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.
33
<PAGE>
The following table summarizes the Initial Mortgage Loans as
of December 31, 1997:
<TABLE>
<CAPTION>
Initial Mortgage Loans
(as of December 31, 1997)
Outstanding Smallest Largest
----------- -------- --------
Amount* Maturity Loan Loan Origination Date
------- -------- ---- ---- ----------------
Earliest Latest
-------- ------
<S> <C> <C> <C> <C> <C>
$ 39,912,395 Jan-2000 $8,723.66 $674,130.25 Jun-1986 Jan-1997
38,444,700 Jan-2000 $14,457.89 $1,118,189.58 Jun-1984 Jan-1997
79,960,295 Jan-2000 $13,249.13 $352,320.10 Aug-1983 Jan-1997
26,319,677 Jan-2000 $9,708.22 $314,697.46 Sep-1983 Dec-1997
73,591,245 Jul-2000 $5,604.36 $688,957.68 Apr-1986 Jul-1997
50,004,887 Jul-2000 $4,907.53 $612,452.46 May-1985 Jul-1997
12,142,187 Jul-2000 $11,936.51 $889,759.33 Mar-1985 Jul-1997
15,735,516 Jul-2000 $6,931.20 $323,940.67 Apr-1984 Jul-1997
8,730,228 Jan-2001 $15,874.42 $182,474.82 Feb-1985 Aug-1997
10,493,697 Jan-2001 $7,844.42 $208,616.64 Feb-1985 Jul-1997
55,026,166 Jan-2001 $6,368.53 $455,474.11 Jun-1987 May-1997
78,352,736 Jan-2001 $5,201.57 $580,003.32 Oct-1984 Jul-1997
36,972,357 Jul-2001 $6,825.40 $236,868.62 Apr-1986 Jul-1997
176,395,307 Jul-2001 $5,856.08 $2,270,054.60 Feb-1986 Jul-1997
37,821,383 Jul-2001 $10,045.36 $729,680.17 May-1985 Jun-1997
53,228,970 Jul-2001 $4,938.29 $344,466.58 May-1986 Jun-1997
-------------
$793,131,746
</TABLE>
<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
34
<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 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 Series A Preferred Shares.
Because the rate at which dividends on the
35
<PAGE>
Series A 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 Series A 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 Series A 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
36
<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 Series A 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.
37
<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 Series A Preferred Shares, the Independent Directors will consider
the interests of the holders of both the Series A 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 since September
1987. Mr. Hanley is a chartered accountant and a member of the Ordre des
comptables agrees du Quebec.
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.
38
<PAGE>
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 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:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Awards
-------------------------------------------------- ------------
Other Securities
Name and Annual Underlying All Other
Principal Salary Bonus Compensation Options/ Compensation
Position Year (US$) (US$) (US$) SARs(#) (US$)
- --------------------- ---------- ------------ ------------- -------------------- ----------------- -------------
<S> <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$4,555
annual car allowance.
</FN>
</TABLE>
39
<PAGE>
Options Exercised and Year-End Option/SAR Holdings
The following table provides information about stock option
exercises by Mr. Smock during 1997 and stock options/SARs held by Mr. Smock at
fiscal year-end:
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End (C$) (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>
40
<PAGE>
<TABLE>
<CAPTION>
Pension Plan
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 Series A Preferred Shares require that, as
long as any Series A Preferred Shares are outstanding, certain actions by the
Company must be approved by a majority of the Independent Directors. See
"Description of Series A 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 Series A 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 Series A 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 Series A 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.
41
<PAGE>
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.
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.
42
<PAGE>
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 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 Series A 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 Series A 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 THE SERIES A PREFERRED SHARES
The following summary of the material terms and provisions of
the Series A 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 Series A 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 Series A 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 Series A Preferred Shares.
When issued the Series A Preferred Shares will be validly
issued, fully paid and nonassessable. The holders of the Series A Preferred
Shares will have no preemptive rights with respect to any shares of the stock of
the Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares 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
43
<PAGE>
fund or other obligation of the Company for their repurchase or retirement. The
Series A Preferred Shares will be exchanged automatically on a one-for-one basis
for the Bank Preferred Shares upon the occurrence of an Exchange Event.
The transfer agent, registrar and dividend disbursement agent
for the Series A Preferred Shares will be The Bank of Nova Scotia Trust Company
of New York. The registrar for shares of Series A Preferred Shares will send
notices to shareholders of any meetings at which holders of the Series A
Preferred Shares have the right to elect directors of the Company or to vote on
any other matter.
Dividends
Holders of the 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 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 Series A
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. Except
for the initial period, which shall commence on and include , 1998 and end on ,
1998, dividends in each quarterly dividend period will accrue from the first day
of such period, whether or not authorized, declared or paid 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 Series A 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 Series A
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 Series A Preferred Shares to
receive dividends is noncumulative. Accordingly, if the Board of Directors fails
to authorize or declare a dividend on the Series A Preferred Shares for a
quarterly dividend period, then holders of the Series A Preferred Shares will
have no right to receive a dividend for that period, and the Company will have
no obligation to pay a dividend for that period, whether or not dividends are
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 Series A
Preferred Shares, holders of Preferred Stock, including the Series A Preferred
Shares and the Senior Preferred Shares, will be entitled to elect two directors.
See "--Voting Rights."
If full dividends on the Series A Preferred Shares for any
dividend period shall not have been 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 Series A Preferred Shares as to
dividends or amounts upon liquidation, nor shall any Common Stock or any other
capital stock of the Company ranking junior to or on a parity with the Series A
Preferred Shares as to dividends or amounts upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any monies to be paid
to or made available for a sinking fund for the redemption of any such stock) by
the Company (except by conversion into or exchange for other stock of the
Company ranking junior to the Series A Preferred Shares as to dividends and
amounts upon liquidation), until such time as dividends on all outstanding
Series A Preferred Shares have been (i) 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.
44
<PAGE>
When dividends are not paid in full (or a sum sufficient for
such full payment is not set apart) upon the Series A Preferred Shares and the
shares of any other series of stock ranking on a parity as to dividends with the
Series A Preferred Shares, all dividends authorized and declared upon the Series
A Preferred Shares and any other series of stock ranking on a parity as to
dividends with the Series A Preferred Shares shall be authorized and declared
proportionately so that the amount of dividends authorized and declared per
Series A 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 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 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 Series A 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 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. Any Series A 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 Series A Preferred Shares will be deemed cancelled without any further
action by the Company, all rights of the holders of the Series A Preferred
Shares as stockholders of the Company will cease, and such persons shall
thereupon and thereafter be deemed to be and shall be for all purposes holders
of Bank Preferred Shares. The Company will mail notice of the occurrence of an
Exchange Event to each holder of the Series A 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
Series A 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 Series A 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 Series A Preferred Shares, by the Bank or
by the Company in order to effect the Automatic Exchange as of the Time of
Exchange.
45
<PAGE>
Holders of the Series A Preferred Shares, by purchasing such
Series A Preferred Shares, will be deemed to have agreed to be bound by the
unconditional obligation to exchange such Series A Preferred Shares for the Bank
Preferred Shares upon the occurrence of an Exchange Event. The obligation of the
holders of the Series A Preferred Shares to surrender such shares and the
obligation of the Bank to issue the Bank Preferred Shares in exchange for the
Series A 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 Series A Preferred Shares (except that there
would be no redemption for a Tax Event). Any accrued and unpaid dividends on the
Series A Preferred Shares as of the 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 Series A Preferred Shares cannot exchange the
Series A Preferred Shares for the Bank Preferred Shares voluntarily. In
addition, absent the occurrence of the Automatic Exchange, holders of the Series
A Preferred Shares will have no dividend, voting, liquidation preference or
other rights with respect to the Bank or any security of the Bank.
Ranking
The Series A 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 Series A 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 Series A Preferred Shares, or
ranking junior to the Series A Preferred Shares, without any approval or consent
of the holders of Series A Preferred Shares. So long as any Series A 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 Series A
Preferred Shares. See "--Voting Rights." So long as any Series A 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."
46
<PAGE>
Voting Rights
Except as indicated below, the holders of the Series A
Preferred Shares will not be entitled to vote. In the event the holders of the
Series A Preferred Shares are entitled to vote as indicated below, each Series A
Preferred Share will be entitled to one vote on matters on which holders of the
Series A Preferred Shares are entitled to vote.
If, at the time of any annual meeting of the Company's
stockholders for the election of directors, the Company has failed to pay or
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 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 Series A 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
Series A 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
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 a meeting of the Company's stockholders, or of the
holders of the Series A Preferred Shares and Parity 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 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 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.
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 (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 Series A Preferred Shares) so as to
adversely affect the voting powers, preferences or special rights of the holders
of a series of Preferred Stock 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 Series A 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 Series A 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 Series A
Preferred Shares are to be redeemed, the number of Series A Preferred Shares to
be redeemed shall be determined by the Board of Directors, and the shares to be
redeemed shall be determined by lot or 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
Series A 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 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 Company shall not purchase or
otherwise acquire any Series A Preferred Shares; provided, however, that the
Company may purchase or acquire Series A Preferred Shares pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding Series A
Preferred Shares.
Furthermore, the Company may, at its option, on or after
September 3, 2002 and prior to September 3, 2007, redeem the Series A 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
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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.
"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 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 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 Series A Preferred
Shares at the time outstanding will be entitled to receive out of assets of the
Company legally available for distribution to stockholders under applicable law,
before any distribution of assets is made to holders of Common Stock or any
other class of stock ranking junior to the Series A Preferred Shares upon
liquidation, 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 Series A Preferred
Shares will have no right or claim to any of the remaining assets of the
Company. In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Company are insufficient
to pay the amount of the liquidation distributions on all the outstanding Series
A 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 Series A
Preferred Shares in the distribution of assets upon any liquidation, dissolution
or winding up of the affairs of the Company, then the holders of the Series A
Preferred Shares and such other classes or series of 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 Series A Preferred Shares require that, as
long as any Series A Preferred Shares are outstanding, certain actions by the
Company be approved by a majority of the Independent Directors. 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 Series A Preferred Shares, will be deemed to be Independent
Directors for purposes of approving actions requiring the approval of a majority
of the Independent Directors. The actions which require approval of a majority
of the Independent Directors include (i) the issuance of additional Preferred
Stock ranking on a parity with the Series A Preferred Shares, (ii) the
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 Series A
Preferred Shares and the Common Stock would exceed an amount equal to the sum of
105% of the Company's "REIT taxable income" (excluding capital gains) for such
year plus net capital gains of the Company for that year, (iii) the acquisition
of Mortgage Assets issued by NB Finance 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
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 Series A Preferred Shares.
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REGISTRATION RIGHTS
The Company and the Bank entered into the Registration Rights
Agreement for the benefit of the holders of the Series A Preferred Shares issued
on the Issue Date (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, for the Series A Preferred Shares issued under
the Registration Statement (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 Series A 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 Series A 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 Series A 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
Series A 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 Series A 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 resale of all 61,600 Old Preferred Shares currently held by
the Initial Purchaser, 300,000 shares of Series A 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
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to establish, from time to time, the number of shares of Preferred Stock to be
included in any such class or series and to fix the designation and any
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends 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
Series A 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 Series A 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
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shares of stock will provide the Company with increased flexibility in
structuring possible future financings and 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
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owned by a particular individual or entity. As a result, the acquisition or
ownership of less than 5% of a class or series of issued and outstanding
Preferred Stock (or the acquisition or ownership of an interest in an entity
that owns shares of such series of Preferred Stock) by an individual or entity
could cause that individual or entity (or another individual or entity) to own
constructively in excess of 5% of such class or series of Preferred Stock, and
thus subject such stock to the applicable Ownership Limit. Direct or
constructive ownership in excess of the Ownership Limit would cause ownership of
the shares in excess of the limit to be transferred to the trustee.
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
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combinations with the Company that may not be in the best interest of its
stockholders without compliance by the Company with the super-majority vote
requirements and the other provisions of the statute.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast by stockholders, excluding shares owned by the acquiror and officers 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 Series A 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 Series A Preferred Share certificates (the
"Global Certificate") representing the Series A 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
Series A 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 Series A Preferred Shares, see "Certificated New Preferred Shares."
Except as described below, owners of interests in the Global
Certificate will not have Series A Preferred Shares registered in their name,
will not receive physical delivery of Series A 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
Series A 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 Series A
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 Series A Preferred Shares will
be governed
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by standing 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 Series A 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 Series A 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 Series A 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 Series A Preferred Shares
The Global Certificate is exchangeable for Series A 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
Series A Preferred Shares in certificated form. In all cases, certificated
Series A 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).
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States federal
income tax considerations with respect to the 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
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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.
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 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,
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 Series A 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:
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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 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.
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
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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 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.
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Tax Treatment of Automatic Exchange
Upon the occurrence of an Exchange Event, the outstanding
Series A Preferred Shares will be automatically exchanged on a one-for-one basis
for the Bank Preferred Shares. See "Description of Series A Preferred
Shares--Automatic Exchange." The Automatic Exchange will be a taxable exchange
with respect to which each holder of the Series A Preferred Shares will
recognize a gain or loss, as the case may be, measured by the difference between
the adjusted basis of such holder in its Series A Preferred Shares and the fair
market value of the Bank Preferred Shares received in the Automatic Exchange.
Assuming that such holder's Series A Preferred Shares were held as capital
assets prior to the Automatic Exchange, any 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 Series A Preferred Shares
Distributions (including constructive distributions) made to
holders of the Series A 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 Series A 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 Series A 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 Series A Preferred
Shares will not be permitted to deduct any share of that loss. Future Treasury
Regulations may require that holders of the Series A 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 Series A Preferred Shares 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 Series A 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 Series A Preferred
Shares, a holder of the Series A 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 Series A 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
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a substantial United States federal income tax liability, and the amount of
income available for distribution to its stockholders (including holders of the
Series A 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 Series A Preferred Shares will generally not
be subject to tax on distributions from the Company or gain realized on the sale
of the Series A Preferred Shares, provided that such holder has not incurred
indebtedness to purchase or hold its Series A 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.
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 Series A
Preferred Shares should consult their tax advisors regarding the effect of state
and local tax laws on an investment in the Series A 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.
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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 Series A Preferred Shares by a prospective investor in Series A Preferred
Shares that, for United States federal income tax purposes, is not a "United
States person" (a "Non-United States Holder"). For purposes of this discussion,
a "United States person" means: a citizen or individual resident of the United
States; a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof; an
estate the income of which is 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 Series A Preferred Shares as well as any tax consequences that
may arise under the laws of any foreign, state, local or other taxing
jurisdiction.
Dividends. Dividends paid by the Company out of current and
accumulated earnings and profits, as determined for United States federal income
tax purposes, to a Non-United States Holder will generally be subject to
withholding of United States federal income tax at the rate of 30%, unless
reduced or eliminated by an applicable tax treaty or unless such dividends are
treated as effectively connected with a United States trade or business of the
Non-United States Holder. Distributions paid by the Company in excess of its
current and accumulated earnings and profits will be treated first as a
nontaxable return of capital to the extent of the holder's adjusted basis in his
Series A Preferred Shares and, thereafter, as gain from the sale or exchange of
a capital asset as described "Gain on Disposition." If it cannot be determined
at the time a distribution is made whether such distribution will exceed the
current and accumulated earnings and profits of the Company, the distribution
will be subject to withholding at the same rate as dividends. Amounts so
withheld, however, will be refundable or creditable against the Non-United
States Holder's United States federal income tax liability if it is subsequently
determined that such distribution was, in fact, in excess of the current and
accumulated earnings and profits of the Company. If the receipt of a dividend is
treated as being effectively connected with the conduct of a United States trade
or business by a Non-United States Holder, the dividend received by such holder
will be subject to United States federal income tax in the same manner as United
States persons generally (and, in the case of a corporate holder, possibly the
branch profits tax).
Gain on Disposition. A Non-United States Holder will generally
not be subject to United States federal income tax on gain recognized on a sale
or other disposition of the Series A Preferred Shares unless (i) the gain is
effectively connected with the conduct of a United States trade or business by
the Non-United States Holder, (ii) in the case of a Non-United States Holder who
is a nonresident alien individual and holds the Series A Preferred Shares as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year and certain other requirements are met, or (iii) the Series
A Preferred Shares constitute "United States real property interests"
("USRPIs"). The Company does not believe that the Series A
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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 Series A 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 Series A
Preferred Shares. Certain holders of the Series A 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
Series A 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 Series A Preferred Shares of
the Company are exchanged for the Bank Preferred Shares pursuant to the
Automatic Exchange. See "Description of Series A 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.
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 Series A 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
Series A 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.
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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 Series A 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 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 Series A Preferred Shares will, following the consummation
of the Offer, 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 Offer, the Exchange Offer or (if no
Exchange Offer is consummated) the effectiveness of a Shelf Registration
Statement, however, the Series A Preferred Shares will
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not be "publicly-offered securities" and, accordingly, the assets of the Company
may be treated as assets of a Plan that purchases the Series A 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 Series A
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 Series A 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 Series A Preferred Shares are not
treated as "publicly-offered securities" as of the dates on which the Offer and
the Exchange Offer are 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 Series A 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 Series A
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
Offer, 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 from entities
unaffiliated with the Bank or the Company. In addition, in the event that the
Series A Preferred Shares are not treated as "publicly-offered securities" as of
the date on which the Offer and the Exchange Offer are 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 Series A 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 Offer and the Exchange Offer, the
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Series A Preferred Shares will be registered under the Securities Act and the
Exchange Act within the time periods specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely
held" only if it is a part of the class of securities that is owned by 100 or
more investors independent of the issuer and of one another. A security will not
fail to be "widely held" because the number of independent investors falls below
100 subsequent to the initial offering as a result of events beyond the control
of the issuer. The Company anticipates that the Series A 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 Series A Preferred Shares following the consummation of the
Offer and 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 Series A 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 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.
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Each investor in Series A Preferred Shares will 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 Series A 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
Series A 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 Series A 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 Series A Preferred Shares by the purchaser Plan are
entitled to the full exemptive relief thereunder. Any such Plan fiduciary should
also determine whether the investment in Series A 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 Series A 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 Series A 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 Series A
Preferred Shares, and, accordingly, there can be no assurance that the ratings
assigned to the Series A Preferred Shares will not be lowered or withdrawn by
the assigning rating organization at any time thereafter.
INITIAL PURCHASER
The Series A Preferred Shares were originally purchased by the
Initial Purchaser in a transaction exempt from the registration requirements of
the Securities Act, to persons reasonably believed by such Initial Purchaser to
be "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act), to certain qualified institutional buyers acting on behalf of
institutional "accredited investors" (as defined in Rule 501(a) (1), (2), (3) or
(7) under the Securities Act), or outside the United States to non-U.S. persons
in offshore transactions in reliance on Regulation S under the Securities Act.
The Initial Purchaser may from time to time offer and sell pursuant to this
Prospectus any or all of the Series A Preferred Shares.
As of February __, 1998, the Initial Purchaser held of record
61,600 or approximately 20.5% of the outstanding Series A Preferred Shares. The
Initial Purchaser disclaims beneficial ownership of these Series A Preferred
Shares.
The Initial Purchaser does not, and has never had, any
position, office or other material relationship with the Company or any of its
affiliates. Because the Initial Purchaser may, pursuant to this Prospectus,
offer all or some portion of the Series A Preferred Shares, no estimate can be
given as to the amount of the Series A Preferred Shares that will be held by the
Initial Purchaser upon termination of any such sales. In addition, the Initial
Purchaser may have sold, transferred or otherwise disposed of all or a portion
of their Series A Preferred Shares since the date on which they provided the
information regarding their Series A Preferred Shares, in transactions exempt
from the registration requirements of the Securities Act.
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PLAN OF DISTRIBUTION
The Series A Preferred Shares may be sold from time to time to
purchasers directly by the Initial Purchaser. Alternatively, the Initial
Purchaser may from time to time offer the Series A Preferred Shares to or
through underwriters, brokers/dealers or agents, who may receive compensation in
the form of underwriting discounts, concessions or commissions from the Initial
Purchaser or the purchasers of such securities for whom they may act as agents.
The Initial Purchaser and any underwriters, broker/dealers or agents that
participate in the distribution of Series A Preferred Shares may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of such securities and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Series A Preferred Shares may be sold from time to time in
one or more transactions at fixed prices, at prevailing market prices at the
time of sale, at varying prices determined at the time of sale or at negotiated
prices. The sale of the Series A Preferred Shares may be effected in
transactions (which may involve crosses or block transactions) (i) on any
national securities exchange or quotation service on which the Series A
Preferred Shares may be listed or quoted at the time of sale, (ii) in the
over-the-counter market, (iii) in transactions otherwise than on such exchanges
or in the over-the-counter market or (iv) through the writing of options. At the
time a particular offering of the Series A Preferred Shares is made, a
supplement to this Prospectus, if required, will be distributed which will set
forth the aggregate amount being offered and the terms of the offering,
including the name or names of any underwriters, broker/dealers or agents, any
discounts, commissions and other terms constituting compensation from the
Initial Purchaser and any discounts, commissions or concessions allowed or
reallowed or paid to broker/dealers.
To comply with the securities laws of certain jurisdictions,
if applicable, the Series A Preferred Shares will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Series A Preferred Shares may not be
offered or sold unless they have been registered or qualified for sale in such
jurisdictions or any exemption from registration or qualification is available
and is complied with.
The Initial Purchaser will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, which provisions
may limit the timing of purchases and sales of any of the Series A Preferred
Shares by the Initial Purchaser. The foregoing may affect the marketability of
such securities.
Pursuant to the Registration Rights Agreement, all expenses of
the registration of the Series A Preferred Shares will be paid by the Company,
including, without limitation, Commission filing fees and expenses of compliance
with state securities or "blue sky" laws; provided, however, that the Initial
Purchaser will pay all underwriting discounts and selling commissions, if any.
The Initial Purchaser will be indemnified by the Company against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith. The Company will be
indemnified by the Initial Purchaser against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith.
LEGAL MATTERS
The validity of the Series A 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.
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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 Series A 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 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 all 238,400 Old Preferred Shares
outstanding at the rate of one New Preferred Share for each Old Preferred Share
tendered.
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<PAGE>
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 Series A
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 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 September 3, 2007, discounted to the
date fixed for redemption of such Series A 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 Series A 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
provided to holders of Old Preferred Shares in connection with the Exchange
Offer.
NYBL: The Banking laws of the State of New York.
Offer: The offering of 61,600 Series A Preferred Shares by the Initial
Purchaser under this Prospectus.
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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.
Original Offering: The offering of Series A Preferred Shares by the
Company on the Issue Date.
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 Series A 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 Series
A 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 and 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
offering of Series A Preferred Shares.
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<PAGE>
PTCE: Prohibited Transaction Class Exemption.
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 Series A 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 Registration Statement to Form S-4/Registration Statement to Form
F-9 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
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<PAGE>
incurred to acquire Qualified REIT Real Estate Assets) not held for
sale in the ordinary course of business.
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
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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.
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.
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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, $ 1
100 shares issued and outstanding 999
--------
Additional paid-in capital $ 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 U.S. 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 U.S. 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 U.S. 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 U.S. 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>
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>
FORM S-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The fees and expenses in connection with the issuance and
distribution of the securities being registered hereunder, other than discounts
and commissions, are estimated as follows:
Printing and engraving expenses..............................................$
Legal fees and expenses.......................................................
Accounting fees and expenses..................................................
Blue sky fees and expenses....................................................
Miscellaneous.................................................................
Total...............................................................$
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,
II-1
<PAGE>
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.
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 Desjardin 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 -- Opinion letter of Desjardin Ducharme Stein Monast**
99.2 -- Opinion letter of Conyers Dill & Pearman**
99.3 -- Opinion letter of Osler, Hoskin & Harcourt*
- ------------
* Previously filed on the S-4/F-9 Registration Statement with the
Registration Statement of NB Capital Corporation on Form S-4/Form F-9
(Registration No. 333-41009) (the "S-4/F-9 Registration Statement")
** To be filed by amendment.
II-2
<PAGE>
Item 22. Undertakings
(a) The undersigned registrant 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
II-3
<PAGE>
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 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>
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>
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>
FORM S-1
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
---------------------------------------
Roger Smock
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, February 17, 1998
John Richter Chief Executive Officer,
President and Director
(Principal Executive Officer)
/s/ Tom Doss
- ---------------------- Chief Financial Officer, February 17, 1998
Tom Doss Treasurer and Director
(Principal Financial Officer
and Principal Accounting Officer)
/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>
II-5
<PAGE>
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-1 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>
FORM S-1
EXHIBITS
<TABLE>
<CAPTION>
Page
Exhibit Number Description Number
- -------------- ----------- ------
<S> <C> <C>
3(i) Articles of Incorporation and Articles of Amendment of 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 Desjardin 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 Opinion letter of Desjardin Ducharme Stein Monast*
99.2 Opinion letter of Conyers Dill & Pearman*
99.3 Opinion letter of Osler, Hoskin & Harcourt*
<FN>
* Previously filed on the S-4/F-9 Registration Statement
** To be filed by amendment by the S-4/F-9 Registration Statement
</FN>
</TABLE>
II-6
<PAGE>
FORM F-9
EXHIBITS
<TABLE>
<CAPTION>
Page
Exhibit 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*
<FN>
- ---------------------
* Previously filed on S-4/F-9 Registration Statement
</FN>
</TABLE>
Exhibit 23.2 to Form S-1
[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
Exhibit 23.3 to Form S-1
[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
Exhibit 23.4 to Form S-1
[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
