As filed with the Securities and Exchange Commission on January 27, 1998
Registration Statement No.333-41009
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
-------------------------------
Amendment No. 1 to Form F-9, Amendment No. 2 to Form S-4 and Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
<TABLE>
<S> <C> <C>
Amendment No. 1 to Form F-9 Amendment No. 2 to
National Bank of Canada (Exact Name of Registrant as Specified in its Charter) Form S-4 and Form S-1
NB Capital Corporation
Canada (Province or Other Jurisdiction of Incorporation or Organization) Maryland
6021 (Primary Standard Industrial Classification Code Number) 6798
Not Applicable (I.R.S. Employer Identification No. if Applicable) 52-2063921
National Bank Tower 125 West 55th Street
600 de La Gauchetiere Street West New York, New York 10019
Montreal, Quebec, Canada H3B 4L2 (212) 632-8500
(514) 394-6080
(Address, including postal code and telephone number, including area code, of Registrant's principal executive offices)
NB Capital Corporation NB Capital Corporation
Francois Bourassa Francois Bourassa
Vice-President Legal and Secretary Vice-President Legal and Secretary
125 West 55th Street 125 West 55th Street
New York, New York 10019 New York, New York 10019
(212) 632-8693 (212) 632-8693
(Name, Address (Including Zip Code) and Telephone Number (Including Area Code) of Agent for Services in the United States)
Copies to:
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form S-1 Amendment No. 1 to Amendment No. 2 to
Form F-9 Form S-4
<S> <C> <C>
If any of the securities being (Principal jurisdiction regulating If the securities being
registered on this Forms are being this Form F-9 offering (if registered on this Form are
offered on a delayed or continuous applicable) being offered in connection with
basis pursuant to Rule 415 under the It is proposed that this filing the formation of a holding
Securities Act, check the following shall become effective company and there is compliance
box. |x| (check appropriate box): with General Instruction G,
A. |_| upon filing with the check the following box. |_|
Commission,
If this Form is filed to register pursuant to Rule 467(a) (if If this Form is filed to
additional securities for an offering in connection with an register additional securities for
pursuant to Rule 462(b) under the offering being made an offering pursuant to Rule
Securities Act, check the following contemporaneously in the 462(b) under the Securities Act,
box and list the Securities Act United States and Canada). check the following box and list
registration statement number of the B. |x| at some future date the Securities Act registration
earlier effective registration (check the appropriate statement number of the earlier
statement for the same offering. box below) effective registration statement
|_| ___________ 1. |_| pursuant to Rule 467(a) for the same offering. |_|
on ( ) at ( )
If this Form is a post-effective (designate a time not sooner If this Form is a
amendment filed pursuant to Rule than 7 calendar days after post-effective amendment filed
462(c) under the Securities Act, filing). pursuant to Rule 462(d) under
check the following box and list the 2. |_| pursuant to Rule 467(b) the Securities Act, check the
Securities Act registration statement on ( ) at ( ) following box and list the
number of the earlier effective (designate a time 7 calendar Securities Act registration
registration statement for the same days or sooner after filing) statement number on the earlier
offering. |_| ____________ because the securities effective registration statement
regulatory authority in the for the same offering. |_|
If this Form is a post-effective review jurisdiction has
amendment filed pursuant to Rule issued a receipt or
462(d) under the Securities Act, notification of clearance on
check the following box and list the ( ).
Securities Act registration statement 3. |x| pursuant to Rule 467(b)
number of the earlier effective as soon as practicable after
registration statement for the same notification of the
offering. |_| ____________ Commission by the
Registrant or the Canadian
If delivery of this prospectus is securities regulatory
expected to be made pursuant to authority of the review
Rule 434, check the following jurisdiction that a receipt or
box. |_| notification of clearance has
been issued with respect
hereto.
4. |_| after the filing of the
next amendment to this
Form (if preliminary
material is being filed).
If any of the securities
being registered on this Form are
to be offered on a delayed or
continuous basis pursuant to the
home jurisdiction's shelf
prospectus offering procedures,
check the following box. |_|
===================================================================================================================================
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<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
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.$300,000,000 U.S.$1,000 U.S.$300,000,000 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
</TABLE>
================================================================================
(1) Pursuant to Rule 457(f)(2) under the Securities Act, U.S.$90,910 was
paid on November 25, 1997 by NB Capital Corporation in connection with
its filing of a Registration Statement on Form S-4 related to up to
300,000 shares of its 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, which includes up to 61,600 shares of 8.35% Noncumulative
Exchangeable Preferred Stock, Series A, registered pursuant to the
Registration Statement on Form S-1. Each share of 8.35% Noncumulative
Exchangeable Preferred Stock, Series A, is convertible into one 8.45%
Noncumulative First Preferred Share, Series Z, of National Bank of
Canada. Accordingly, pursuant to Rule 457(i) under the Securities Act,
no registration fee is due with respect to the registration of the
8.45% Noncumulative First Preferred Shares, Series Z of National Bank
of Canada.
* The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registration Statement
shall become effective as provided in Rule 467 under the Securities Act of 1933
or on such date as the Commission, acting pursuant to Section 8(a) of the Act,
may determine.
** The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until this Registration
Statement shall become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
================================================================================
* Solely with respect to Form F-9.
** Solely with respect to Amendment No. 2 to Form S-4 and Form S-1.
================================================================================
<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/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 14, 1998, the Bank and the Company received from
the staff of the Commission a comment letter (the "Comment Letter") with respect
to Amendment No. 1/Form F-9. Additionally, the Initial Purchaser currently holds
61,600 Old Preferred Shares as an unsold allotment (the "Unsold Allotment").
Accordingly, the Company and the Bank are filing this Amendment No. 2 to Form
S-4/Amendment No. 1 to Form F-9/Form S-1 to respond to the Comment Letter and to
permit the resale of the Unsold Allotment.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY __, 1998
----------------------------
PRELIMINARY PROSPECTUS
--------------
NB Capital Corporation
Offer to Exchange
8.35% Noncumulative Exchangeable Preferred Stock, Series A
for up to 300,000 shares of
8.35% Noncumulative Exchangeable Preferred Stock, Series A
NB Capital Corporation (the "Company"), a wholly owned
subsidiary of National Bank of Canada (the "Bank"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and in the accompanying Letter of Transmittal (which together with
the Prospectus constitute the "Exchange Offer"), to exchange up to 300,000
shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "New Preferred Shares") for up to all of the
outstanding shares of its 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, par value US$.01 per share (the "Old Preferred Shares" and together
with the New Preferred Shares, the "Preferred Shares") at the rate of one New
Preferred Share for each Old Preferred Share. The form and terms of the New
Preferred Shares are identical in all material respects to the form and terms of
the Old Preferred Shares, except that (i) the New Preferred Shares have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, therefore, will not bear legends restricting their transfer and (ii)
holders of the New Preferred Shares will not be entitled to the registration
rights available to holders of the Old Preferred Shares under the Registration
Rights Agreement (the "Registration Rights Agreement") dated September 3, 1997,
among the Company, the Bank and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Initial Purchaser") which registration rights with respect to
the Old Preferred Shares will terminate upon completion of the Exchange Offer.
See "Description of the New Preferred Shares."
The 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." The
Initial Mortgage Loans consist of sixteen pools of, in the aggregate, 12,101
"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 New Preferred
Shares, including the following:
o The Old Preferred Shares may not be offered or sold, unless
registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the
Securities Act and applicable securities laws of states and
other jurisdictions. Consequently, holders of Old Preferred
Shares who fail to exchange their Old Preferred Shares for New
Preferred Shares pursuant to the Exchange Offer will continue
to be subject to the transfer restrictions set forth in the
legends thereon.
o 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
<PAGE>
difficult to sell their New Preferred shares or to sell their
New Preferred Shares at a price equivalent to the purchase
price thereof.
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 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 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'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 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 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, and in certain circumstances, CMHC
insurance may not be available or receipt of payment thereof
may be delayed.
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 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 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.
<PAGE>
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 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 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.
The Old Preferred Shares were issued on September 3, 1997 (the
"Issue Date") in a transaction not registered under the Securities Act in
reliance upon an exemption from the registration requirements thereof. The New
Preferred Shares are being offered hereby to satisfy certain obligations of the
Company contained in the Registration Rights Agreement. Based on interpretations
by the staff of the Securities and Exchange Commission (the "Commission") set
forth in no-action letters issued to third parties, the Company believes that
the New Preferred Shares issued pursuant to the Exchange Offer in exchange for
Old Preferred Shares may be offered for resale, resold or otherwise transferred
by any holder or beneficial owner thereof (other than any holder or beneficial
owner that is a broker-dealer or an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that such New Preferred Shares are acquired in the ordinary course of
such holder or beneficial owner's business, such holder or beneficial owner has
no arrangement or understanding with any person to participate in the
distribution of such New Preferred Shares and neither such holder or beneficial
owner nor any such other person is engaging in or intends to engage in a
distribution of New Preferred Shares. The Company has not sought, and does not
intend to seek, its own no-action letter, and there can be no assurance that the
Commission or its staff would make a similar determination with respect to the
Exchange Offer. Notwithstanding the foregoing, each broker-dealer that receives
New Preferred Shares for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Preferred Shares. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed that, for a period of six months after the date of this
Prospectus, it will make this Prospectus, as it may be amended or supplemented,
available to any broker-dealer for use in connection with any such resale and
will update this Prospectus, as required, during such six-month period.
The Exchange Offer is not conditioned upon any minimum
aggregate number of Old Preferred Shares being tendered for exchange. The
Company will accept for exchange any and all validly tendered Old Preferred
Shares not withdrawn prior to 5:00 p.m. New York City time, on , 1998, unless
the Company, in its sole discretion, extends the period of time during which the
Exchange Offer is open (the "Expiration Date"). The Company does not currently
intend to extend the Expiration Date. The date of acceptance and exchange of the
Old Preferred Shares will be the business day following the Expiration Date.
Tenders of Old Preferred Shares may be withdrawn at any time prior to the
Expiration Date. The Company will not receive any proceeds from the Exchange
Offer. The Company will pay certain expenses incident to the Exchange Offer.
--------------------
<PAGE>
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 January __, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting
and other informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As a result of the Exchange Offer, the Company
will be required to file reports and other information with the Commission
pursuant to the informational requirements of the Exchange Act.
This Prospectus constitutes a part of a Registration Statement
on Form S-4/Form F-9/Form S-1 (the "Registration Statement") filed by the
Company with the Commission under the Securities Act. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules thereto, and reference is hereby made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the New Preferred Shares. Statements contained herein concerning
the provisions of any documents filed as an exhibit to the Registration
Statement or otherwise filed with the Commission are not necessarily complete,
and in each instance reference is made to the copy of such document so filed.
Each such statement is qualified in its entirety by such reference.
The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices, located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can be
obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates and may also be
accessed electronically by means of the Commission's website at
http://www.sec.gov.
iv
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TABLE OF CONTENTS
<TABLE>
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PROSPECTUS SUMMARY............................................................................... 1
The Company............................................................................. 1
The Bank ............................................................................... 2
Business and Strategy................................................................... 3
Tax Status of the Company............................................................... 4
The Exchange Offer...................................................................... 5
Selected Financial Data................................................................. 12
RISK FACTORS..................................................................................... 13
Consequences of Failure to Exchange Old Preferred Shares................................ 13
Absence of Public Market................................................................ 13
Dividends Not Cumulative................................................................ 14
Interest Rate Risk and Maturity of Initial Mortgage Loans............................... 14
Currency Exchange Rate Risk............................................................. 14
Dividend and Other Regulatory Restrictions on Operations of the Company................. 14
Real Estate Market Conditions........................................................... 15
Geographic Concentration of the Real Property Securing the Initial Mortgage Assets...... 15
Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC Insurance....... 15
Balloon Payments........................................................................ 16
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations with
Affiliates..................................................................... 16
Relationship with the Bank and Its Affiliates; Conflicts of Interest.................... 16
Dependence upon the Bank................................................................ 17
Risk of Future Revisions in Policies and Strategies by Board of Directors............... 17
Certain Risks Associated with the Bank.................................................. 17
Tax Risks............................................................................... 18
Canadian Legal Considerations........................................................... 20
THE COMPANY...................................................................................... 21
USE OF PROCEEDS.................................................................................. 21
CAPITALIZATION................................................................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES.......................... 22
THE EXCHANGE OFFER............................................................................... 23
General ............................................................................... 23
Purpose of the Exchange Offer........................................................... 23
Terms of the Exchange................................................................... 24
Expiration Date; Extension; Termination; Amendment...................................... 24
Procedures for Tendering Old Preferred Shares........................................... 25
Terms and Conditions of the Letter of Transmittal....................................... 27
Withdrawal Rights....................................................................... 28
Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred Shares....... 29
Certain Conditions to the Exchange Offer................................................ 29
Exchange Agent.......................................................................... 31
Solicitation of Tenders; Fees and Expenses.............................................. 31
Transfer Taxes.......................................................................... 32
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
Accounting Treatment.................................................................... 32
Consequences of Failure to Exchange..................................................... 32
Resale of New Preferred Shares.......................................................... 33
BUSINESS AND STRATEGY............................................................................ 33
General ............................................................................... 33
Description of Dividend Policy.......................................................... 34
Description of the Company's Investment Policy.......................................... 35
Description of the Company's Management Policies........................................ 38
Description of the Initial Mortgage Assets.............................................. 40
Description of the Initial Mortgage Loans............................................... 42
Effect of Interest Rate Fluctuation on Assets and Earnings.............................. 44
Servicing............................................................................... 44
Employees............................................................................... 45
Competition............................................................................. 46
Legal Proceedings....................................................................... 46
MANAGEMENT....................................................................................... 46
Directors and Executive Officers........................................................ 46
Summary Compensation Table.............................................................. 47
Independent Directors................................................................... 48
Audit Committee......................................................................... 48
Compensation of Directors and Officers.................................................. 48
Limitation of Liability and Indemnification of Directors and Officers................... 48
The Bank as Advisor..................................................................... 49
DESCRIPTION OF NEW PREFERRED SHARES.............................................................. 50
General ............................................................................... 50
Dividends............................................................................... 50
Automatic Exchange...................................................................... 51
Ranking ............................................................................... 53
Voting Rights........................................................................... 53
Redemption.............................................................................. 54
Rights upon Liquidation................................................................. 56
Independent Director Approval........................................................... 56
EXCHANGE OFFER; REGISTRATION RIGHTS.............................................................. 57
DESCRIPTION OF CAPITAL STOCK..................................................................... 60
Common Stock............................................................................ 60
Preferred Stock......................................................................... 61
Power to Issue Additional Shares of Common Stock and Preferred Stock.................... 62
Restrictions on Ownership and Transfer.................................................. 62
Super-Majority Director Approval........................................................ 63
Business Combinations................................................................... 63
Control Share Acquisitions.............................................................. 64
Form, Denomination, Book-Entry Procedures and Transfer.................................. 65
Depositary Procedures................................................................... 65
Certificated New Preferred Shares....................................................... 66
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................................................. 67
Tax Impact of the Exchange Offer........................................................ 67
Qualification of the Company as a REIT.................................................. 67
Stock Ownership Tests................................................................... 68
Asset Tests............................................................................. 68
Gross Income Tests...................................................................... 69
Distribution Requirement................................................................ 69
Taxation of the Company................................................................. 69
Tax Treatment of Automatic Exchange..................................................... 70
Taxation of New Preferred Shares........................................................ 70
Taxation of Tax-Exempt Entities......................................................... 71
State and Local Taxes................................................................... 72
Taxation of Bank Preferred Shares....................................................... 72
Certain United States Federal Income Tax Considerations Applicable to Foreign Holders... 72
Information Reporting and Backup Withholding............................................ 73
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS....................................................... 73
Automatic Exchange...................................................................... 74
Taxation of Dividends................................................................... 74
Disposition of Bank Preferred Shares.................................................... 74
Redemption of Bank Preferred Shares..................................................... 74
ERISA CONSIDERATIONS............................................................................. 74
Status Under Plan Asset Regulations..................................................... 75
Publicly-Offered Security Exception..................................................... 76
Exemptions from Prohibited Transactions................................................. 76
Unrelated Business Taxable Income....................................................... 77
RATINGS ........................................................................................ 77
PLAN OF DISTRIBUTION............................................................................. 77
LEGAL MATTERS.................................................................................... 78
EXPERTS ........................................................................................ 78
GLOSSARY..........................................................................................79
FINANCIAL STATEMENTS.............................................................................F-1
ANNEX A
</TABLE>
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
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus. The offering by NB
Capital Corporation (the "Company") of up to 300,000 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share
(the "New Preferred Shares") in exchange for up to all the outstanding shares of
8.35% Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per
share (the "Old Preferred Shares" and together with the New Preferred Shares,
the "Preferred Shares"), of the Company is referred to herein as the "Exchange
Offer." References to dollars and US$ are to United States dollars; references
to C$ and $ are to Canadian dollars. As of , 1997, the Canadian dollar exchange
rate was C$ =US$1.00 and certain amounts stated herein reflect such exchange
rate.
The Company
General
The Company is a Maryland corporation incorporated on August
20, 1997. All of the common stock, par value $.01, of the Company (the "Common
Stock") is owned by National Bank of Canada (the "Bank"). The Company's
principal business objective is to acquire, hold, finance and manage assets
consisting of obligations secured by real property, as well as certain other
qualifying REIT assets ("Mortgage Assets"). The Company will elect to be taxable
as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and
generally will not be liable for United States federal income tax to the extent
that it distributes its income to its stockholders and maintains its
qualification as a REIT. See "United States Federal Income Tax
Considerations--Qualification of the Company as a REIT." The Bank has indicated
to the Company that, for as long as any of the New Preferred Shares are
outstanding, the Bank intends to continue to own all of the outstanding shares
of the Common Stock. The Company was formed to provide investors with the
opportunity to invest in Canadian residential mortgages and other real estate
assets and to provide the Bank with a cost-effective means of raising capital.
The Company began operations on September 3, 1997.
Mortgage Assets
The Mortgage Assets currently consist of sixteen
"hypothecation loans" (the "Initial Mortgage Assets") issued to the Company by
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, in the aggregate, 12,101
"Mortgage Loans." Mortgage Loans consist of Canada Mortgage and Housing
Corporation ("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 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 will mature semi-annually beginning
in 2000, and the proceeds thereof (net of distributions and expenses) are
expected to be reinvested in additional Mortgage Assets as described under
"Business and Strategy--Description of Mortgage Assets; Investment Policy."
The 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.
<PAGE>
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. The Bank is a Schedule I bank under the Bank Act (Canada), as amended (the
"Bank Act"). 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, 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 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
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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.
At October 31, 1997, the Tier 1 risk-based capital ratio and
total risk-based capital ratio levels of the Bank were 6.8% and 9.7%,
respectively. After giving effect to the issuance of the Old Preferred Shares on
September 3, 1997, the Tier 1 risk-based capital ratio and total risk-based
capital ratio levels of the Bank as of that date were 8.1% and 11.3%,
respectively. The Bank's Tier 1 risk-based capital ratio and total risk-based
capital ratio were 6.9% and 10.2% at October 31, 1996, 6.8% and 10.4% at October
31, 1995 and 6.9% and 11.1% at October 31, 1994.
Section 485 of the Bank Act requires Canadian banks to
maintain adequate capital and adequate and appropriate forms of liquidity and to
comply with related regulations. Under subsection 485(3), the Superintendent
may, by order, direct a bank to increase its capital or to provide additional
liquidity in such forms and amounts as the Superintendent may require. The
Superintendent may act under subsection 485(3) even if a bank is in compliance
with all applicable guidelines and regulations.
Exchange Event
Each of the New Preferred Shares will be exchanged
automatically (the "Automatic Exchange") for one Bank Preferred Share (i)
immediately prior to such time, if any, at which the Bank fails to declare and
pay or set aside for payment when due any dividend on any issue of its
cumulative First Preferred Shares or the Bank fails to pay or set aside for
payment when due any declared dividend on any of its non-cumulative First
Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based
capital ratio of less than 4.0% or a total risk-based capital ratio of less than
8.0%, (iii) in the event that the Superintendent takes control of the Bank
pursuant to the Bank Act, or proceedings are commenced for the winding-up of the
Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the
event that the Superintendent, by order, directs the Bank to act pursuant to
subsection 485(3) of the Bank Act and the Bank elects to cause the exchange
(each, an "Exchange Event"). In connection with the Exchange Offer, the Bank
Preferred Shares will be registered with the Commission. See "Risk
Factors--Certain Risks Associated with the Bank" and "Description of New
Preferred Shares--Automatic Exchange."
Organizational Structure
The following diagram outlines the organizational structure of
the Bank relevant to the Exchange Offer: [Description of diagram: National Bank
of Canada on the top level of a two-tier diagram connected to NB Capital
Corporation and NB Finance Ltd. on the second level of the two-tier diagram.]
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 of US$477 million, issued by NB Finance to the Company that
are recourse only to the Initial Mortgage Loans (which are sixteen pools of, in
the aggregate, 12,101 CMHC-insured residential first mortgages, in an aggregate
amount of C$828 million (US$596 million) and that are secured by the residential
real property underlying the Initial Mortgage Loans). See "Business and Strategy
- -- Description of the Initial Mortgage Assets" and "-- Description of the
Initial Mortgage Loans." The Company has acquired substantially all of its
Mortgage Assets from the Bank and/or affiliates of the Bank on terms that are
comparable to those that could be obtained by the
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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 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 and
although the Company has no current intention to invest in any assets other than
the Initial Mortgage Loans or obligations comparable to the Initial Mortgage
Loan, obligations that are comparable to the Initial Mortgage Assets.
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 Companies Management Policies."
The Company intends and has the ability to hold the Mortgage
Loans to maturity unless there is a prepayment by the customer or a Mortgage
Loan is impaired. Therefore the Mortgage Loans will be recorded as a long-term
investment in the balance sheet of the Company.
Management
The Board of Directors is composed of five members, two of
whom are Independent Directors. An "Independent Director" is a director who is
not a current officer or employee of the Company or a current director, officer
or employee of the Bank or any affiliate of the Bank. Pursuant to the terms of
the New Preferred Shares, the Independent Directors must consider the interests
of the holders of both the Preferred Stock and the Common Stock in determining
whether any proposed action requiring their approval is in the best interests of
the Company. The Company currently has six employees and does not anticipate
that it will require additional employees. See "Management."
Year 2000 Issue
Pursuant to the Advisory Agreement, dated as of September 3,
1997, between the Company and the Bank (the "Advisory Agreement"), the Bank
administers the day-to-day activities of the Company. Pursuant to the Servicing
Agreement, dated as of September 3, 1997, between the Company and the Bank (the
"Servicing Agreement"), the Bank services the Mortgage Loans on behalf of the
Bank. See "Risk Factors--Relationship with the Bank and Its Affiliates;
Conflicts of Interest," "--Dependence upon the Bank," "Business and
Strategy--Description of the Initial Mortgage Loans" and "Management--The Bank
as Advisor." Accordingly, the Company does not have a material Year 2000 issue.
The Bank, as originator and servicer of the Mortgage Loans
that underlie the Mortgage Assets and administrator of the day-to-day activities
of the Company, has formulated a detailed plan to address the Year 2000 issue.
The Bank expects to invest C$35 million dollars from 1997 through 2000 to modify
computer software and hardware in relation to the Year 2000 issue. According to
such plan, 30% of computer software and 20% of computer hardware were converted
and certified accurate by December 31, 1997. By December 31, 1998, the Bank
expects 95% of computer software and 50% of computer hardware will be converted
and certified accurate. By March 31, 1999, the Bank expects that the conversion
and certification of all remaining computer software and hardware will be
complete. The plan and budget also provide for monitoring such conversion
through the Year 2000.
Tax Status of the Company
The Company will elect to be taxable as a REIT under sections
856 through 860 of the Code, commencing with its taxable year ending December
31, 1997. As a REIT, the Company generally will not be
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liable for United States federal income tax to the extent that it distributes
its income to the holders of its Common Stock and Preferred Stock, including the
New Preferred Shares, and maintains its qualification as a REIT. See "United
States Federal Income Tax Considerations--Qualifications of the Company as a
REIT."
A REIT is subject to a number of organizational and
operational requirements, including a requirement that it currently distribute
to stockholders at least 95% of its taxable income computed without regard to
the dividends paid deduction and the Company's net capital gain ("REIT taxable
income"). Notwithstanding its election to be taxable as a REIT, the Company may
be subject to federal, state and/or local tax. See "Risk Factors--Tax Risks" and
"United States Federal Income Tax Considerations."
The Exchange Offer
For a more complete description of the terms of the New
Preferred Shares specified in the following summary, see "Description of New
Preferred Shares."
The Exchange Offer The Company is offering to exchange pursuant
to the Exchange Offer up to 300,000 shares
of its New Preferred Shares for up to all of
its outstanding Old Preferred Shares at a
rate of one New Preferred Share for each Old
Preferred Share. The form and terms of the
New Preferred Shares (including the dividend
rate, liquidation preference and redemption
rights) are identical in all material
respects to the form and terms of the Old
Preferred Shares, except that the New
Preferred Shares have been registered under
the Securities Act, and therefore, will not
bear legends restricting their transfer.
Further, the holders of New Preferred Shares
will not be entitled to the registration
rights of holders of Old Preferred Shares
under the Registration Rights Agreement,
which rights with respect to the Old
Preferred Shares will terminate upon
consummation of the Exchange Offer. The
issuance of the New Preferred Shares is
intended to satisfy certain obligations of
the Company contained in the Registration
Rights Agreement. Subject to certain
conditions, a holder of Old Preferred Shares
who wishes to tender must transmit a
properly completed and duly executed Letter
of Transmittal to The Bank of Nova Scotia
Trust Company of New York (the "Exchange
Agent") on or prior to the Expiration Date.
For procedures related to tendering, see
"The Exchange Offer." As of the date hereof,
300,000 shares of Old Preferred Stock were
outstanding.
Minimum Condition The Exchange Offer is not conditioned
upon any minimum aggregate principal
amount of Old Preferred Shares being
tendered for exchange.
Expiration Date; Withdrawal The Exchange Offer will expire at
5:00 p.m., New York City time, on the
"Expiration Date." As used herein, the
term "Expiration Date" means 5:00 p.m., New
York City time, on , 1998; unless the
Company, in its sole discretion, extends the
period of time for which the Exchange Offer
is to remain open. The tender of Old
Preferred Shares pursuant to the Exchange
Offer may be withdrawn at any time prior to
the Expiration Date by sending a written
notice of withdrawal to the Exchange Agent.
Any Old Preferred Shares so withdrawn will
be deemed not to have been validly tendered
for exchange for purposes of the Exchange
Offer. Any Old Preferred Shares not accepted
for exchange for any reason will be returned
without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange
Offer. See "The
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<PAGE>
Exchange Offer--Expiration Date; Extension;
Termination; Amendment" and "--Withdrawal
Rights."
Exchange Date The date of acceptance and exchange for
the Old Preferred Shares will be the
business day following the Expiration Date.
Conditions to the
Exchange Offer The Exchange Offer is subject to certain
customary conditions which may be waived by
the Company. The Company currently expects
that each of these conditions will be
satisfied and that no waivers will be
necessary. See "The Exchange Offer--Certain
Conditions to the Exchange Offer." The
Company reserves the right to terminate or
amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence
of any such condition.
Procedure for
Tendering Old
Preferred Shares Each holder of Old Preferred Shares wishing
to accept the Exchange Offer must complete,
sign and date the Letter of Transmittal, or
a facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, together with the Old Preferred
Shares and any other required documentation,
to the Exchange Agent at the address set
forth herein. See "The Exchange
Offer--Procedures for Tendering Old
Preferred Shares" and "Plan of
Distribution."
Use of Proceeds There will be no proceeds to the Company
from the exchange of Old Preferred
Shares pursuant to the Exchange Offer.
Special Procedures
for Beneficial
Owners Any beneficial owner whose Old Preferred
Shares are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee who wishes to
tender should contact such registered holder
promptly and instruct such registered holder
to tender on such beneficial owner's own
behalf. If such beneficial owner wishes to
tender on such beneficial owner's own
behalf, such beneficial owner must, prior to
completing and executing the Letter of
Transmittal and delivering the Old Preferred
Shares, either make appropriate arrangements
to register ownership of the Old Preferred
Shares in such beneficial owner's name or
obtain a properly completed stock power from
the registered holder. The transfer of
registered ownership may take considerable
time. See "The Exchange Offer--Procedure for
Tendering Old Preferred Shares."
Guaranteed Delivery
Procedures Holders of Old Preferred Shares who wish to
tender their Old Preferred Shares and whose
Old Preferred Shares are not entirely
available or who cannot deliver their Old
Preferred Shares, the Letter of Transmittal
or any other documents required by the
Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender
their Old Preferred Shares according to the
guaranteed delivery procedures set forth in
"The Exchange Offer--Procedure for Tendering
Old Preferred Shares."
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Acceptance of the
Old Preferred
Shares and Delivery
of the New
Preferred Shares The Company will accept for exchange any and
all Old Preferred Shares which are properly
tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the of the New
Expiration Date. The New Preferred Shares
issued pursuant to the Exchange Offer will
be delivered promptly following the
Expiration Date. See "The Exchange
Offer--Procedures for Tendering Old
Preferred Shares."
Effect on the
Holders of Old
Preferred Shares As a result of the making of, and upon
acceptance for exchange of all validly
tendered Old Preferred Shares pursuant to
the terms of the Exchange Offer, the Company
will have fulfilled the covenant contained
in the Registration Rights Agreement and,
accordingly, there will be no liquidated
damages pursuant to the terms of the
Registration Rights Agreement, and the
holders of the Old Preferred Shares will
have no further registration or other rights
under the Registration Rights Agreement.
Holders of the Old Preferred Shares who do
not tender their Old Preferred Shares in the
Exchange Offer will continue to hold such
Old Preferred Shares without any rights
under the Registration Rights Agreement
that, by their terms, terminate or cease to
have further effectiveness as a result of
the making of, and the acceptance for
exchange of all validly tendered Old
Preferred Shares pursuant to, the Exchange
Offer. To the extent that the Old Preferred
Shares are tendered and accepted in the
Exchange Offer, the trading market for
untendered Old Preferred Shares could be
adversely affected.
Consequence of Failure
to Exchange Securities
Offered Holders of Old Preferred Shares who do not
exchange for New Preferred Shares pursuant
to the Exchange Offer will continue to be
subject to the restrictions on transfer of
such Old Preferred Shares as set forth in
the legend thereon as a consequence of the
offer or sale of the Old Preferred Shares
pursuant to an exemption from, or in a
transaction not subject to, the registration
requirements of the Securities Act and the
applicable state securities laws. The
Company does not currently anticipate that
they will register any Old Preferred Shares
which are not exchanged pursuant to the
Exchange Offer under the Securities Act
after the Expiration Date.
The New Preferred Shares
Issuer NB Capital Corporation, a Maryland
corporation.
Securities Offered 300,000 Noncumulative Exchangeable Preferred
Shares, Series A.
Ranking The New Preferred Shares rank senior to the
Common Stock with respect to dividend rights
and rights upon liquidation. In order to
qualify as a REIT, the capital stock of the
Company must be held by at least 100 holders
during approximately 90% or more of the
taxable year beginning in the Company's
second taxable year and in each subsequent
taxable year. See "United States
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<PAGE>
Federal Income Tax Considerations--Stock
Ownership Tests." The Company has issued
shares of a series of cumulative, senior
preferred stock ("Senior Preferred Stock")
with an aggregate liquidation preference of
up to US$450,000 and limited transferability
to ensure that it meets, and will continue
to meet, the 100 person ownership
requirement for REIT status without having
to constantly monitor the number of holders
of Preferred Shares. Except for the Senior
Preferred Stock, additional shares of
Preferred Stock ranking senior to the New
Preferred Shares may not be issued without
the approval of holders of at least
two-thirds of the New Preferred Shares.
Additional shares of Preferred Stock ranking
on a parity with the New Preferred Shares
may not be issued without the approval of a
majority of the Board of Directors and a
majority of the Independent Directors.
Dividends Dividends on the New Preferred Shares are
payable at the rate of 8.35% per annum of
the liquidation preference (an amount equal
to US$83.50 per annum per share, calculated
by multiplying the annual dividend rate of
8.35% by the liquidation preference of
US$1,000 per share, assuming authorization
and declaration by the Board of Directors of
four quarterly dividends), if, when and as
authorized and declared by the Board of
Directors. If authorized and declared,
dividends are payable quarterly in arrears
on the 30th day of March, June, September
and December in each year, commencing June
30, 1998. With respect to the dividend
period in which the Exchange Offer is
consummated, dividends on each New Preferred
Share will accrue from the first day of
the dividend period. Thereafter, dividends
accrue in each quarterly period from the
first day of such period, whether or not
authorized, declared or paid with respect to
New Preferred Shares for the prior quarterly
period. Dividends on the New Preferred
Shares are not cumulative and, accordingly,
if no dividend is authorized and declared on
the New Preferred Shares by the Board of
Directors for a quarterly dividend period,
holders of the New Preferred Shares will
have no right to receive a dividend for that
period, and the Company will have no
obligation to pay a dividend for that
period, whether or not dividends are
authorized, declared and paid for any future
period with respect to either the New
Preferred Shares or the Common Stock. If no
dividend is paid on the New Preferred Shares
for a quarterly dividend period, the payment
of dividends on the Common Stock will be
prohibited for that period and at least the
following three quarterly dividend periods.
See "Description of New Preferred
Shares--Dividends."
Liquidation Preference The liquidation preference for each of the
New Preferred Shares is US$1,000. Upon
liquidation, holders of the New Preferred
Shares will also be entitled to receive an
amount equal to the quarterly accrued and
unpaid dividend, if any, thereon to the date
of liquidation. See "Description of New
Preferred Shares--Rights Upon Liquidation."
Registration Rights
Agreement The Old Preferred Shares were sold by the
Company on September 3, 1997 pursuant to a
Purchase Agreement, dated as of August 22,
1997, among the Company, the Bank and the
Initial Purchaser (the "Purchase
Agreement"). Pursuant to the Purchase
Agreement, the Company and the Initial
Purchaser entered into the Registration
Rights Agreement. This Exchange Offer is
intended to satisfy certain rights under the
Registration Rights Agreement,
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<PAGE>
which terminate upon the consummation of the
Exchange Offer. The holders of the New
Preferred Shares are not entitled to any
exchange or registration rights with respect
to the New Preferred Shares. The Old
Preferred Shares are subject to the payment
of additional interest under certain
circumstances if the Company is not in
compliance with its obligations under the
Registration Rights Agreement. See "Exchange
Offer; Registration Rights."
Description of the
New Preferred Shares The form and terms of the New Preferred
Shares are the same as the form and terms of
the Old Preferred Shares except that (i) the
New Preferred Shares will be registered
under the Securities Act and therefore the
New Preferred Shares will not bear legends
restricting the transfer thereof and (ii)
holders of the New Preferred Shares will not
be entitled to the registration rights
available to holders of Old Preferred Shares
under the Registration Rights Agreement,
which registration rights with respect to
Old Preferred Shares will terminate upon the
consummation of the Exchange Offer. See
"Description of the New Preferred Shares."
Redemption The New Preferred Shares are not redeemable
prior to September 3, 2007 (except upon the
occurrence of a Tax Event, as defined in
"Description of New Preferred
Shares--Redemption," on or after September
3, 2002). On and after September 3, 2007,
the New Preferred Shares may be redeemed for
cash at the option of the Company, in whole
or in part, at any time and from time to
time, at the redemption prices set forth
herein, plus the quarterly accrued and
unpaid dividend, if any, thereon to the date
of redemption. Upon the occurrence of a Tax
Event, on or after September 3, 2002, the
Company will have the right to redeem the
New Preferred Shares in whole (but not in
part) at a redemption price equal to the
Make-Whole Amount (as defined in
"Description of New Preferred
Shares--Redemption"), plus the quarterly
accrued and unpaid dividend, if any, thereon
to the date of redemption. Any redemption is
subject to the prior written approval of the
Superintendent. See "Description of New
Preferred Shares-- Redemption." The New
Preferred Shares are not subject to any
sinking fund or mandatory redemption and are
not convertible into any other securities of
the Company.
Automatic Exchange Each of the New Preferred Shares will be
exchanged automatically for one Bank
Preferred Share upon the occurrence of an
Exchange Event. See "Description of New
Preferred Shares--Automatic Exchange."
Voting Rights Holders of the New Preferred Shares will not
have any voting rights, except as expressly
provided herein. On any matter on which
holders of the New Preferred Shares may
vote, each of the New Preferred Shares will
be entitled to one vote. See "Description of
New Preferred Shares--Voting Rights."
Ownership Limits Beneficial ownership by any
individual of more than 5% of any
outstanding series of Preferred Stock,
including the New Preferred Shares offered
hereby, is restricted in order to preserve
the Company's status as a REIT for United
States federal income tax purposes. See
"Description of Capital Stock--Restrictions
on Ownership and Transfer."
Ratings The New Preferred Shares are rated "a2" by
Moody's Investors Service, Inc. and "BBB+"
by Standard & Poor's Ratings Services. A
security rating is
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<PAGE>
not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning
rating organization.
Use of Proceeds There will be no proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
Federal Income Tax
Consequences For federal income tax purposes, the
exchange pursuant to the Exchange Offer will
not result in any income gain or loss to the
holders or the Company. See "United States
Federal Income Tax Considerations."
Exchange Agent The Bank of Nova Scotia Trust Company of
New York is serving as Exchange Agent in
connection with the Exchange Offer.
ERISA Consideration Each holder of the New Preferred Shares
will, by exchanging its Old Preferred Shares
for New Preferred Shares, be deemed to have
directed the Company to invest in the
Initial Mortgage Assets (as well as the
other assets held by the Company and
identified at the time of purchase) and
represented and agreed that either (A) no
part of the assets to be used by it to
acquire and hold such New Preferred Shares
constitutes the assets of any (I) employee
benefit plan (as defined in Section 3(3) of
the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) subject to
Title I of ERISA, (II) plan (as defined in
section 4975(e)(1) of the Code) or (III)
entity whose underlying assets include "plan
assets" under Department of Labor Regulation
29 C.F.R. Section 2510.3-101 (collectively,
"Plans") or (B) one or more prohibited
transaction statutory or class exemptions
apply such that the use of such plan assets
to acquire and hold such New Preferred
Shares will not constitute a non-exempt
prohibited transaction under ERISA or the
Code.
In addition, in the event that the New
Preferred Shares are not treated as
"publicly-offered securities" (within the
meaning of the above-referenced regulations)
as of the date on which the Exchange Offer
is consummated or (if no Exchange Offer is
consummated) the shelf registration
statement, which the Company is required to
file, pursuant to the Registration Rights
Agreement, in lieu of or in addition to the
Registration Statement in the event (i) the
Company is not permitted to effect the
Exchange Offer, (ii) for any reason, the
Registration Statement is not declared
effective within 180 days of the Issue Date,
or (iii) in certain other circumstances (the
"Shelf Registration Statement"), is declared
effective, then during the period commencing
on such date and ending on the date on which
the New Preferred Shares become
"publicly-offered securities", each Plan
purchaser will be deemed to have appointed
an independent fiduciary (the "Independent
Fiduciary"), which will be identified by the
Company to exercise any discretionary
authority with respect to transactions
involving both the Company and the Bank or
any Bank affiliate. The Independent
Fiduciary will be identified prior to any
such transaction and will be subject to
removal and replacement by a majority of the
holders of the New Preferred Shares.
Any Plan fiduciary that proposes to cause a
Plan to exchange New Preferred Shares for
Old Preferred Shares should consult with its
counsel with respect to the potential
applicability of ERISA and the Code to such
investment and whether any exemption or
exemptions would be applicable and determine
on
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its own whether all conditions of such
exemption or exemptions have been satisfied.
Any such Plan fiduciary should also
determine whether the exchange of New
Preferred Shares for Old Preferred Shares is
permitted under the governing Plan
instruments and is appropriate for the Plan
in view of the overall investment policy and
the composition and diversification of its
portfolio.
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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.
August 20, 1997
(date of inception) to
September 30, 1997
-----------------------
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
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 exchanging stockholders should carefully consider
the following information in conjunction with the other information contained in
this Prospectus before exchanging Old Preferred Shares for the New Preferred
Shares in the Exchange Offer. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include those discussed
below.
Consequences of Failure to Exchange Old Preferred Shares
The New Preferred Shares will be issued in exchange for Old
Preferred Shares only after timely receipt by the Exchange Agent of such Old
Preferred Shares, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of Old Preferred Shares
desiring to tender such Old Preferred Shares in exchange for New Preferred
Shares should allow sufficient time to ensure timely delivery. Neither the
Exchange Agent nor the Company is under any duty to give notification of defects
or irregularities with respect to tenders of Old Preferred Shares for exchange.
In general, the Old Preferred Shares may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable securities laws
of states and other jurisdictions. Consequently, holders of Old Preferred Shares
who do not exchange their Old Preferred Shares for New Preferred Shares pursuant
to the Exchange Offer (i) will continue to be subject to the restrictions on
transfer of such Old Preferred Shares as set forth in the legends thereon as a
result of the Old Preferred Shares having been issued pursuant to exemption
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws and (ii) will not be
entitled to the registration rights available pursuant to the Registration
Rights Agreement which will terminate upon completion of the Exchange Offer. In
addition, any holder of Old Preferred Shares who tenders in the Exchange Offer
for the purpose of participating in a distribution of the New Preferred Shares
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Preferred Shares for its own account in
exchange for Old Preferred Shares, where such Old Preferred Shares were acquired
by such broker-dealer as a result of market-making activities or any other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Shares.
Absence of Public Market
There is no existing market for the New Preferred Shares and
there can be no assurance as to the liquidity of any markets that may develop
for the New Preferred Shares, the ability of the holders to sell their New
Preferred Shares or at what price holders of the New Preferred Shares will be
able to sell their New Preferred Shares. Future liquidity and trading prices of
the New Preferred Shares will depend on many factors including, among other
things, prevailing interest rates, the Company's operating results, the market
for similar securities and whether the New Preferred Shares are listed on a
national exchange. The Company is under no obligation, and currently has no
intention, to list the New Preferred Shares on a national exchange. The Initial
Purchaser has informed the Company that the Initial Purchaser intends to make a
market in the Series A Preferred Shares. However, the Initial Purchaser is not
obligated to do so and any such market making activity may be terminated at any
time without notice to the holders of the New Preferred Shares. In addition,
such market making activity will be subject to the limits of the Securities Act
and may be limited during the pendency of the Registration Statement or the
Shelf Registration Statement. Consequently, holders of New Preferred Shares may
find it difficult to sell their New Preferred Shares or to sell their New
Preferred Shares at a price equivalent to the purchase price thereof.
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<PAGE>
Dividends Not Cumulative
Dividends on the New Preferred Shares are not cumulative. The
Board of Directors may determine, in its business judgment, that it would be in
the best interests of the Company to pay less than the full amount of the stated
dividend on the New Preferred Shares or no dividend for any quarterly dividend
period, notwithstanding that funds are available to pay such dividend. Factors
that may be considered by the Board of Directors in making this determination
are the Company's financial condition and capital needs, legal or regulatory
requirements, economic conditions, and such other factors as the Board may deem
relevant. Consequently, if the Board of Directors does not authorize and declare
a dividend on the New Preferred Shares for a quarterly dividend period, the
holders of the New Preferred Shares would not be entitled to recover such
dividend, even if funds are, or subsequently become, available for payment
thereof. Notwithstanding the foregoing, to remain qualified as a REIT, the
Company must distribute annually at least 95% of its "REIT taxable income" (not
including capital gains) to stockholders. See "--Tax Risks" and "United States
Federal Income Tax Considerations--Taxation of the Company."
Interest Rate Risk and Maturity of Initial Mortgage Loans
The Company's income consists principally of interest payments
from the Initial Mortgage Assets and obligations which are comparable to the
Initial Mortgage Assets. Interest and principal amounts generated by the Initial
Mortgage Loans and obligations that are comparable to the Initial Mortgage Loans
enable full payment with respect to the Initial Mortgage Loans. 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 in
respect of its Mortgage Assets or Mortgage Loans, the Company may find it
difficult to purchase additional Mortgage Assets or Mortgage Loans that generate
sufficient income to support the payment of dividends on the New Preferred
Shares, and (ii) because the rate at which dividends on the New Preferred
Shares, if, when and as authorized and declared, are payable is fixed, there can
be no assurance that an interest rate environment in which there is a
significant decline in interest rates would not adversely affect the Company's
ability to pay dividends on the New Preferred Shares.
Currency Exchange Rate Risk
The Company's income consists principally of interest payments
from the Initial Mortgage Assets and obligations which are comparable to the
Initial Mortgage Assets. While the Initial Mortgage Assets are, and the
Company's future Mortgage Assets likely will be, denominated in United States
dollars, Mortgage Loans are denominated and payable in Canadian dollars.
Consequently, if there is a significant decrease in the value of the Canadian
dollar, the value in U.S. dollars of the cash flow from Mortgage Loans assigned
to the Company by NB Finance (including principal payments) may decrease, which
may adversely affect the cash flow to the Company and the Company's ability to
pay the dividends on the New Preferred Shares. From the beginning of 1994 to and
including , 1998, the exchange rate of the Canadian dollar to the United
States dollar has ranged from C$ to US$1.00 on to C$ to US$1.00 on ,
with an average for such period of C$ to US$1.00.
Dividend and Other Regulatory Restrictions on Operations of the Company
Because the Company and NB Finance are subsidiaries of the
Bank, the Superintendent has the right to examine the Company and NB Finance and
their respective activities. Under certain circumstances, including any
determination that the Bank's relationship with the Company or NB Finance
results in an unsafe and unsound banking practice, the Superintendent has the
authority to restrict the ability of the Company or NB Finance to transfer
assets, to engage in transactions with the Bank, to make distributions to their
stockholders (including dividends to the holders of the New Preferred Shares, as
described below), or to redeem shares of Preferred Stock. The Superintendent
could also require the Bank to sever its relationship with or divest its
14
<PAGE>
ownership of the Company. Consequently, such actions could potentially result in
the Company's failure to pay dividends in respect of the New Preferred Shares or
failure to qualify as a REIT, and therefore, result in the Company being (i)
subject to United States income tax in the same manner as a regular, domestic
corporation and (ii) unless entitled to relief, disqualified from treatment as a
REIT for four taxable years following the year during which such qualification
was lost. Failure to qualify as a REIT would not necessarily give the Company
the right to redeem the New Preferred Shares or give the holders thereof the
right to have the New Preferred Shares redeemed. See "--Tax Risks." In addition,
as subsidiaries of the Bank, the Company and NB Finance are subject to
supervision by U.S. bank regulators.
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, 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. Consequently, there can be no assurance that prevailing real
estate market conditions will not adversely affect the Company's operations and
its ability to pay dividends on the New Preferred Shares. These foregoing
factors may also have an effect on the business and financial condition of the
Bank. Consequently, such factors may increase the likelihood of an Exchange
Event.
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 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 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 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.
Consequently, in the event of nonpayment of interest or other default on the
Initial Mortgage Assets, 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), 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.
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<PAGE>
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.
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 was at least equal the amount that the Company paid
for the Initial Mortgage Assets (approximately US$477 million). However, no
third party valuations were obtained for purposes of the Exchange Offer.
Consequently, there can be no assurance that the fair market value of the
Initial Mortgage Assets did not differ from the amount that the Company paid for
the Initial Mortgage Assets.
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
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<PAGE>
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."
Risk of Future Revisions in Policies and Strategies by Board of Directors
The Board of Directors has established the investment policies
and operating policies and strategies of the Company, certain of which are
described in this Prospectus. These policies may be amended or revised from time
to time at the discretion of the Board of Directors (in certain circumstances
subject to the approval of a majority of the Independent Directors) without a
vote of the Company's stockholders, including holders of the New Preferred
Shares. Consequently, holders of the New Preferred Shares cannot preclude the
Board of Directors from revising such policies and strategies and the ultimate
effect of such revision in the policies and strategies of the Company on a
holder of the New Preferred Shares may be negative. See "Business and
Strategy--Management Policies and Programs."
Certain Risks Associated with the Bank
The exchange of Old Preferred Shares for New Preferred Shares
involves risks to the holders of New Preferred Shares with respect to the
performance and capital levels of the Bank. An imminent failure to pay dividends
on preferred shares of the Bank when due, a decline in the capital levels of the
Bank or an act of the Superintendent could result in the New Preferred Shares
being exchanged automatically for the Bank Preferred Shares. Consequently, (i)
the Bank Preferred Shares would be an investment in the Bank and not in the
Company and (ii) as a result of an Exchange Event, holders of the New Preferred
Shares would be required to exchange their New Preferred Shares for Bank
Preferred Shares and become preferred shareholders of the Bank at a time when
the Bank is experiencing financial difficulties or its financial condition is
deteriorating or when the Bank has been taken over by the Superintendent or
proceedings for the winding-up of the Bank have been commenced. An Exchange
Event includes the Superintendent electing to cause the Automatic Exchange.
An investment in the Bank is also subject to certain risks
that are distinct from the risks associated with an investment in the Company,
including the general risks inherent in equity investments in depository
institutions. In the event of a winding-up of the Bank, the claims of depositors
and secured, senior, general and subordinated creditors of the Bank would be
entitled to a priority of payment over the claims of holders of equity
interests, such as the Bank Preferred Shares. Consequently, if the Bank were to
be wound up, the holders of the New Preferred Shares likely would receive, if
anything, substantially less than they would have received had the New Preferred
Shares not been exchanged for the Bank Preferred Shares.
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<PAGE>
If an Exchange Event occurs, the Bank would likely be
prohibited from paying dividends on the Bank Preferred Shares. The Bank's
ability to pay dividends on the Bank Preferred Shares would also be subject to
various restrictions under applicable regulations and certain contractual
provisions. In addition, dividends on the Bank Preferred Shares owned by U.S.
investors will generally be subject to Canadian nonresident withholding tax.
Consequently, in the event of an Exchange Event, holders of New Preferred Shares
automatically exchanged for Bank Preferred Shares would likely receive no
dividends or, in the alternative, if dividends were paid on the Bank Preferred
Shares, holders of New Preferred Shares automatically exchanged for Bank
Preferred Shares would become subject to Canadian nonresident withholding tax.
The Bank currently has outstanding three series of cumulative First Preferred
Shares and three series of non-cumulative First Preferred Shares. The Bank may
not, without the approval of the holders of all such series and any future
series, create or issue any shares ranking in priority to or equally therewith
if any cumulative dividends have not been declared and paid or set aside for
payment or any declared and unpaid non-cumulative dividends have not been paid
or set aside for payment. Immediately prior to any failure by the Bank to
declare and pay or set aside for payment, the New Preferred Shares will be
automatically exchanged for Bank Preferred Shares. See "Canadian Federal Income
Tax Considerations." Potential holders of the New Preferred Shares should
carefully consider the foregoing.
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 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. Since the Company anticipates fewer than 100
holders of the New Preferred Shares, the Company has issued shares of its Senior
Preferred Stock to meet the 100 person ownership requirement for REIT status.
The Company is relying on the opinion of Shearman & Sterling,
counsel to the Company, regarding various issues affecting the Company's ability
to qualify, and retain qualification, as a REIT. Such legal opinion is not
binding on the Internal Revenue Service (the "IRS") or the courts and no
assurance can be given that such opinion will not be challenged by the IRS.
Consequently, (i) if the Company fails to qualify as a REIT in
any taxable year, the Company would not be allowed a deduction for distributions
to stockholders in computing its taxable income and would be subject to United
States federal income tax on its taxable income in the same manner as a regular,
domestic corporation, (ii) as a result, the amount available for distribution to
the Company's stockholders, including the holders of the New Preferred Shares,
would be reduced for the year or years involved and (iii) unless entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for
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<PAGE>
the four taxable years following the year during which REIT qualification was
lost. The failure of the Company to qualify as a REIT would not necessarily give
the Company the right to redeem the New Preferred Shares, nor would it give the
holders of the New Preferred Shares the right to have their shares redeemed. See
"Description of New Preferred Shares--Redemption."
Notwithstanding the fact that the Company currently operates
in a manner designed to enable it to qualify as a REIT, future economic, market,
legal, tax and other considerations may cause the Board of Directors to
determine that it is in the best interests of the Company and the holders of the
Common Stock and the New Preferred Shares to revoke the Company's REIT election.
As long as any of the New Preferred Shares are outstanding, any such
determination by the Company may not be made without the approval of a majority
of the Independent Directors. United States federal income tax law prohibits the
Company from electing to be taxable as a REIT for the four taxable years
following the year of such revocation. See "United States Federal Income Tax
Considerations."
REIT Requirements with Respect to Stockholder Distributions.
To qualify as a REIT under the Code, the Company is generally
required each year to distribute as dividends to its stockholders at least 95%
of its "REIT taxable income" (excluding capital gains). Failure to comply with
this requirement would result in the Company failing to qualify as a REIT.
Consequently, the Company would become subject to tax at normal corporate rates.
In addition, the Company would be subject to a 4% nondeductible excise tax on
the amount, if any, by which certain distributions considered as paid by it with
respect to any calendar year are less than the sum of 85% of its ordinary income
for the calendar year, 95% of its capital gains net income for the calendar year
and any undistributed taxable income from prior periods. Under certain
circumstances, the Superintendent may restrict the ability of the Company, as a
subsidiary of the Bank, to make distributions to its stockholders. Consequently,
such a restriction could result in the Company's failing to satisfy the REIT
requirements with respect to stockholder distributions. See "--Dividend and
Other Regulatory Restrictions on Operations of the Company."
Redemption upon Occurrence of a Tax Event.
At any time following the occurrence of a Tax Event on or
after September 3, 2002, even if such Tax Event occurs prior to September 3,
2007, the Company will have the right to redeem the New Preferred Shares in
whole but not in part, subject to the prior written approval of the
Superintendent. The occurrence of a Tax Event will not, however, give the
holders of the New Preferred Shares any right to have such shares redeemed. See
"Description of New Preferred Shares--Redemption."
Automatic Exchange upon Occurrence of an Exchange Event.
Upon the occurrence of an Exchange Event, the outstanding New
Preferred Shares will be exchanged automatically on a one-for-one basis for Bank
Preferred Shares. See "Description of New Preferred Shares--Automatic Exchange."
The Automatic Exchange will be a taxable event. Consequently, each holder of the
New Preferred Shares will have a gain or loss, as the case may be, equal to the
difference between the basis of such holder in the New Preferred Shares and the
fair market value of the Bank Preferred Shares received in the Automatic
Exchange. See "United States Federal Income Tax Considerations--Tax Treatment of
Automatic Exchange."
Changes in Tax Law.
Under current tax law, payments on the Initial Mortgage Loans
and the Initial Mortgage Assets 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 might not
in the future become subject to withholding tax.
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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. Consequently, there can be no assurance that the
remaining payments on the Initial Mortgage Assets would be sufficient to make
timely payments of dividends on the New Preferred Shares.
Ownership of the New Preferred Shares.
If the possibility of the occurrence of the Automatic Exchange
caused the Bank to be viewed from the date of issuance of the New Preferred
Shares as the holder for U.S. federal income tax purposes of the New Preferred
Shares, distributions on the New Preferred Shares would be subject to
withholding of United States federal income tax at a 30 percent rate.
Consequently, the Company, as withholding agent, would be liable for the payment
of such tax, which would reduce the amount available to pay dividends on the New
Preferred Shares.
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, in the
aggregate, 12,101 Mortgage Loans (the "Initial Mortgage Loans"). Mortgage Loans
consist of CMHC-insured residential first mortgages that are secured by real
property located in Canada. See "Business and Strategy--Description of Initial
Mortgage Assets" and "--Description of Initial Mortgage Loans." At least 90% of
the Company's Mortgage Assets consist of obligations that are recourse only to
Mortgage Loans and that are secured by real property.
Generally, the Company acquired its Mortgage Assets from the
Bank and affiliates of the Bank. The Company may also from time to time,
however, acquire Mortgage Assets from unrelated third parties. The Bank
administers the day-to-day operations of the Company under the Advisory
Agreement. All of the Common Stock is owned by the Bank. The Company will elect
to be taxable as a REIT under the Code and will generally not be liable for
United States federal income tax to the extent that it distributes its income to
its stockholders and maintains its qualification as a REIT. For a further
description of the operations of the Company, see "Business and Strategy,"
"Management," "Risk Factors" and "United States Federal Income Tax
Considerations."
The New Preferred Shares will be exchanged automatically on a
one-for-one basis for the Bank Preferred Shares upon the occurrence of the
Exchange Event. CONSEQUENTLY, HOLDERS OF THE NEW PREFERRED SHARES COULD BE
REQUIRED TO EXCHANGE THEIR NEW PREFERRED SHARES FOR BANK PREFERRED SHARES,
WITHOUT ANY ACTION BY THE HOLDER THEREOF, AT A TIME WHEN THE BANK IS
EXPERIENCING FINANCIAL DIFFICULTIES OR ITS FINANCIAL CONDITION IS DETERIORATING
OR WHEN THE SUPERINTENDENT HAS TAKEN CONTROL OF THE BANK OR PROCEEDINGS FOR THE
WINDING-UP OF THE BANK HAVE BEEN COMMENCED. See "Description of New Preferred
Shares--Automatic Exchange."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange
pursuant to the Exchange Offer.
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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
Preferred Stock, US$.01 par value per share; none authorized,
issued and outstanding, actual and 10,000,000 shares authorized, 300,000 shares
issued and outstanding, as adjusted................................................. 3
Common Stock, US$.01 par value per share; 1,000 shares
authorized, 100 shares issued and outstanding, actual and as adjusted............... (1)
----------
Additional paid-in capital................................................................... 483,335
Total stockholders' equity................................................................... 483,338(1)
Total Capitalization......................................................................... US$483,338
==========
</TABLE>
(1) The Company was formed with an initial capitalization of US$1,000.
Contemporaneously with the consummation of the offering of the Old
Preferred Shares on September 3, 1997 (the "Offering"), the Bank made
capital contributions to the Company equal to US$177,000,000 plus an
amount sufficient to pay the Initial Purchaser's discount of
US$6,000,000 ("Initial Purchaser's Discount") and the expenses of the
Offering and the formation of the Company payable by the Company,
estimated by the Company to be approximately US$750,000. The additional
paid-in capital of US$483,335,000 represents (i) the total capital
contributions made by the Bank to the Company minus the aggregate
Initial Purchaser's Discount and the expense of the Offering and the
formation of the Company payable by the Company and (ii) the full
US$300,000,000 of proceeds of the Offering minus the aggregate US$3,000
par value of the Old Preferred Shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES
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.
The Company's principal short-term and long-term liquidity
needs are to pay quarterly dividends on the New Preferred Shares, to pay fees
and expenses of the Bank pursuant to the Servicing Agreement and the Advisory
Agreement, and to pay franchise fees and expenses of advisors, if any, to the
Company. The Company does not have any indebtedness (current or long-term),
other material capital 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.
The US$477 million of Initial Mortgage Assets are over-collateralized by the
C$828 million (US$596 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 and that such payments will
provide the Company with sufficient funds to meet its operating expenses and to
pay quarterly dividends on the New Preferred Shares. To the extent that the cash
flow from its
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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.
THE EXCHANGE OFFER
General
The Company hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the Exchange Offer), to exchange up to
300,000 New Preferred Shares for a like number of Old Preferred Shares properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
pursuant to the procedures described below. The Exchange Offer is being made
with respect to all of the Old Preferred Shares.
As of the date of this Prospectus, the aggregate number of the
Old Preferred Shares outstanding is 300,000. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about
, 1998, to all holders of Old Preferred Shares known to the Company. The
Company's obligation to accept Old Preferred Shares for exchange pursuant to the
Exchange Offer is subject to certain conditions set forth under "--Certain
Conditions to the Exchange Offer" below. The Company currently expects that each
of the conditions will be satisfied and that no waivers will be necessary.
Purpose of the Exchange Offer
The Old Preferred Shares were issued on September 3, 1997 in a
transaction exempt from the registration requirements of the Securities Act.
Accordingly, the Old Preferred Shares may not be reoffered, resold, or otherwise
transferred unless registered under the Securities Act or any applicable
securities law or unless an applicable exemption from the registration and
prospectus delivery requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Preferred
Shares, the Company entered into the Registration Rights Agreement, which
requires (i) the Company to file with the Commission a registration statement
relating to the Exchange Offer not later than 150 days after the date of
issuance of the Old Preferred Shares, (ii) the Company to use its best efforts
to cause the registration relating to the Exchange Offer to become effective
under the Securities Act not later than 180 days after the date of issuance of
the Old Preferred Shares and (iii) the Exchange Offer to be consummated not
later than 30 days after the date of the effectiveness of the Registration
Statement (or, if the Company is not permitted to effect the Exchange Offer, to
use its best efforts to cause to become effective as promptly as practicable the
Shelf Registration Statement with respect to resales of the Old Preferred
Shares). A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement.
The Exchange Offer is being made by the Company to satisfy
certain of its obligations under the Registration Rights Agreement. The term
"holder," with respect to the Exchange Offer, means any person in whose name Old
Preferred Shares are registered on the books of the Company or any other person
who has obtained a properly completed stock power from the registered holder, or
any person whose Old Preferred Shares are held of record by The Depository Trust
Company. Other than pursuant to the Registration Rights Agreement, the Company
is not required to file any registration statement to register any outstanding
Old Preferred Shares. Holders of Old Preferred Shares who do not tender their
Old Preferred Shares or whose Old Preferred Shares are tendered but not accepted
would have to rely on exemptions to registration requirements under the
securities laws, including the Securities Act, if they wish to sell their Old
Preferred Shares.
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Terms of the Exchange
The Company hereby offers to exchange, subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus, each New Preferred Share for each Old Preferred Share. The terms of
the New Preferred Shares are identical in all material respects to the terms of
the Old Preferred Shares for which they may be exchanged pursuant to this
Exchange Offer, except that the New Preferred Share will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. See "Description of New Preferred Shares."
The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Preferred Shares being tendered for exchange.
The Company is making the Exchange Offer in reliance on the
position of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letters, and there can be no assurance that the
Commission would make a similar determination with respect to the New Preferred
Shares. Based on these interpretations by the staff of the Commission, the
Company believes that New Preferred Shares issued pursuant to the Exchange Offer
in exchange for Old Preferred Shares may be offered for sale, resold and
otherwise transferred by any holder of such New Preferred Shares (other than any
such holder that is a broker-dealer or an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Preferred Shares are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Preferred Shares and
neither such holder nor any other such person is engaging in or intends to
engage in a distribution of such New Preferred Shares. Since the Commission has
not considered the Exchange Offer in the context of an interpretive letter,
there can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. See "--Resale of New Preferred
Shares" and "Plan of Distribution."
Dividends on the New Preferred Shares, if, when and as
authorized and declared by the Board of Directors, shall accrue from the first
day of the quarterly period whether or not authorized, declared or paid with
respect to Preferred Shares for the prior quarterly period on which paid on the
Old Preferred Shares so surrendered.
Tendering holders of the Old Preferred Shares shall not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of the
Old Preferred Shares pursuant to the Exchange Offer.
Expiration Date; Extension; Termination; Amendment
The Exchange Offer will expire on the Expiration Date. The
Expiration Date will be at least 20 business days after the commencement of the
Exchange Offer in accordance with Rule 14e-1(a) under the Exchange Act. The
Company expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance for exchange of any Old Preferred Shares, by giving oral or
written notice to the Exchange Agent and by giving written notice of such
extension to the holders thereof or by timely public announcement no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. During any such extension, all Old Preferred Shares
previously tendered will remain subject to the Exchange Offer unless properly
withdrawn. The Company does not anticipate extending the Expiration Date.
The Company expressly reserves the right to (i) terminate the
Exchange Offer and not to accept for exchange any Old Preferred Shares not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "--Certain Conditions to the Exchange Offer" which have
not been waived
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by the Company and (ii) amend the terms of the Exchange Offer in any manner
which, in its good faith judgment, is advantageous to the holders of the Old
Preferred Shares, whether before or after any tender of the Old Preferred
Shares. If any such termination or amendment occurs, the Company will notify the
Exchange Agent and will either issue a press release or give oral or written
notice to the holders of the Old Preferred Shares as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any
day other than Saturday, Sunday or a date on which banking institutions are
required or authorized by New York State law to be closed, and consists of the
time period from 12:01 a.m. through 12:00 midnight, New York City time. Unless
the Company terminates the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date, the Company will exchange the New Preferred Shares
for the Old Preferred Shares on the business day following the Exchange Date.
Procedures for Tendering Old Preferred Shares
The tender to the Company of Old Preferred Shares by a holder
thereof as set forth below and the acceptance thereof by the Company will
constitute a binding agreement between the tendering holder and the Company upon
the terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal.
A holder of Old Preferred Shares may tender the same by (i)
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Old Preferred Shares being tendered
and any required signature guarantees and any other documents required by the
Letter of Transmittal, to the Exchange Agent at its address set forth below on
or prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
The method of delivery of Old Preferred Shares, Letters of
Transmittal and all other required documents is at the election and risk of the
holders. If such delivery is by mail, it is recommended that registered mail,
properly insured, with return receipt requested, be used. In all cases,
sufficient time should be allowed to insure timely delivery. No Old Preferred
Shares or Letters of Transmittal should be sent to the Company.
If tendered Old Preferred Shares are registered in the name of
the signer of the Letter of Transmittal and the New Preferred Shares to be
issued in exchange therefor are to be issued (and any untendered Old Preferred
Shares are to be reissued) in the name of the registered holder (which term, for
the purposes described herein, shall include any participant in The Depository
Trust Company ("DTC," also referred to as a "book-entry transfer facility")
whose name appears on a security listing as the owner of Old Preferred Shares),
the signature of such signer need not be guaranteed. In any other case, the
tendered Old Preferred Shares must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the New
Preferred Shares and/or Old Preferred Shares not exchanged are to be delivered
to an address other than that of the registered holder appearing on the
preferred stock register for the Old Preferred Shares, the signature in the
Letter of Transmittal must be guaranteed by an Eligible Institution.
The Exchange Agent will establish accounts with respect to the
Old Preferred Shares at the book-entry transfer facility for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the book-entry transfer
facility's system may make
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<PAGE>
book-entry delivery of Old Preferred Shares by causing such book-entry transfer
facility to transfer such Old Preferred Shares into the Exchange Agent's account
with respect to the Old Preferred Shares in accordance with the book-entry
transfer facility's procedures for such transfer. Although delivery of Old
Preferred Shares may be effected through book-entry transfer into the Exchange
Agent's account at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will
not permit a Letter of Transmittal or Old Preferred Shares to reach the Exchange
Agent before the Expiration Date or the procedure for book-entry transfer cannot
be completed on a timely basis, a tender may be effected if the Exchange Agent
has received at its address set forth below, on or prior to the Expiration Date,
a letter by hand or mail, or sent by facsimile transmission (receipt confirmed
by telephone and an original delivered by guaranteed overnight courier) from an
Eligible Institution setting forth the name and address of the tendering holder,
the names in which the Old Preferred Shares are registered and, if possible, the
certificate numbers of the Old Preferred Shares to be tendered, and stating that
the tender is being made thereby and guaranteeing that within three business
days after the Expiration Date, the Old Preferred Shares in proper form for
transfer (or a confirmation of book-entry transfer of such Old Preferred Shares
into the Exchange Agent's account at the book-entry transfer facility), will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Old Preferred Shares being tendered by the above-described method are deposited
with the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Company may, at its option, reject the tender. Copies of the
notice of guaranteed delivery ("Notice of Guaranteed Delivery") which may be
used by Eligible Institutions for the purposes described in this paragraph are
available from the Exchange Agent.
A tender will be deemed to have been received as of the date
when (i) the tendering holder's properly completed and duly executed Letter of
Transmittal accompanied by the Old Preferred Shares is received by the Exchange
Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Preferred Shares in exchange
for Old Preferred Shares tendered pursuant to a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Preferred
Shares (or a confirmation of book-entry transfer of such Old Preferred Shares
into the Exchange Agent's account at the book-entry transfer facility).
All questions as to the validity, form, eligibility (including
time of receipt) and acceptance of Letters of Transmittal or Old Preferred
Shares tendered for exchange will be determined by the Company in its sole
discretion, which determination shall be final and binding. The Company reserves
the absolute right to reject any and all tenders of any particular Old Preferred
Shares not properly tendered and not to accept any particular Old Preferred
Shares for exchange which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities as to any particular Old Preferred Shares or
conditions of the Exchange Offer either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Preferred Shares in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Preferred Shares for exchange must be cured within such reasonable period
of time as the Company shall determine. None of the Company, the Exchange Agent
nor any other person shall be under any duty to give notification of any defect
or irregularity with respect to any tender of Old Preferred Shares for exchange,
nor shall any of them incur any liability for failure to give such notification.
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If the Letter of Transmittal is signed by a person or persons
other than the registered holder or holders of Old Preferred Shares, such Old
Preferred Shares must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names of the registered
holder or holders appear on the Old Preferred Shares.
If the Letter of Transmittal or any Old Preferred Shares or
powers of attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each holder will represent to the Company that,
among other things, (a) New Preferred Shares acquired pursuant to the Exchange
Offer are being acquired in the ordinary course of business of the person
receiving such New Preferred Shares, whether or not such person is the holder,
(b) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Preferred Shares and (c) neither the holder nor any such other person is an
"affiliate" of the Company as defined under Rule 405 of the Securities Act, or
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. Any holder
of Old Preferred Shares using the Exchange Offer to participate in a
distribution of the New Preferred Shares (i) cannot rely on the position of the
staff of the Commission enunciated in its interpretive letter with respect to
Exxon Capital Holdings Corporation (available April 13, 1989) or similar letters
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives New Preferred Shares for its
own account in exchange for Old Preferred Shares where such Old Preferred Shares
were acquired by such broker-dealer as a result of market-making activities or
other trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Shares. The Company has agreed
that, for a period of six months after the date of this Prospectus, it will make
this Prospectus, as it may be amended or supplemented, available to any
broker-dealer for use in connection with any such resale and will update this
Prospectus, as required, during such six-month period. See "Plan of
Distribution."
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the
following terms and conditions, which are part of the Exchange Offer.
The party tendering Old Preferred Shares for exchange (the
"Transferor") exchanges, assigns and transfers the Old Preferred Shares to the
Company and irrevocably constitutes and appoints the Exchange Agent as the
Transferor's agent and attorney-in-fact to cause the Old Preferred Shares to be
assigned, transferred and exchanged. The Transferor represents and warrants that
it has full power and authority to tender, exchange, assign and transfer the Old
Preferred Shares and to acquire New Preferred Shares issuable upon the exchange
of such tendered Old Preferred Shares, and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
Old Preferred Shares, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Preferred Shares or
transfer ownership of such Old Preferred Shares on the account books maintained
by a book-entry transfer facility. The Transferor further agrees that acceptance
of any tendered Old Preferred Shares by the Company and the issuance of New
Preferred Shares in exchange therefor shall constitute performance in full by
the Company of certain of its obligations under the Registration Rights
Agreement. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor, and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
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The Transferor certifies that neither it, nor the person
receiving the New Preferred Shares, whether or not such person is the
Transferor, (a) is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, (b) is acquiring the New Preferred Shares offered
hereby in the ordinary course of such Transferor's business and (c) has an
arrangement with any person to participate in the distribution of such New
Preferred Shares. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of New
Preferred Shares. Each Transferor which is a broker-dealer receiving New
Preferred Shares for its own account must represent that the Old Preferred
Shares to be exchanged for New Preferred Shares were acquired by it as a result
of market-making activities or other trading activities and acknowledge that it
will deliver a prospectus in connection with any resale of such New Preferred
Shares. By so acknowledging and by delivering a prospectus meeting the
requirements of the Securities Act, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Preferred Shares received
in exchange for Old Preferred Shares where such Old Preferred Shares were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company will, for a period of up to six months after the
date of this Prospectus, make copies of this Prospectus available to any
broker-dealer for use in connection with any such resale and will update this
Prospectus, as required, during such six-month period.
Withdrawal Rights
Tenders of Old Preferred Shares may be withdrawn at any time
prior to the Expiration Date.
For a withdrawal to be effective, a written notice of
withdrawal sent by telegram, facsimile transmission (receipt confirmed by
telephone) or letter must be received by the Exchange Agent at the address set
forth herein prior to the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having tendered the Old Preferred Shares to
be withdrawn (the "Depositor"), (ii) identify the Old Preferred Shares to be
withdrawn (including the certificate number), (iii) specify the number of Old
Preferred Shares to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Preferred Shares exchanged, (v) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such Old Preferred Shares were tendered or as otherwise
described above (including any required signature guarantees) and (vi) specify
the name in which any such Old Preferred Shares are to be registered, if
different from that of the Depositor. The Exchange Agent will return the
properly withdrawn Old Preferred Shares promptly following receipt of notice of
withdrawal. If Old Preferred Shares have been tendered pursuant to the procedure
for book-entry transfer, any notice of withdrawal must specify the name and
number of the account at the book-entry transfer facility to be credited with
the withdrawn Old Preferred Shares or otherwise comply with the book-entry
transfer facility procedure. All questions as to the validity of notices of
withdrawals, including time of receipt, will be determined by the Company and
such determination will be final and binding on all parties.
Any Old Preferred Shares so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer. Any
Old Preferred Shares which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Old Preferred Shares tendered by book-entry
transfer into the Exchange Agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described above, such Old
Preferred Shares will be credited to an account with such book-entry transfer
facility specified by the holder) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Preferred Shares may be retendered by following one of the procedures described
under "--Procedures for Tendering Old Preferred Shares" above at any time on or
prior to the Expiration Date.
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Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred
Shares
Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, the Company will accept, on the Exchange Date, all Old Preferred
Shares properly tendered and will issue the New Preferred Shares promptly after
such acceptance. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Preferred Shares for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
For each Old Preferred Share accepted for exchange, the holder
of such Old Preferred Share will receive a New Preferred Share.
In all cases, issuance of New Preferred Shares for Old
Preferred Shares that are accepted for exchange pursuant to the Exchange Offer
will be made only after timely receipt by the Exchange Agent of certificates for
such Old Preferred Shares or a timely book-entry confirmation of such Old
Preferred Shares into the Exchange Agent's account at the book-entry transfer
facility, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Old Preferred Shares are not accepted
for any reason set forth in the terms and conditions of the Exchange Offer or if
Old Preferred Shares are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Preferred
Shares will be returned without expense to the tendering holder thereof (or, in
the case of Old Preferred Shares tendered by book-entry transfer into the
Exchange Agent's account at the book-entry transfer facility pursuant to the
book-entry transfer procedures described above, such non-exchanged Old Preferred
Shares will be credited to an account maintained with such book-entry transfer
facility) as promptly as practicable after the expiration of the Exchange Offer.
Certain Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or
any extension of the Exchange Offer, the Company shall not be required to accept
for exchange, or to issue New Preferred Shares in exchange for, any Old
Preferred Shares and may terminate or amend the Exchange Offer (by oral or
written notice to the Exchange Agent or by a timely press release) if at any
time before the acceptance of such Old Preferred Shares for exchange or the
exchange of the New Preferred Shares for such Old Preferred Shares, any of the
following events occur:
(a) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency or regulatory
authority or any injunction, order or decree is issued with respect to
the Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or have a material adverse effect on the contemplated
benefits of the Exchange Offer to the Company; or
(b) any change (or any development involving a prospective
change) shall have occurred or be threatened in the business,
properties, assets, liabilities, financial condition, operations,
results of operations or prospects of the Company that is or may be
adverse to the Company, or the Company shall have become aware of facts
that have or may have adverse significance with respect to the value of
the Old Preferred Shares or the New Preferred Shares or that may
materially impair the contemplated benefits of the Exchange Offer to
the Company; or
(c) any law, rule or regulation or applicable interpretations
of the staff of the Commission is issued or promulgated which, in the
good faith determination of the Company, do not permit the Company to
effect the Exchange Offer; or
(d) any governmental approval has not been obtained, which
approval the Company, in its sole discretion, deems necessary for the
consummation of the Exchange Offer; or
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(e) there shall have been proposed, adopted or enacted any
law, statute, rule or regulation (or an amendment to any existing law,
statute, rule or regulation) which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed
with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company; or
(f) there shall occur a change in the current interpretation
by the staff of the Commission which permits the New Preferred Shares
issued pursuant to the Exchange Offer in exchange for Old Preferred
Shares to be offered for resale, resold and otherwise transferred by
holders thereof (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Preferred
Shares are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in
the distribution of such New Preferred Shares; or
(g) there shall have occurred (i) any general suspension of,
shortening of hours for, or limitation on prices for, trading in
securities on any national securities exchange or in the
over-the-counter market (whether or not mandatory), (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks by Federal or state
authorities in the United States (whether or not mandatory), (iv) a
commencement of a war, armed hostilities or other international or
national crisis directly or indirectly involving the United States, (v)
any limitation (whether or not mandatory) by any governmental authority
on, or other event having a reasonable likelihood of affecting, the
extension of credit by banks or other lending institutions in the
United States, or (vi) in the case of any of the foregoing existing at
the time of the commencement of the Exchange Offer, a material
acceleration or worsening thereof.
The Company expressly reserves the right to terminate the
Exchange Offer and not accept for exchange any Old Preferred Shares upon the
occurrence of any of the foregoing conditions (which represent all of the
material conditions to the acceptance by the Company of properly tendered Old
Preferred Shares). In addition, the Company may amend the Exchange Offer at any
time prior to the Expiration Date if any of the conditions set forth above
occur. Moreover, regardless of whether any of such conditions has occurred, the
Company may amend the Exchange Offer in any manner which, in its good faith
judgment, is advantageous to holders of the Old Preferred Shares.
The foregoing conditions are for the sole benefit of the
Company and may be asserted by the Company regardless of the circumstances
giving rise to any such condition or may be waived by the Company in whole or in
part at any time and from time to time in its sole discretion. The failure by
the Company at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right, and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time. If the
Company waives or amends the foregoing conditions, it will, if required by law,
extend the Exchange Offer for a minimum of five business days from the date that
the Company first gives notice, by public announcement or otherwise, of such
waiver or amendment, if the Exchange Offer would otherwise expire within such
five business-day period. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old
Preferred Shares tendered, and no New Preferred Shares will be issued in
exchange for any such Old Preferred Shares, if at such time any stop order shall
be threatened or in effect with respect to the Registration Statement of which
this Prospectus constitutes a part. In any such event, the Company is required
to use every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
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The Exchange Offer is not conditioned upon any minimum number
of Old Preferred Shares being tendered for exchange.
Exchange Agent
The Bank of Nova Scotia Trust Company has been appointed as
the Exchange Agent for the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at one of the addresses set forth
below:
By Hand/Overnight Courier:
The Bank of Nova Scotia
Trust Company of New York
One Liberty Plaza, 23rd Floor
New York, New York 10006
Attn: Reorganization Section
By Mail:
The Bank of Nova Scotia
Trust Company of New York
One Liberty Plaza, 23rd Floor
New York, New York 10006
Attn: Reorganization Section
By Facsimile: (212) 225-5436
By Telephone: (212) 225-5422
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN THE ONES
SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
Solicitation of Tenders; Fees and Expenses
The Company has not retained any dealer-manager in connection
with the Exchange Offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of the Exchange Offer. The Company will,
however, pay the Exchange Agent reasonable and customary fees for its services
and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this and other related documents to the beneficial
owners of the Old Preferred Shares and in handling or forwarding tenders for
their customers.
The estimated cash expenses to be incurred in connection with
the Exchange Offer will be paid by the Company and are estimated in the
aggregate to be approximately US$ , which includes fees and expenses of the
Exchange Agent, registration fees, accounting, legal, printing and related fees
and expenses.
No person has been authorized to give any information or to
make any representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such
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information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the respective
dates as of which information is given herein. The Exchange Offer is not being
made to (nor will tenders be accepted from or on behalf of) holders of Old
Preferred Shares in any jurisdiction in which the making of the Exchange Offer
or the acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, the Company may, at its discretion, take such action as
it may deem necessary to make the Exchange Offer in any such jurisdiction and
extend the Exchange Offer to holders of Old Preferred Shares in such
jurisdiction. In any jurisdiction in which the securities laws or blue sky laws
of which require the Exchange Offer to be made by a licensed broker or dealer,
the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
Transfer Taxes
The Company will pay all transfer taxes, if any, applicable to
the exchange of Old Preferred Shares pursuant to the Exchange Offer. If,
however, certificates representing New Preferred Shares are to be delivered to,
or are to be issued in the name of, any person other than the registered holder
of the Old Preferred Shares tendered, or if tendered Old Preferred Shares are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Preferred Shares pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
Accounting Treatment
The New Preferred Shares will be recorded at the carrying
value of the Old Preferred Shares as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company upon the exchange of New Preferred
Shares for Old Preferred Shares. Expenses incurred in connection with the
issuance of the New Preferred Shares will be amortized over the term of the New
Preferred Shares.
Consequences of Failure to Exchange
Holders of Old Preferred Shares who do not exchange their Old
Preferred Shares for New Preferred Shares pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Old Preferred
Shares as set forth in the legend thereon. Old Preferred Shares not exchanged
pursuant to the Exchange Offer will continue to remain outstanding in accordance
with their terms. In the event of an Exchange Event, each Old Preferred Share
not exchanged pursuant to the Exchange Offer will be exchanged automatically for
one newly issued Bank Preferred Share. In the event of a Tax Event on or after
September 3, 2002, the Company will have the right to redeem, in whole but not
in part, each Old Preferred Share not exchanged pursuant to the Exchange Offer,
subject to the prior written approval of the Superintendent. On and after
September 3, 2007, the Old Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at any time and from time to time,
at the redemption prices set forth herein, plus the quarterly accrued and unpaid
dividend, if any, thereon to the date of redemption. See "Description of New
Preferred Shares--Redemption." In general, the Old Preferred Shares may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Preferred Shares under the Securities Act.
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Participation in the Exchange Offer is voluntary, and holders
of Old Preferred Shares should carefully consider whether to participate.
Holders of the Old Preferred Shares are urged to consult their financial and tax
advisors in making their decision with respect to tendering.
As a result of the making of, and upon acceptance for exchange
of all validly tendered Old Preferred Shares pursuant to the terms of, this
Exchange Offer, the Company will have fulfilled a covenant contained in the
Registration Rights Agreement. Holders of Old Preferred Shares who do not tender
their Old Preferred Shares in the Exchange Offer will continue to hold such Old
Preferred Shares and will not be entitled to any rights under the Registration
Rights Agreement that, by their terms, terminate or cease to have further
effectiveness as a result of the making of this Exchange Offer. To the extent
that Old Preferred Shares are tendered and accepted in the Exchange Offer, the
trading market for untendered Old Preferred Shares could be adversely affected.
Resale of New Preferred Shares
The Company is making the Exchange Offer in reliance on the
position of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter, and there can be no assurance that the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Commission, the Company believes that the
New Preferred Shares issued pursuant to the Exchange Offer in exchange for Old
Preferred Shares may be offered for resale, resold and otherwise transferred by
a holder (other than any Holder that is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act. However, any holder who is an "affiliate" of the Company or who
has an arrangement or understanding with respect to the distribution of the New
Preferred Shares to be acquired pursuant to the Exchange Offer, or any
broker-dealer who purchased Old Preferred Shares from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) cannot rely on the applicable interpretations of the staff of the Commission
and (ii) will not be entitled to tender its Old Preferred Shares in the Exchange
Offer, and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act. A broker-dealer who holds Old Preferred
Shares that were acquired for its own account as a result of market-making or
other trading activities may be deemed to be an "underwriter" within the meaning
of the Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of New
Preferred Shares. Each such broker-dealer that receives New Preferred Shares for
its own account in exchange for Old Preferred Shares, where such Old Preferred
Shares were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such New Preferred Shares. The Company has agreed that, for a period of six
months after the date of this Prospectus, it will make this Prospectus, as it
may be amended or supplemented, available to any broker-dealer for use in
connection with any such resale and will update this Prospectus, as required,
during such six-month period. See "Plan of Distribution."
In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Preferred Shares may not be offered or
sold unless they have been registered or qualified for sale in such jurisdiction
or an exemption from registration or qualification is available and is complied
with.
BUSINESS AND STRATEGY
General
The Company's principal business objective is to acquire,
hold, finance and manage Mortgage Assets that will generate net income for
distribution to stockholders. Mortgage Assets are obligations secured by real
property, as well as certain other qualifying REIT assets. Currently, the
Company's Mortgage Assets consist of sixteen hypothecation loans issued to the
Company by NB Finance (the "Initial Mortgage Assets") that are recourse only to
the sixteen pools of, in the aggregate, 12,101 CMHC-insured residential first
mortgages secured by real property located in Canada (the "Initial Mortgage
Loans"). The Company acquired the Initial
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Mortgage Assets 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 and other real estate assets that are of the type set forth in Section
856(c)(6)(B) of the Code. See "United States Federal Income Tax Considerations."
Description of Dividend Policy
Dividends on the New Preferred Shares are payable at the rate
of 8.35% per annum of the liquidation preference (an amount equal to US$83.50
per annum per share, calculated by multiplying the annual dividend rate of 8.35%
by the liquidation preference of US$1,000 per share, assuming authorization and
declaration by the Board of Directors of four quarterly dividends), if, when and
as authorized and declared by the Board of Directors. The US$477 million of
Initial Mortgage Assets are overcollateralized by C$828 million (US$596 million)
of Initial Mortgage Loans. The Company believes that the amounts generated from
the payment of interest and principal on such Initial Mortgage Loans will more
than provide sufficient funds to make full payments with respect to the Initial
Mortgage Assets and that such payments will provide the Company with sufficient
funds to meet its operating expenses and to pay quarterly dividends on the New
Preferred Shares. 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." In order to remain qualified as a REIT, the
Company must distribute annually at least 95% of its REIT taxable income
(excluding capital gains) to stockholders. The Company anticipates that none of
the dividends on the New Preferred Shares and none or no material portion of the
dividends on the Common Stock will constitute non-taxable returns of capital.
Dividends will be authorized and declared at the discretion of
the Board of Directors after considering the Company's distributable funds and
financial requirements, tax considerations and other factors. There are,
however, several limitations on the Company's ability to pay dividends on the
Common Stock (none of which should adversely affect the legal right of the
Company to pay dividends on the New Preferred Shares). First, under the
Company's current dividend policy, the Company may not make any distribution in
respect of the Common Stock to the extent that, after taking into account such
proposed distribution, total cash or property distributions on the Company's
outstanding shares of Preferred Stock and Common Stock in any year would exceed
105% of the Company's REIT taxable income for that year, plus net capital gains
of the Company for that year. This policy regarding the limitation on payment of
dividends on the Common Stock may not be modified without the approval of a
majority of the Independent Directors. Second, if the Company fails to authorize
and declare and pay the stated dividend on the New Preferred Shares in any
dividend period, the Company may not pay any dividends with respect to the
Common Stock until such time as dividends on all outstanding New Preferred
Shares have been (i) authorized and declared and paid for three consecutive
dividend periods and (ii) authorized and declared and paid or authorized and
declared and a sum sufficient for the payment thereof set apart for the fourth
consecutive dividend period. See "Description of New Preferred
Shares--Dividends." Third, the Maryland General Corporation Law ("MGCL")
provides that dividends may be paid on the stock of a corporation only if, after
payment of the distribution, (i) the corporation would be able to pay its
indebtedness as such indebtedness becomes due in the usual course of business
and (ii) the corporation's total assets would not be less than the sum of its
total liabilities plus, unless the corporation's charter provides otherwise
(which the Charter does), the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights on dissolution of stockholders whose rights on dissolution
are superior to those receiving the distribution. It is possible that these
limitations on the Company's ability to pay dividends on the Common Stock could
affect the ability of the Company to qualify as a REIT under the Code. See
"United States Federal Income Tax Considerations--Taxation of the Company."
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Description of the Company's Investment Policy
General.
The Company has formulated the following investment policy.
This policy may be amended or revised from time to time at the discretion of the
Board of Directors (in certain circumstances subject to the approval of a
majority of the Independence Directors without a vote of the Company's
stockholders, including holders of New Preferred Shares. See "Risk Factors --
Risk of Future Revision in Policies and Strategies by the Board of Directors."
There is no specific policy with respect to the amount or percentage of assets
which will be invested in any specific property. All investments will be made
primarily for income. The general policy of the Bank with respect to uninsured
loans is to lend no more than 75% of the appraised value of the asset securing
such loan.
Initial Mortgage Assets.
Percentage of current portfolio: 100%. The Company's
investments currently consist solely of the Initial Mortgage Assets (i.e.,
sixteen hypothecation loans, in the aggregate amount of US$477 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 of C$828 million (US$596 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 are secured by residential
real property located in Quebec underlying the Initial Mortgage Loans. See
"--Description of the Initial Mortgage Assets." 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. The
maturities of the Initial Mortgage Assets range from January 2000 to July 2001.
Accordingly, after July 2001, the Company's portfolio will not include any
Initial Mortgage Assets.
Mortgage Loans.
Percentage of current portfolio: 0%. While no Mortgage Loans
are included in the Initial Mortgage Assets 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, will be virtually
free of credit risk. The properties underlying such Mortgage Loans are expected
to located in Canada. See "--Description of the Initial Mortgage Loans."
Potentially, up to 10% of the Company's portfolio could be comprised of Mortgage
Loans.
Residential Mortgage Loans.
Percentage of current portfolio: 0%. While no residential
mortgages are included in the Initial Mortgage Assets and while the Company has
no current intention to acquire residential mortgages, the Company may from time
to time acquire individual residential mortgages other than Mortgage Loans
("Residential Mortgage Loans"). These Residential Mortgage Loans are expected to
meet the requirements for sale to governmental or private mortgage conduit
programs or other investors in the secondary mortgage market (i.e., such
Residential Mortgages must be rated "A" (or better) by at least one major rating
agency (a Canadian rating agency for Canadian-based mortgages or a U.S. rating
agency for U.S.-based mortgages) or include some form of credit enhancement
(such as over-collateralization, letter of credit or accumulated cash)).
While Mortgage Loans benefit from CMHC insurance, there can be
no assurance that any Residential Mortgage Loans acquired by the Company will be
similarly protected. Some Residential Mortgage Loans are, however, insured by
Mortgage Insurance Company of Canada (now part of GE Capital), therefore
considerably mitigating any credit risk relating to those mortgages. Moreover,
large (i.e., more than four
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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-Backed Securities.
Percentage of current portfolio: 0%. While no Mortgage-Backed
Securities are included in the Initial Mortgage Assets 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
relatively short-term (typically, 6 month to 5 years) balloon mortgages, also
reducing the impact of prepayments.
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Commercial Mortgage Loans.
Percentage of current portfolio: 0%. While no Commercial
Mortgage Loans are included in the Initial Mortgage Assets 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 and while the Company has
no current intention to acquire any partnership interests, the Company may from
time to time acquire limited partnership interests in partnerships the only
activities of which are the purchase and ownership of Mortgage Loans
("Partnership Interests") that are comparable to the Initial Mortgage Loans
(i.e., government insured residential first mortgages). The ability to invest in
Partnership Interests allows the Company to acquire Partnership Interests that
in effect function as conduits for Mortgage Loans, as an alternative to
acquiring a direct interest in such Mortgage Loans. Any Partnership Interests
would be economically comparable to an investment in Mortgage Loans. The
limitations imposed by the REIT rules on the ownership of Partnership Interests
are the same as those imposed on the ownership of Mortgage Loans. Potentially,
up to 10% of the Company's portfolio could be comprised of Partnership
Interests.
Other Assets.
Percentage of current portfolio: 0%. While the Company has no
current intention to do so, the Company may invest up to 10% of the total value
of its portfolio in assets eligible to be held by REITs other than those
described above. Assets eligible to be held by REITs are, and therefore the
Company's portfolio could include, cash, cash equivalents, government securities
and shares or interests in other REITs. Cash, cash equivalents and government
securities would be expected to be relatively low risk investments. However, the
return on investment related thereto would also be expected to be relatively
low. The Company
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expects that any investment in shares or interests in other REITs would be made
in REITs holding assets similar to the Initial Mortgage Loans. Accordingly, the
expected risks and return related to such an investment would be similar to the
risks and returns related to the Initial Mortgage Assets and Initial Mortgage
Loans.
Description of the Company's Management Policies
General.
In administering the Company's Mortgage Assets, the Bank has a
high degree of autonomy. The Board of Directors has, however, adopted certain
policies to guide the Company and the Bank with respect to the acquisition and
disposition of assets, use of capital and leverage, credit risk management and
certain other activities. These policies, which are discussed below, may be
amended or revised from time to time at the discretion of the Board of Directors
(in certain circumstances subject to the approval of a majority of the
Independent Directors) without a vote of the Company's stockholders, including
holders of the New Preferred Shares. See also "--Dividend Policy"; "Risk
Factors--Risk of Future Revisions in Policies and Strategies by Board of
Directors."
Asset Acquisition and Disposition Policies.
The Company may, from time to time, use payments of interest
and principal in respect of its Mortgage Assets to purchase additional Mortgage
Assets (which are essentially loans to other persons secured by real property)
and may also purchase additional Mortgage Assets out of the proceeds from the
issuance, and not by direct issuance, of additional shares of Preferred Stock or
the contribution of additional capital by the Bank; provided, however, that (i)
to the extent that the investment of such payments or proceeds occurs prior to
the consummation of the Exchange Offer, such payments or proceeds will be
invested in Canadian or U.S. government guaranteed, mortgage-backed certificates
and other Canadian or U.S. government obligations which will be purchased on the
open market or from entities unaffiliated with the Bank or the Company or banks
that are not affiliated with the Bank and (ii) in the event that the New
Preferred Shares are not treated as "publicly-offered securities" as of the date
on which the Exchange Offer is consummated, then during the period commencing on
such date and ending on the date on which the New Preferred Shares become
"publicly-offered securities," any investment by the Company in any Mortgage
Assets in a transaction with the Bank and/or affiliates of the Bank will be made
only upon the decision of the Independent Fiduciary. The Company has acquired
all or substantially all of such Mortgage Assets from the Bank and/or affiliates
of the Bank, on terms that are comparable to those that could be obtained by the
Company if such Mortgage Assets were purchased from unrelated third parties. The
Company may also from time to time, however, acquire Mortgage Assets from
unrelated third parties. As of the date of this Prospectus, the Company has not
entered into any agreements with any third parties with respect to the purchase
of Mortgage Assets. Other than with respect to the temporary investment of
payments of interest and principal on its Mortgage Assets, the Company
anticipates that it would purchase Mortgage Assets from unrelated third parties
only if neither the Bank nor any affiliate of the Bank had an amount or type of
Mortgage Assets sufficient to meet the requirements of the Company.
At least 90% of the Company's portfolio will consist of the
Initial Mortgage Assets and obligations which are comparable to the Initial
Mortgage Assets. The Company may, however, invest in other assets eligible to be
held by REITs. See "-- Description of the Company's Investment Policy." The
Company's current policy prohibits the acquisition of an interest in any
Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities or a Partnership Interest) which is delinquent in the
payment of principal or interest at the time of proposed acquisition.
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<PAGE>
Capital and Leverage Policies.
To the extent that the Board of Directors determines that
additional funding is required, the Company may raise such funds through
additional equity offerings, or retention of cash flow (after consideration of
the provisions of the Code requiring the distribution by a REIT of a certain
percentage of its income annually and taking into account taxes that would be
imposed on the Company's undistributed taxable income), or a combination of
these methods. The Company will have no debt outstanding following consummation
of the Exchange Offer and has no intention of incurring any indebtedness in the
future.
In order to qualify as a REIT, the capital stock of the
Company must be held by at least 100 holders during approximately 90% or more of
the taxable year beginning in the Company's second taxable year and in each
subsequent taxable year. See "United States Federal Income Tax Considerations --
Stock Ownership Tests." The Company has issued the Senior Preferred Shares with
an aggregate liquidation preference of up to US$450,000 and limited
transferability to ensure that it meets, and will continue to meet, the 100
person ownership requirement for REIT status without having to constantly
monitor the number of holders of Preferred Shares. Except for such Senior
Preferred Shares, the Company may not, pursuant to its Charter, issue additional
shares of Preferred Stock senior to the New Preferred Shares either in the
payment of dividends or in the distribution of assets in liquidation, without
the consent of holders of at least two-thirds of the outstanding shares of
Preferred Stock at that time, including the New Preferred Shares, and the
Company may not issue additional shares of Preferred Stock on a parity with the
New Preferred Shares either in the payment of dividends or in the distribution
of assets in liquidation without the approval of a majority of the Independent
Directors. The Company does not currently intend to issue any additional series
of Preferred Stock unless it simultaneously receives additional capital
contributions from the Bank equal to the sum of 59% of the aggregate offering
price of such additional Preferred Stock and the Company's expenses in
connection with the issuance of such additional shares of Preferred Stock. Prior
to its issuance of additional shares of Preferred Stock, the Company will take
into consideration the Bank's regulatory capital requirements and the cost of
raising and maintaining that capital at the time.
Credit Risk Management Policies.
The Company intends that each Mortgage Loan, if any, acquired
from the Bank, an affiliate of the Bank, or an unrelated third party in the
future will represent a first lien position, will be covered by valid CMHC
insurance and will be originated in the ordinary course of the originator's real
estate lending activities based on the underwriting standards generally applied
(at the time of origination) for the originator's own account. The Company also
expects that all Mortgage Loans held by the Company directly or indirectly will
be serviced pursuant to the Servicing Agreement, or a similar agreement which
requires servicing in conformity with accepted secondary market standards, with
any servicing guidelines promulgated by the Company and with relevant government
agency guidelines and procedures.
Conflict of Interest Policies.
Because of the nature of the Company's relationship with the
Bank and its affiliates, it is likely that conflicts of interest will arise with
respect to certain transactions, including, without limitation, the Company's
acquisition of Mortgage Assets from, or disposition of Mortgage Assets to, the
Bank or its affiliates and the renewal, termination or modification of the
Advisory Agreement or the Servicing Agreement. It is the Company's policy that
the terms of any dealings with the Bank and its affiliates will be consistent
with those available from third parties. In addition, neither the Advisory
Agreement nor the Servicing Agreement may be renewed, terminated or modified by
the Company without the approval of a majority of the Independent Directors.
Conflicts of interest between the Company and the Bank and its
affiliates may also arise in connection with making decisions that bear upon the
credit arrangements that the Bank or one of its affiliates
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<PAGE>
may have with a borrower. Conflicts could also arise in connection with actions
taken by the Bank as a controlling stockholder in the Company. It is the
intention of the Company and the Bank that any agreements and transactions
between the Company, on the one hand, and the Bank or its affiliates, on the
other hand, including, without limitation, the Servicing Agreement, be fair to
all parties and consistent with market terms for such types of transactions. The
Servicing Agreement provides that foreclosures and dispositions in connection
with Mortgage Loans will be performed with a view toward maximizing the recovery
by the Company of amounts due on its Mortgage Assets and the Bank will be
required to service Mortgage Loans solely with a view toward the interests of
the Company, and without regard to the interests of the Bank or any of its other
affiliates. The requirement in the terms of the New Preferred Shares that
certain actions of the Company be approved by a majority of the Independent
Directors is also intended to ensure fair dealings between the Company and the
Bank and its affiliates. However, there can be no assurance that any such
dealings will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
There are no provisions in the Charter limiting any officer,
director, security holder or affiliate of the Company from having any direct or
indirect pecuniary interest in any Mortgage Asset to be acquired or disposed of
by the Company or in any transaction in which the Company has an interest or
from engaging in acquiring, holding and managing Mortgage Assets. As described
herein, the Bank and its affiliates have direct interests in transactions with
the Company (including without limitation the issuance of Mortgage Assets to the
Company); however, none of the officers or directors of the Company will have
any interests in such Mortgage Assets.
Other Policies.
The Company operates in a manner that will not subject it to
regulation under the Investment Company Act of 1940, as amended, including by
investing primarily in mortgages and other interests in and liens on real
estate.
The Company intends to distribute to stockholders annual
reports containing financial statements prepared in accordance with generally
accepted accounting principles and certified by the Company's independent public
accountants. The Charter provides that following the consummation of the
Exchange Offer the Company shall maintain its status as a reporting company
under the Exchange Act, for as long as any of the New Preferred Shares are
outstanding.
The Company currently has no intention to (a) invest in
securities of other issuers for the purpose of exercising control or (b)
underwrite securities of other issuers. The Company intends, and has the
ability, to hold the Mortgage Assets and the underlying Mortgage Loans until
maturity. Although the Company has no current intention to do so, the Company
may, pursuant to the terms of its Charter, redeem the Preferred Shares. See
"Description of the New Preferred Shares--Redemption."
The Company makes investments and operates its business at all
times in such a manner as to comply with the requirements of the Code to qualify
as a REIT. However, future economic, market, legal, tax or other considerations
may cause the Board of Directors, subject to approval by a majority of the
Independent Directors, to determine that it is in the best interests of the
Company and its stockholders to revoke the Company's REIT status.
Description of the Initial Mortgage Assets
The Initial Mortgage Assets are comprised of sixteen
hypothecation loans issued by NB Finance to the Company. The Company acquired
the Initial Mortgage Assets pursuant to the terms of a loan agreement with NB
Finance. Each Initial Mortgage Asset is recourse only to the Initial Mortgage
Loan securing such Initial Mortgage Asset. Each Initial Mortgage Loan is a pool
of between 130 and 2,561 CMHC-
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<PAGE>
insured residential first mortgages. See "Description of the Initial Mortgage
Loans." Each Initial Mortgage Asset 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 principal amount of the Initial Mortgage Assets
equals approximately US$477 million. The Initial Mortgage Assets pay interest at
rates ranging from 6.90% to 9.77%, with an average rate of approximately 8.40%
per annum.
The following table summarizes the Initial Mortgage Assets:
Initial Mortgage Assets
Outstanding Maturity Interest Monthly
Amount Date Rate* Interest Payments
----------- -------- -------- -----------------
US$ 24,175,420 Jan. 2000 6.895% US$ 136,954
23,250,251 Jan. 2000 7.471% 142,550
48,236,245 Jan. 2000 8.047% 318,171
16,364,955 Jan. 2000 8.622% 115,524
43,894,121 July 2000 6.895% 248,660
29,713,817 July 2000 7.471% 182,178
7,246,742 July 2000 8.622% 51,156
9,511,225 July 2000 8.047% 62,737
33,305,900 Jan. 2001 9.198% 250,531
46,882,784 Jan. 2001 9.774% 374,309
5,257,516 Jan. 2001 8.047% 34,679
6,342,462 Jan. 2001 8.622% 44,773
22,146,227 July 2001 8.047% 146,079
104,830,848 July 2001 8.622% 740,026
23,008,093 July 2001 9.198% 173,070
32,421,747 July 2001 9.774% 258,853
US$ 476,588,453 8.404% US$ 3,280,250
- ------------
* All rates quoted on a 30/360 semiannual basis
Payments of interest are made monthly out of payments on the
Initial Mortgage Loans. Pursuant to an agreement between the Company and NB
Finance (the "Mortgage Loan Assignment Agreement"), dated September 3, 1997, the
Company receives all scheduled payments made on the Initial Mortgage Loans,
retains a portion of any such payments equal to the amount due and payable on
the Initial Mortgage Assets and remits the balance, if any, to NB Finance. The
Company also retains a portion of any prepayments of principal in respect of the
Initial Mortgage Loans equal to the proportion of such prepayments that the
outstanding principal amount of the Initial Mortgage Loans bears to the
outstanding principal amount of the Initial Mortgage Assets, which amount would
be applied to reduce the outstanding principal amount of the Initial Mortgage
Assets. Repayment of the Initial Mortgage Assets 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
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<PAGE>
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 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, 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 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.
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 2,561
CMHC-insured residential first mortgages and is secured by the underlying
residential real property located in Canada, primarily in Quebec. See "Risk
Factors--All of the Real Property Securing the Initial Mortgage Assets is
Located Outside of the United States." In aggregate, 12,101 CMHC-insured
residential first mortgages comprise the sixteen pools. Generally, the
CMHC-insured residential first mortgages comprising any individual are less than
C$100,000. Accordingly, no individual CMHC-insured residential first mortgage is
material to the Company, its operation or its business.
Payments on the Initial Mortgage Loans are due monthly in
arrears on the 1st day of each month through July 2001 or such earlier date on
which payment in full of the Initial Mortgage Loans is made (the "Final Payment
Date") or, if the 1st day of a month is not a business day, on the first
business day following the 1st day of such month (a "Monthly Payment Date").
Payments of interest and principal on the Initial Mortgage Loans are made in
Canadian dollars.
The Initial Mortgage Loans mature monthly beginning in 1999
and bear interest at rates ranging from approximately 6.0% to 8.99% with an
average interest rate of 7.53% per annum. The Final Payment Date may occur at an
earlier date if final payment on the Initial Mortgage Loans occurs earlier than
such date, because of unscheduled prepayments.
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<PAGE>
The following table summarizes the Initial Mortgage Loans:
Initial Mortgage Loans
<TABLE>
<CAPTION>
Outstanding Number
Amount* Maturity Min. Max. Avg. Min. Max. Avg. of Loans
------ -------- ---- ---- ---- ---- ---- ---- --------
Interest rate** Remaining Term (months)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 42,004,792 Jan. 2000 6.000% 6.499% 6.225% 24.00 29.00 28.15 644
40,397,485 Jan. 2000 6.500% 6.999% 6.772% 24.00 29.00 27.79 547
83,810,476 Jan. 2000 7.000% 7.499% 7.166% 24.00 29.00 27.57 1,318
28,434,108 Jan. 2000 7.500% 7.999% 7.791% 24.00 29.00 25.38 411
76,266,035 July 2000 6.000% 6.499% 6.199% 30.00 35.00 32.80 1,083
51,627,757 July 2000 6.500% 6.999% 6.639% 30.00 35.00 33.42 848
12,591,214 July 2000 7.500% 7.999% 7.608% 30.00 35.00 32.03 166
16,525,754 July 2000 7.000% 7.499% 7.188% 30.00 35.00 30.84 251
9,134,934 Jan. 2001 7.000% 7.499% 7.234% 36.00 41.00 39.50 130
11,020,027 Jan. 2001 7.500% 7.999% 7.776% 36.00 41.00 39.14 135
57,869,002 Jan. 2001 8.000% 8.499% 8.287% 36.00 41.00 38.85 697
81,458,837 Jan. 2001 8.500% 8.999% 8.718% 36.00 41.00 38.17 1,266
38,479,070 July 2001 7.000% 7.499% 7.299% 41.00 47.00 44.84 417
182,143,599 July 2001 7.500% 7.999% 7.768% 41.00 47.00 44.81 2,561
39,976,562 July 2001 8.000% 8.499% 8.204% 41.00 47.00 45.17 546
56,332,785 July 2001 8.500% 8.999% 8.523% 41.00 47.00 45.89 1,081
$828,072,438 7.310% 7.809% 7.526% 34.34 39.34 37.32 12,101
<FN>
- -------------
* All amounts quoted in Canadian $
** All rates quoted on a 30/360 semiannual basis
</FN>
</TABLE>
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
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<PAGE>
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. 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. The Initial Mortgage Assets and the
Initial Mortgage Loans mature between January 2000 and July 2001.
If there is a significant decline in interest rates at a time
when the Company must reinvest payments of interest and principal in respect of
its Mortgage Assets or Mortgage Loans, the Company may find it difficult to
purchase additional Mortgage Assets or Mortgage Loans which generate sufficient
income to support the payment of dividends on the New Preferred Shares. Because
the rate at which dividends on the New Preferred Shares, if, when and as
authorized and declared, are payable is fixed, there can be no assurance that an
interest rate environment in which there is a significant decline in interest
rates would not adversely affect the Company's ability to pay dividends on the
New Preferred Shares. Further, it is possible that a significant decline in
interest rates could effect a prepayment of Mortgage Loans. Assuming all
Mortgage Loans provide similar limitations on prepayments as the Initial
Mortgage Loans, the effect on earnings will be, to a certain extent, mitigated.
However, such prepayments could adversely affect the Company's assets.
A significant increase in interest rates would not be expected
to adversely affect the assets or the earnings of the Company.
Servicing
The Initial Mortgage Loans, and certain other Mortgage Loans,
are serviced by the Bank pursuant to the terms of the Servicing Agreement. The
Bank receives a fee equal to 0.25% per annum on the principal balances of the
loans serviced. Payment of such fees is subordinated to payments of dividends on
the New Preferred Shares.
The Servicing Agreement requires the Bank to service Mortgage
Loans in a manner generally consistent with normal mortgage servicing practices
of prudent mortgage lending institutions which service mortgage loans of the
same type as the Mortgage Loans, with any servicing guidelines promulgated by
the Company and with relevant government agency guidelines and procedures. The
Servicing Agreement requires the Bank to service Mortgage Loans solely with a
view toward the interests of the Company and without regard to the interests of
the Bank or any of its other affiliates (including NB Finance). The Bank
collects and remits principal and interest payments, administers mortgage escrow
accounts, submits and pursues mortgage insurance claims and supervises
foreclosure proceedings on any Mortgage Loans it services. The Bank also
provides accounting and reporting services with respect to such Mortgage Loans.
The Servicing Agreement requires the Bank to follow such collection procedures
as are customary in normal mortgage servicing practices of prudent
44
<PAGE>
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 terminate the Servicing Agreement without cause upon 60 days' notice
and payment of a termination fee equal to the product of 0.0002% of the then
current aggregate unpaid principal balance of the Mortgage Loans and the number
of months remaining until the first anniversary of the Servicing Agreement. The
termination fee will be based on the aggregate outstanding principal amount of
the Mortgage Loans then serviced under the Servicing Agreement. As long as any
of the New Preferred Shares remain outstanding, the Company may not renew,
terminate, or modify the Servicing Agreement without the approval of a majority
of the Independent Directors.
As is customary in the mortgage loan servicing industry, the
Bank is entitled to retain any late payment charges, penalties and assumption
fees collected in connection with the Mortgage Loans serviced by it. The Bank
will receive any benefit derived from interest earned on collected principal and
interest payments between the date of collection and the date of remittance to
the Company and, to the extent permitted by law, from interest earned on tax and
insurance impound funds with respect to Mortgage Loans serviced by it.
When any mortgaged property underlying a Mortgage Loan is
conveyed by a mortgagor, the Bank generally will enforce any "due-on-sale"
clause contained in the Mortgage Loan, to the extent permitted under applicable
law and governmental regulations. The terms of a particular Mortgage Loan or
applicable law, however, may provide that the Bank is prohibited from exercising
the "due-on-sale" clause under certain circumstances related to the security
underlying the Mortgage Loan and the buyer's ability to fulfill the obligations
thereunder. Upon any assumption of a Mortgage Loan by a transferee, a nominal
fee is typically required, which sum will be retained by the Bank as additional
servicing compensation.
Employees
The Company has six employees. Information regarding the
executive officers of the Company is provided below under "Management--Directors
and Executive Officers." The Company does not anticipate that it will require
any additional employees because it retains the Bank to perform certain
functions pursuant to the Advisory Agreement as described below under
"Management--The Bank." Each employee of
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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 mortgage 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 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.
MANAGEMENT
Directors and Executive Officers
The Board of Directors consists of the individuals set forth
below. Messrs. Hanley and Michel are Independent Directors. Pursuant to the
terms of the New Preferred Shares, the Independent Directors will consider the
interests of the holders of both the New Preferred Shares and the Common Stock
in determining whether any proposed action requiring their approval is in the
best interests of the Company. The Company currently has six employees and does
not anticipate that it will require additional employees. See "Business and
Strategy--Employees."
As of January 1, 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
Roger Smock Director; Chairman of the Board; Chief Executive Officer;
President
Tom Doss Director; Chief Financial Officer; Treasurer
John Richter Director; Vice President
Francois Bourassa (Vice President--Legal; Secretary), Andree
Grimard (Assistant Secretary) and Martin Ouillet (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:
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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 June 1994, Vice President, Finance
of Canadian Pacific Forest Products Ltd. (now known as Avenor Inc.) since
September 1990, and a 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.
Mr. Smock has been Senior Vice-President, United States of the
Bank since 1988. In this position, he functions as the Bank's senior
representative in the United States. Mr. Smock is Chairman of the Board of
several of the Bank's U.S. subsidiaries, including National Canada Finance Corp.
and National Canada Corporation. He is also Chairman of the Bank's Management
Committee in the United States.
Mr. Doss joined the Bank in 1981 and has served as Chairman,
Credit Committee (United States) since 1981. He was elected Vice President,
Credit (U.S.) in 1988. He is an officer of several of the Bank's U.S.
subsidiaries and is a director of National Canada Finance Corp. and NB Finance.
He is also a member of the Board of Trustees for Soundview Preparatory School.
Mr. Richter has been Vice President - Eastern United States of
the Bank since 1988. In this position he functions as the Bank's senior lender
officer in the United States. Mr. Richter is President of National Canada
Finance Corp., a United States subsidiary of the Bank. He is also a member of
the Bank's management committee in the United States.
Summary Compensation Table
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 table below sets forth the compensation paid or
accrued by the Bank and its subsidiaries for the fiscal year ended December 31,
1997 to Roger Smock, the President of the Company.
Annual Compensation
Name and -------------------
Principal Position Year Salary Bonus
- ------------------ ---- ------ -----
Roger Smock 1997
President (1)
- ------------------------
(1) Roger Smock was elected Chairman of the Board; Chief Executive Officer;
President of the Company effective January 1, 1998.
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Independent Directors
The terms of the New Preferred Shares require that, as long as
any New Preferred Shares are outstanding, certain actions by the Company must be
approved by a majority of the Independent Directors. See "Description of New
Preferred Shares--Independent Director Approval." Mr. Hanley and Mr. Michel are
Independent Directors. As long as there are only two Independent Directors, any
action that requires the approval of a majority of Independent Directors must be
approved by both the Independent Directors.
If at any time the Company fails to declare and pay a
quarterly dividend on the New Preferred Shares, the number of directors then
constituting the Board of Directors will be increased by at least two at the
Company's next annual meeting and the holders of the New Preferred Shares,
voting together as a single class with the holders of any other outstanding
series of Preferred Stock entitled to vote on the matter, including the Senior
Preferred Shares, will be entitled to elect two additional directors to serve on
the Board of Directors. Any member of the Board of Directors elected by holders
of Preferred Stock will be deemed to be an Independent Director for purposes of
the actions requiring the approval of a majority of the Independent Directors.
The Company expects that the Bank will elect a majority of the Board of
Directors. See "Description of New Preferred Shares--Voting Rights."
Audit Committee
The Board of Directors has established an audit committee
which reviews the engagement of independent accountants and their independence.
The audit committee also reviews the adequacy of the Company's internal
accounting controls. The audit committee is comprised of Mr. Hanley and Mr.
Michel.
Compensation of Directors and Officers
The Company pays the Independent Directors fees for their
services as directors. The Independent Directors receive annual compensation of
$10,000 plus a fee of $750 for attendance (in person or by telephone) at each
meeting of the Board of Directors.
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,
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officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by the Company and (b) a
written statement by or on his behalf to repay the amount paid or reimbursed by
the Company if it shall ultimately be determined that the standard of conduct
was not met.
The Bank as Advisor
The Company entered into the Advisory Agreement with the Bank
to administer the day-to-day operations of the Company. The Bank is responsible
for (i) monitoring the credit quality of Mortgage Assets held by the Company,
(ii) advising the Company with respect to the reinvestment of income from and
payments on, and with respect to the acquisition, management, financing and
disposition of, Mortgage Assets held by the Company, (iii) holding documents
relating to the Company's Mortgage Assets as custodian, (iv) monitoring the
Company's compliance with the requirements necessary to qualify as a REIT and
(v) maintaining its status as a NHA Approved Lender. The Bank may, with the
approval of a majority of the Board of Directors as well as a majority of the
Independent Directors, subcontract all or a portion of its obligations under the
Advisory Agreement to one or more related or unrelated third parties. The Bank
will not, in connection with the subcontracting of any of its obligations under
the Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement.
The Bank and its affiliates have substantial experience in
mortgage finance and in the administration of Mortgage Assets.
The Advisory Agreement has an initial term of one year, and
may be renewed for additional one-year periods. The Advisory Agreement may be
terminated by the Company at any time upon 60 days' prior written notice. As
long as any of the New Preferred Shares remain outstanding, any decision by the
Company to renew, terminate or modify the Advisory Agreement must be approved by
a majority of the Board of Directors, as well as by a majority of the
Independent Directors. The Bank is entitled to receive an advisory fee equal to
C$50,000 payable in equal quarterly installments with respect to the advisory
and management services provided by it to the Company. Payment of such fees is
subordinated to payments of dividends on the New Preferred Shares.
As a result of the relationship between the Bank and the
Company, certain conflicts of interest may arise. See "Risk
Factors--Relationship with the Bank and its Affiliates; Conflicts of Interest."
In addition,
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under certain circumstances, The Independent Fiduciary will exercise the
discretionary authority reserved to the Company with respect to transactions
involving both the Company and the Bank or any Bank affiliate. See "ERISA
Considerations."
DESCRIPTION OF NEW PREFERRED SHARES
The following summary of the material terms and provisions of
the New Preferred Shares does not purport to be complete and is qualified in its
entirety by reference to Maryland law and to the terms and provisions of the
Charter establishing the New Preferred Shares and the other provisions of the
Charter, a copy of which is available from the Company upon request. See
"Description of Capital Stock."
General
The New Preferred Shares form a series of Preferred Stock,
which Preferred Stock may be issued from time to time in one or more series with
such designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption as are determined by the Board of
Directors. The Board of Directors has authorized the Company to issue the New
Preferred Shares.
When issued, the New Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the New Preferred Shares will have
no preemptive rights with respect to any shares of the stock of the Company or
any other securities of the Company convertible into or carrying rights or
options to purchase any such shares. The New Preferred Shares are perpetual and
will not be convertible into shares of Common Stock or any other class or series
of stock of the Company and will not be subject to any sinking fund or other
obligation of the Company for their repurchase or retirement. The New Preferred
Shares will be exchanged automatically on a one-for-one basis for the Bank
Preferred Shares upon the occurrence of an Exchange Event.
The transfer agent, registrar and dividend disbursement agent
for the New Preferred Shares will be The Bank of Nova Scotia Trust Company of
New York. The registrar for shares of New Preferred Shares will send notices to
shareholders of any meetings at which holders of the New Preferred Shares have
the right to elect directors of the Company or to vote on any other matter.
Dividends
Holders of the New Preferred Shares shall be entitled to
receive, if, when and as authorized and declared by the Board of Directors out
of assets of the Company legally available therefor, noncumulative cash
dividends at the rate of 8.35% per annum of the liquidation preference
(equivalent to US$83.50 per share per annum, calculated by multiplying the
annual dividend rate of 8.35% by the liquidation preference of US$1,000 per
share, assuming authorization and declaration by the Board of Directors of four
quarterly dividends.) If authorized and declared, dividends on the New Preferred
Shares shall be payable quarterly in arrears on the 30th day of March, June,
September and December (or, if any such day is not a business day, on the next
business day) of each year, at such annual rate, commencing , 1998. With respect
to the dividend period in which the Exchange Offer is consummated, dividends on
each New Preferred Share will accrue from the first day of such dividend period.
Thereafter, dividends in each quarterly dividend period will accrue from the
first day of such period, whether or not authorized, declared or paid with
respect to New Preferred Shares for the prior quarterly period. Each authorized
and declared dividend shall be payable to holders of record as they appear at
the close of business on the stock register of the Company on such record dates,
not exceeding 45 calendar days nor less than 10 calendar days preceding the
payment dates thereof, as shall be fixed by the Board of Directors. Dividends
payable on the New Preferred Shares for any dividend period greater or less than
a full dividend period shall be computed on the basis of twelve 30-day months, a
360-day year and the actual number of days elapsed in the period; provided,
however, that in the event of the
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Automatic Exchange, any accrued and unpaid dividends on the New Preferred Shares
as of the Time of Exchange (as defined) shall be deemed to be accrued and unpaid
dividends on the Bank Preferred Shares.
The right of holders of the New Preferred Shares to receive
dividends is noncumulative. Accordingly, if the Board of Directors fails to
authorize or declare a dividend on the New Preferred Shares for a quarterly
dividend period, then holders of the New Preferred Shares will have no right to
receive a dividend for that period, and the Company will have no obligation to
pay a dividend for that period, whether or not dividends are authorized and
declared and paid for any future period with respect to either the Preferred
Stock or the Common Stock authorized. If the Company fails to pay or authorize
and set aside for payment a quarterly dividend on the New Preferred Shares,
holders of Preferred Stock, including the New Preferred Shares and the Senior
Preferred Shares, will be entitled to elect two directors. See "--Voting
Rights."
If full dividends on the New Preferred Shares for any dividend
period shall not have been authorized, declared and paid, or authorized,
declared and a sum sufficient for the payment thereof set apart for such
payments, no dividends shall be authorized, declared or paid or set aside for
payment with respect to the Common Stock or any other stock of the Company
ranking junior to or on a parity with the New Preferred Shares as to dividends
or amounts upon liquidation, nor shall any Common Stock or any other capital
stock of the Company ranking junior to or on a parity with the New Preferred
Shares as to dividends or amounts upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any monies to be paid to or made
available for a sinking fund for the redemption of any such stock) by the
Company (except by conversion into or exchange for other stock of the Company
ranking junior to the New Preferred Shares as to dividends and amounts upon
liquidation), until such time as dividends on all outstanding New Preferred
Shares have been (i) authorized, declared and paid for three consecutive
dividend periods and (ii) authorized, declared and paid or authorized, declared
and a sum sufficient for the payment thereof has been set apart for payment for
the fourth consecutive dividend period.
When dividends are not paid in full (or a sum sufficient for
such full payment is not set apart) upon the New Preferred Shares and the shares
of any other series of stock ranking on a parity as to dividends with the New
Preferred Shares, all dividends authorized and declared upon the New Preferred
Shares and any other series of stock ranking on a parity as to dividends with
the New Preferred Shares shall be authorized and declared proportionately so
that the amount of dividends authorized and declared per New Preferred Share and
such other series of stock shall in all cases bear to each other the same ratio
that full dividends, for the then-current dividend period, per New Preferred
Share (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods) and full dividends, including required or permitted
accumulations, if any, on such other series of stock bear to each other.
For a discussion of the tax treatment of distributions to
stockholders, see "United States Federal Income Tax Considerations--Taxation of
United States Stockholders" and "--Taxation of Foreign Stockholders," and for a
discussion of certain potential regulatory limitations on the Company's ability
to pay dividends, see "Risk Factors--Dividend and Other Regulatory Restrictions
on Operations of the Company."
Automatic Exchange
Each New Preferred Share will be exchanged automatically for
one newly issued Bank Preferred Share (i) immediately prior to such time, if
any, at which the Bank fails to declare and pay or set aside for payment when
due any dividend on any issue of its cumulative First Preferred Shares or the
Bank fails to pay or set aside for payment when due any declared dividend on any
of its non-cumulative First Preferred Shares, (ii) in the event that the Bank
has a Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based
capital ratio of less than 8.0%, (iii) in the event that the Superintendent
takes control of the Bank pursuant to the Bank Act or proceedings are commenced
for the winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange. Upon an Exchange
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Event, each holder of the New Preferred Shares shall be unconditionally
obligated to surrender to the Bank the certificates representing each New
Preferred Share held by such holder, and the Bank shall be unconditionally
obligated to issue to such holder in exchange for each such New Preferred Share
a certificate representing one Bank Preferred Share. Any New Preferred Shares
purchased or redeemed by the Company prior to the Time of Exchange (as defined
below) shall be deemed not to be outstanding and shall not be subject to the
Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern
Time on the date for such exchange set forth in the requirements of the
Superintendent or, if such date is not set forth in such requirements as of 8:00
a.m. on the earliest possible date such exchange could occur consistent with
such requirements (the "Time of Exchange"), as evidenced by the issuance by the
Bank of a press release prior to such time. As of the Time of Exchange, all of
the New Preferred Shares will be deemed cancelled without any further action by
the Company, all rights of the holders of the New Preferred Shares as
stockholders of the Company will cease, and such persons shall thereupon and
thereafter be deemed to be and shall be for all purposes holders of Bank
Preferred Shares. The Company will mail notice of the occurrence of an Exchange
Event to each holder of the New Preferred Shares within 30 days of such event,
and the Bank will deliver to each such holder certificates for the Bank
Preferred Shares upon surrender of such holder's certificates for the New
Preferred Shares. The Charter provides that, immediately after the delivery of
such notice, the existence of the Company shall terminate and the Company will
be liquidated and its affairs wound up in accordance with the procedures of the
MGCL relating to forfeiture of the charter of a corporation and expiration of
corporate existence. Until such replacement stock certificates are delivered (or
in the event such replacement certificates are not delivered), certificates
previously representing the New Preferred Shares shall be deemed for all
purposes to represent the Bank Preferred Shares. All corporate action necessary
for the Bank to issue the Bank Preferred Shares has been taken by the Bank.
Accordingly, once an Exchange Event occurs, no action will be required to be
taken by holders of the New Preferred Shares, by the Bank or by the Company in
order to effect the Automatic Exchange as of the Time of Exchange.
Holders of the New Preferred Shares, by purchasing such New
Preferred Shares, will be deemed to have agreed to be bound by the unconditional
obligation to exchange such New Preferred Shares for the Bank Preferred Shares
upon the occurrence of an Exchange Event. The obligation of the holders of the
New Preferred Shares to surrender such shares and the obligation of the Bank to
issue the Bank Preferred Shares in exchange for the New Preferred Shares shall
be enforceable by the Bank and such holders, respectively, against the other.
Absent the occurrence of an Exchange Event, no Bank Preferred
Shares will be issued. Upon the occurrence of an Exchange Event, the Bank
Preferred Shares to be issued as part of the Automatic Exchange would constitute
a newly issued series of First Preferred Shares of the Bank ranking senior to
all shares of common stock of the Bank then issued and outstanding and equally
with all other series of First Preferred Shares of the Bank then issued and
outstanding. As of October 31, 1997, 170,461,483 shares of common stock of the
Bank were issued and outstanding. The Bank Preferred Shares would constitute
100% of the issued and outstanding Bank Preferred Shares. The Bank Preferred
Shares would have a liquidation preference of US$1,000 and be subject to
redemption on the same terms as the New Preferred Shares (except that there
would be no redemption for a Tax Event). Any accrued and unpaid dividends on the
New Preferred Shares as of the Time of Exchange would be accounted for as
accrued and unpaid dividends on the Bank Preferred Shares. The Bank Preferred
Shares would rank equally, in terms of dividend payments and liquidation
preference, with, or senior to, any outstanding First Preferred Shares of the
Bank. The Bank Preferred Shares would not entitle the holders to vote except in
certain circumstances. Dividends on the Bank Preferred Shares would be
non-cumulative and payable at the rate of 8.45% per annum of the liquidation
preference, if, when and as declared by the Board of Directors of the Bank. The
Bank does not intend to apply for listing of the Bank Preferred Shares on any
national securities exchange or for quotation of the Bank Preferred Shares
through the National Association of Securities Dealers Automated Quotation
System. Absent the occurrence of an Exchange Event, however, the Bank will not
issue any Bank Preferred Shares, although
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the Bank will be able to issue First Preferred Shares in series other than that
of the Bank Preferred Shares. There can be no assurance as to the liquidity of
the trading markets for the Bank Preferred Shares, if issued, or that an active
public market for the Bank Preferred Shares would develop or be maintained.
Holders of the New Preferred Shares cannot exchange the New
Preferred Shares for the Bank Preferred Shares voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of the New Preferred Shares
will have no dividend, voting, liquidation preference or other rights with
respect to the Bank or any security of the Bank.
Ranking
The New Preferred Shares will rank prior to the Common Stock
and to all other classes and series of equity securities of the Company now or
hereafter issued, other than the Senior Preferred Shares or any other series of
equity securities of the Company expressly designated as being on a parity with
("Parity Stock") or senior to the New Preferred Shares as to dividend rights and
rights upon liquidation, winding up or dissolution. The Company has the power to
create and issue additional Preferred Stock or other classes of stock ranking on
a parity with the New Preferred Shares, or ranking junior to the New Preferred
Shares, without any approval or consent of the holders of New Preferred Shares.
So long as any New Preferred Shares remain outstanding, additional shares of
Senior Stock may not be issued without the approval of the holders of at least
two-thirds of the New Preferred Shares. See "--Voting Rights." So long as any
New Preferred Shares remain outstanding, additional shares of Parity Stock may
not be issued without the approval of a majority of the Board of Directors and a
majority of the Independent Directors. See "--Independent Director Approval."
Voting Rights
Except as indicated below, the holders of the New Preferred
Shares will not be entitled to vote. In the event the holders of the New
Preferred Shares are entitled to vote as indicated below, each New Preferred
Share will be entitled to one vote on matters on which holders of the New
Preferred Shares are entitled to vote.
If, at the time of any annual meeting of the Company's
stockholders for the election of directors, the Company has failed to pay or
failed to authorize and declare and set aside for payment a quarterly dividend
on any series of Preferred Stock of the Company, including the New Preferred
Shares, the number of directors then constituting the Board of Directors will be
increased by at least two (if not already increased by two due to a default in
preference dividends), and the holders of the New Preferred Shares and the
holders of Senior Preferred Shares, voting together with the holders of all
other series of Preferred Stock as a single class, will be entitled to elect
such two additional directors to serve on the Board of Directors at each such
annual meeting. Each director elected by the holders of shares of the Preferred
Stock shall continue to serve as a director until the later of (i) the full term
for which he or she shall have been elected or (ii) the payment of one quarterly
dividend on the Preferred Stock, including the New Preferred Shares. Any such
director may be removed by, and shall not be removed except by, the vote of the
holders of record of the outstanding the New Preferred Shares and Parity Stock
entitled to vote, voting together as a single class with the holders of all
other series of Preferred Stock entitled to vote on the matter, at a meeting of
the Company's stockholders, or of the holders of the New Preferred Shares and
Parity Stock so entitled to vote thereon, called for that purpose. As long as
dividends on the New Preferred Shares shall not have been paid for the preceding
quarterly dividend period, (i) any vacancy in the office of any such director
may be filled (except as provided in the following clause (ii)) by a person
designated in an instrument in writing signed by any such remaining director and
filed with the Company, and (iii) in the case of the removal of any such
director, the vacancy may be filled by the vote of the holders of the
outstanding New Preferred Shares and Parity Stock entitled to vote, voting
together as a single class with the holders of all other series of Preferred
Stock entitled to vote on the matter, at the same meeting at which such removal
shall be voted.
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The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of each series of Preferred Stock,
including the New Preferred Shares, will be required (a) to create any class or
series of stock (other than the Senior Preferred Stock) which shall, as to
dividends or distribution of assets, rank prior to or on a parity with any
outstanding series of Preferred Stock other than a series which shall not have
any right to object to such creation or (b) alter or change the provisions of
the Charter (including the terms of the New Preferred Shares) so as to adversely
affect the voting powers, preferences or special rights of the holders of a
series of Preferred Stock to any material extent; provided that if such
amendment shall not adversely affect all series of Preferred Stock, such
amendment need only be approved by at least two-thirds of the holders of shares
of all series of Preferred Stock adversely affected thereby.
Redemption
The New Preferred Shares are not redeemable prior to September
3, 2007 (except upon the occurrence of a Tax Event on or after September 3,
2002). On or after such date, the New Preferred Shares may be redeemed at the
option of the Company, or its successor or any acquiring or resulting entity
with respect to the Company (including by any parent or subsidiary of the
Company, any such successor, or any such acquiring or resulting entity), as
applicable, in whole or in part, at any time or from time to time on not less
than 30 nor more than 60 days' notice by mail, at the following redemption
prices (expressed as a percentage of the US$1,000 per share liquidation
preference), if redeemed during the 12-month period beginning September 3 of the
years indicated below, plus the quarterly accrued and unpaid dividend to the
date of redemption, if any, thereon:
Year Redemption Price
- ---- ----------------
2007 104.1750%
2008 103.7575
2009 103.3400
2010 102.9225
2011 102.5050
2012 102.0875
2013 101.6700
2014 101.2525
2015 100.8350
2016 100.4175
and thereafter at a redemption price of US$1,000 per share, plus the quarterly
accrued and unpaid dividend to the date of redemption, if any, thereon.
In the event that fewer than all the outstanding New Preferred
Shares are to be redeemed, the number of New Preferred Shares to be redeemed
shall be determined by the Board of Directors, and the shares to be redeemed
shall be determined by lot or proportionately as may be determined by the Board
of Directors or by any other method as may be determined by the Board of
Directors in its sole discretion to be equitable, provided that such method
satisfies any applicable requirements of any securities exchange on which the
New Preferred Shares are then listed.
Any such redemption must comply with applicable capital
distribution regulations of the Superintendent, which may prohibit a redemption
and will require the Superintendent's prior written approval. Unless full
dividends on the New Preferred Shares have been, or contemporaneously are,
authorized, declared and paid or authorized and declared and a sum sufficient
for the payment thereof set apart for payment for the then-current dividend
period, no New Preferred Shares shall be redeemed unless all outstanding New
Preferred Shares are redeemed and the Company shall not purchase or otherwise
acquire any New Preferred Shares;
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provided, however, that the Company may purchase or acquire New Preferred Shares
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding New Preferred Shares.
Furthermore, the Company may, at its option, on or after
September 3, 2002 and prior to September 3, 2007, redeem the New Preferred
Shares, in whole but not in part, at any time upon a Tax Event, at a redemption
price per share equal to the sum of (i) the quarterly accrued and unpaid
dividend to the date of redemption plus (ii) the Make-Whole Amount (as defined
herein).
"Make-Whole Amount" means, with respect to a New Preferred
Share, the greater of (i) 100% of the Maturity Amount of such New Preferred
Share and (ii) the sum of the present values of the remaining scheduled payments
of dividends on such New Preferred Share to September 3, 2007, plus the present
value of the Maturity Amount at September 3, 2007, discounted to the date fixed
for redemption of such New Preferred Share (the "redemption date") on a
quarterly basis (assuming a 360-day year consisting of 30-day months), computed
using a discount rate equal to the Adjusted Treasury Rate.
"Adjusted Treasury Rate" means, with respect to any redemption
date, the rate per annum equal to the semi-annual equivalent yield to maturity
of the Comparable Treasury Issue (as defined herein), assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price (as defined herein) for such prepayment
date plus 0.50%.
"Comparable Treasury Issue" means the United States Treasury
security selected by the Quotation Agent as having a maturity comparable to the
Make-Whole Term that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Make-Whole Term.
"Comparable Treasury Price" means, with respect to any
redemption date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third business day preceding such redemption date, as set forth in the
daily statistical release published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotation for U.S. Government Securities" (or
any successor release) or (ii) if such release is not published or does not
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 Term" means the period from the redemption date to
September 3, 2007.
"Maturity Amount" means the liquidation preference of the New
Preferred Shares.
"Quotation Agent" means the Reference Treasury Dealer (as
defined herein) appointed by the Company.
"Reference Treasury Dealer" means (i) Merrill Lynch Government
Securities, Inc. and their respective successors; provided, however, that if the
foregoing shall cease to be a primary U.S. Government securities dealer in New
York City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer
selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to
each Reference Treasury Dealer and any redemption date, the average, as
determined by the Company, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third business day preceding such redemption date.
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"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.
Rights upon Liquidation
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of the New Preferred
Shares at the time outstanding will be entitled to receive out of assets of the
Company legally available for distribution to stockholders under applicable law,
before any distribution of assets is made to holders of Common Stock or any
other class of stock ranking junior to the New Preferred Shares upon
liquidation, and subject to the rights of the holders of any class or series of
equity securities having preference with respect to distribution upon
liquidation and the rights of the Company's general creditors, liquidating
distributions in the amount of US$1,000 per share, plus the quarterly accrued
and unpaid dividend thereon, if any, to the date of liquidation, without
interest.
After payment of the full amount of the liquidation
distributions to which they are entitled, the holders of the New Preferred
Shares will have no right or claim to any of the remaining assets of the
Company. In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Company are insufficient
to pay the amount of the liquidation distributions on all the outstanding New
Preferred Shares and the corresponding amounts payable on all shares of other
classes or series of stock of the Company ranking on a parity with the New
Preferred Shares in the distribution of assets upon any liquidation, dissolution
or winding up of the affairs of the Company, then the holders of the New
Preferred Shares and such other classes or series of stock shall share ratably
in any such distribution of assets in proportion to the full liquidation
distributions to which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Company
with or into any other entity, or the sale, lease or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute liquidation, dissolution or winding up of the Company.
Independent Director Approval
The terms of the New Preferred Shares require that, as long as
any New Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors. Mr. Hanley and Mr. Michel
are the Independent Directors. See "Management--Independent Directors." As long
as there are only two Independent Directors, any action that requires the
approval of a majority of the Independent Directors must be approved by both
Independent Directors. In order to be considered "independent," a director
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must not be a current officer or employee of the Company or a current director,
officer or employee of the Bank or any other affiliate of the Bank. In addition,
any members of the Board of Directors elected by holders of Preferred Stock,
including the New Preferred Shares, will be deemed to be Independent Directors
for purposes of approving actions requiring the approval of a majority of the
Independent Directors. The actions which require approval of a majority of the
Independent Directors include (i) the issuance of additional Preferred Stock
ranking on a parity with the New Preferred Shares, (ii) the modification of the
Company's general distribution policy or the authorization of any distribution
in respect of the Common Stock for any year if, after taking into account any
such proposed distribution, total distributions on the New Preferred Shares and
the Common Stock would exceed an amount equal to the sum of 105% of the
Company's "REIT taxable income" (excluding capital gains) for such year plus net
capital gains of the Company for that year, (iii) the acquisition of Mortgage
Assets other than obligations which are comparable to the Initial Mortgage
Assets, Mortgage Loans, interests in Mortgage Loans and Partnership Interests,
(iv) the redemption of any shares of Common Stock, (v) the renewal, termination
or modification of the Advisory Agreement or the Servicing Agreement or the
subcontracting of any duties thereunder to third parties unaffiliated with the
Bank, and (vi) the determination to revoke the Company's REIT status. The
Charter requires that, in determining whether any proposed action requiring
their approval is in the best interests of the Company, the Independent
Directors will consider the interests of holders of both the Common Stock and
the Preferred Stock, including, without limitation, holders of the New Preferred
Shares.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Bank entered into the Registration Rights
Agreement for the benefit of the holders of the Old Preferred Shares wherein the
Company and the Bank agreed, for the benefit of the holders of the Old Preferred
Shares, (i) to use their best efforts to file with the Commission within 150
days after the Issue Date the Registration Statement relating to the Exchange
Offer for the New Preferred Shares, and (ii) to use its best efforts to cause
the Registration Statement to be declared effective under the Securities Act
within 180 days after the Issue Date. Promptly after the Registration Statement
has been declared effective, the Company will exchange the New Preferred Shares
for surrender of the Old Preferred Shares. The Company will keep the Exchange
Offer open for not less than 30 days (or longer if required by applicable law)
after the date notice of the Exchange Offer has been mailed to the holders of
the Old Preferred Shares. For each Old Preferred Share validly tendered to the
Company pursuant to the Exchange Offer and not validly withdrawn by the holder
thereof, the holder of such Old Preferred Share will receive a New Preferred
Share having a liquidation preference equal to the liquidation preference of the
tendered Old Preferred Share. Dividends on each New Preferred Share will accrue
from the first day of the dividend period in which the Exchange Offer is
consummated.
Based on existing interpretations of the Securities Act by the
Staff set forth in several no-action letters to third parties, and subject to
the immediately following sentence, the Company believes that the New Preferred
Shares issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by the holders thereof (other than holders who are
broker-dealers) without further compliance with the registration and prospectus
delivery provisions of the Securities Act. However, any prospective holder of
New Preferred Shares who is an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New
Preferred Shares, or any broker-dealer who purchased the Old Preferred Shares
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (i) will not be able to rely on the
interpretation of the Staff set forth in the above-mentioned no-action letters,
(ii) will not be entitled to tender its Old Preferred Shares in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Old Preferred Shares unless such sale or transfer is made pursuant to an
exemption from such requirements. The Company does not intend to seek its own
no-action letter and there can be no assurance that the Staff would make a
similar determination with respect to the New Preferred Shares as it has in such
no-action letters to third parties.
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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.
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.
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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 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)
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(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 not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement, a form of
which is available upon request to the Company. See "Available Information." In
addition, the information set forth above concerning certain interpretations of
and positions taken by the Staff is not intended to constitute legal advice, and
prospective investors should consult their own legal advisors with respect to
such matters.
DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms of the stock of
the Company does not purport to be complete and is qualified in its entirety by
reference to Maryland law and to the Charter and By-laws of the Company, copies
of which are available upon request to the Company.
Common Stock
General. The Company is authorized by the Charter to issue up
to 1,000 shares of Common Stock. The Company has outstanding 100 shares of
Common Stock, all of which are held by the Bank. In addition, the Bank currently
intends that, so long as any New Preferred Shares are outstanding, it will
maintain direct or indirect ownership of all of the outstanding shares of the
Common Stock.
Dividends. Holders of the Common Stock are entitled to receive
dividends if, when, and as authorized and declared by the Board of Directors out
of assets legally available therefor, provided that, if the Company fails to
authorize, declare and pay full dividends on the New Preferred Shares or the
Senior Preferred Shares in any dividend period, the Company may not make any
dividend payments with respect to the Common Stock until such time as dividends
on all outstanding Senior Preferred Shares and New Preferred Shares have been
(i) authorized, declared and paid for three consecutive dividend periods or (ii)
authorized, declared and a sum sufficient for the payment thereof set apart for
payment for the fourth consecutive dividend period.
Voting Rights. Subject to the rights, if any, of the holders
of any class or series of Preferred Stock, including Senior Preferred Stock and
New Preferred Shares, all voting rights are vested in the Common Stock. The
holders of the Common Stock are entitled to one vote per share. All of the
issued and outstanding shares of the Common Stock are currently held by the
Bank.
As the holder of all of the outstanding shares of the Common
Stock, the Bank will be able, subject to the terms of the New Preferred Shares
and of any other class or series of stock subsequently issued by the Company, to
elect and remove directors, amend the Charter and approve other actions
requiring stockholder approval under the MCGL or otherwise.
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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 outstanding
shares of the Old Preferred Shares, 300,000 shares of New Preferred Shares will
be outstanding. Subject to limitations prescribed by Maryland law and the
Charter, the Board of Directors or, if then constituted, a duly authorized
committee thereof, is authorized to issue, from the authorized but unissued
shares of stock of the Company, Preferred Stock in such classes or series as the
Board of Directors may determine and to establish, from time to time, the number
of shares of Preferred Stock to be included in any such class or series and to
fix the designation and any preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption of the shares of any such
class or series, and such other subjects or matters as may be fixed by
resolution of the Board of Directors.
Shares of Preferred Stock, upon issuance against full payment
of the purchase price therefor and in the manner authorized by the Board of
Directors, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock are described in the Charter.
The terms of the Charter relating to each class or series of
Preferred Stock set forth the preferences and other terms of such class or
series, including, without limitation, the following, as applicable: (1) the
designation of such class or series; (2) the number of shares of such class or
series offered and the liquidation preference per share of such class or series;
(3) the dividend rate(s), period(s), and/or payment date(s) or method(s) of
calculation thereof for such class or series; (4) whether dividends on such
class or series of Preferred Stock are cumulative or not and, if cumulative, the
date from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the terms
and conditions of redemption, if applicable, of such class or series; (7) any
limitations on direct or beneficial ownership and restrictions on transfer, in
each case as may be appropriate to preserve the status of the Company as a REIT
or as otherwise deemed appropriate by the Board of Directors; (8) the relative
ranking and preferences of such class or series as to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the Company; (9)
any limitations on issuance of any class or series of Preferred Stock ranking
senior to or on a parity with such class or series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; (10) any other specific terms, preferences, rights,
limitations or restrictions of such class or series; and (11) any voting powers
of such class or series.
Senior Preferred Stock. The shares of the Senior Preferred
Stock are validly issued, fully paid and nonassessable and will entitle the
holders thereof to cumulative, quarterly dividends. The shares of the Senior
Preferred Stock are redeemable, at any time in whole, but not in part, at the
option of the Company at a price equal to the liquidation preference thereof
plus accrued and unpaid dividends thereon through the redemption date. On the
December 30th following each ten year anniversary of the issuance of the Senior
Preferred Stock, each holder of Senior Preferred Stock may require the Company
to purchase such holder's Senior Preferred Stock at the liquidation preference
thereof plus accrued and unpaid dividends thereon through the date of
redemption. The Senior Preferred Stock rank senior to the Common Stock and the
New Preferred Shares as to dividend rights and rights upon liquidation, winding
up or dissolution. Except as provided below, holders of the Senior Preferred
Stock have no voting rights. If at any time the Company shall have failed to pay
all accrued and unpaid dividends on the Senior Preferred Stock when due, the
Company may not pay dividends on, or make certain other payments with respect
to, the New Preferred Shares or the Common Stock or any other series of stock
ranking junior to the Senior Preferred Stock. If, at the time of any annual
meeting
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of the Company's stockholders for the election of directors, the Company has
failed to pay or failed to authorize and declare and set aside for payment a
quarterly dividend on any series of Preferred Stock, including the Senior
Preferred Shares, the number of directors then constituting the Board of
Directors will be increased by at least two (if not already increased by two due
to a default in preference dividends), and the holders of the Senior Preferred
Shares, voting together with the holders of all other series of Preferred Stock
as a single class, will be entitled to elect such two additional directors to
serve on the Board of Directors at each such annual meeting.
Power to Issue Additional Shares of Common Stock and Preferred Stock
The Company believes that the power of the Board of Directors
to issue additional authorized but unissued shares of Common Stock or Preferred
Stock and to classify or reclassify unissued shares of Common Stock or Preferred
Stock and thereafter to cause the Company to use such classified or reclassified
shares of stock will provide the Company with increased flexibility in
structuring possible future financings and 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 compliance with the One Hundred Persons Test.
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
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while the Excess Shares were held by the original transferee prior to the
Company's discovery of the prohibited transfer shall be void and the original
transferee shall be deemed to have given its proxy to the trustee. In
liquidation, the original transferee's ratable share of the Company's assets
would be limited to the price paid by the original transferee for the Excess
Shares or, if no value was given, the price per share equal to the closing
market price on the date of the purported transfer. The trustee of the trust
shall promptly sell the Excess Shares to any person whose ownership thereof is
not prohibited, whereupon the interest of the trust shall terminate. Proceeds of
such sale shall be paid to the original transferee up to its purchase price (or,
if the original transferee did not purchase the shares, the value on the date of
the purported transfer) and any remaining proceeds shall be paid to the
beneficiary of the trust.
The constructive ownership rules of the Code are complex and
may cause Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by a
particular individual or entity. As a result, the acquisition or ownership of
less than 5% of a class 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.
Super-Majority 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
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Stockholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the statute) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Bank beneficially
owns more than 10% of the Company's voting shares and would, therefore, together
with its affiliates, be subject to the business combination provision of the
MGCL. However, pursuant to the statute, the Company has exempted any business
combinations involving the Bank and any present or future affiliate thereof and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between any of them and the Company. As
a result, the Bank and any present or future affiliate thereof may be able to
enter into business combinations with the Company that may not be in the best
interest of its stockholders without compliance by the Company with the
super-majority vote requirements and the other provisions of the statute.
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.
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Form, Denomination, Book-Entry Procedures and Transfer
The New Preferred Shares will be issued only as fully
registered securities registered in the name of Cede & Co. (as nominee for DTC).
One or more fully registered global New Preferred Share certificates (the
"Global Certificate") representing the New Preferred Shares exchanged for Old
Preferred Shares will be deposited with DTC for credit to an account of a direct
or indirect participant in DTC as described below.
Except as set forth below, the Global Certificate may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee, and such transfer shall be effective only when
reflected in the securities register maintained by or on behalf of the Company.
Beneficial interests in the Global Certificate may not be exchanged for the New
Preferred Shares in certificated form.
Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose
trust company created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers (including the Initial Purchaser), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Certificate, DTC will credit
the accounts of Participants designated by the Exchange Agent with portions of
the liquidation preference of the Global Certificate and (ii) ownership of such
interests in the Global Certificate will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC (with
respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interests in the Global
Certificate).
Investors in the Global Certificate may hold their interests
therein directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system. All
interests in the Global Certificate may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in certificated form of securities that they own.
Consequently, the ability to transfer beneficial interests in the Global
Certificate to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in the Global Certificate to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the New Preferred Shares, see "Certificated New Preferred Shares."
Except as described below, owners of interests in the Global
Certificate will not have New Preferred Shares registered in their name, will
not receive physical delivery of New Preferred Shares in certificated form and
will not be considered the registered owners or holders thereof for any purpose.
Payments in respect of the Global Certificate registered in
the name of DTC or its nominee will be payable to DTC in its capacity as the
registered holder. The transfer agent will treat the persons in
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whose names the New Preferred Shares, including the Global Certificate, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the transfer
agent nor any agent thereof has or will have any responsibility or liability for
(i) any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Certificate, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Certificate
or (ii) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants. DTC has advised the Company that its
current practice, upon receipt of any payment in respect of securities such as
the New Preferred Shares, is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in liquidation preference of beneficial interests in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of New
Preferred Shares will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the transfer agent, or
the Company. Neither the Company nor the transfer agent will be liable for any
delay by DTC or any of its Participants in identifying the beneficial owners of
the New Preferred Shares, and the Company and the transfer agent may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Secondary market trading activity in interests in the Global
Certificates will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
DTC has advised the Company that it will take any action
permitted to be taken by a holder of New Preferred Shares only at the direction
of one or more Participants to whose account with DTC interests in the Global
Certificate are credited and only in respect of such portion of the liquidation
preference of the New Preferred Shares as to which such Participant or
Participants has or have given such direction.
The information in this section concerning DTC and its
book-entry systems has been obtained from sources that the Company believes to
be reliable, but the Company does not take responsibility for the accuracy
thereof.
Although DTC has agreed to the foregoing procedures to
facilitate transfers of interest in the Global Certificates among participants
in DTC, they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the transfer agent will have any responsibility for the performance
by DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated New Preferred Shares
The Global Certificate is exchangeable for New Preferred
Shares in registered certificated form if (i) DTC (x) notifies the Company that
it is unwilling or unable to continue as Depositary for the Global Certificate
and the Company thereupon fails to appoint a successor Depositary within 90 days
or (y) has ceased to be a clearing agency registered under the Exchange Act or
(ii) the Company in its sole discretion elects to cause the issuance of the New
Preferred Shares in certificated form. In all cases, certificated New Preferred
Shares delivered in exchange for the Global Certificate or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depositary (in accordance with
its customary procedures).
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States federal
income tax considerations with respect to the Exchange Offer is for general
information only and is not tax advice. The discussion set forth below, to the
extent that it constitutes a summary of legal matters or legal conclusions, has
been reviewed by Shearman & Sterling, and it is such firm's opinion that such
discussion is accurate in all material respects. In rendering such opinion,
Shearman & Sterling has relied on Desjardins Ducharme Stein Monast, with respect
to certain matters of Quebec law, Osler Hoskin & Harcourt, with respect to
certain matters of Ontario law, and Conyers Dill & Pearman, with respect to
certain matters of Bermuda law. The discussion below is based on the Code,
existing and proposed Treasury Regulations issued thereunder, and administrative
and judicial interpretations thereof, all as of the date hereof and all of which
are subject to change, possibly with retroactive effect. The discussion below
does not address all aspects of taxation that may be relevant in the particular
circumstances of each stockholder or to certain types of stockholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers persons that hold stock in the Company other than as a capital
asset, foreign corporations and persons who are not citizens or residents of the
United States, except to the extent discussed) subject to special treatment
under the United States federal income tax laws.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH
BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE
DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF OWNERSHIP
AND DISPOSITION OF THE NEW PREFERRED SHARES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
Tax Impact of the Exchange Offer
The Exchange Offer will not have a United States federal
income tax impact.
Qualification of the Company as a REIT
General. The Company will elect to be taxable as a REIT under
sections 856 through 860 of the Code and the applicable Treasury Regulations
(the "REIT Requirements" or the "REIT Provisions"), commencing with its taxable
year ended December 31, 1997. The Company believes that, commencing with its
taxable year ended December 31, 1997, it will be owned and organized and will
operate in such a manner as to qualify for taxation as a REIT. While the Company
intends to continue to operate in such a manner, no assurance can be given that
it will operate in a manner so as to qualify or remain qualified as a REIT.
The REIT Requirements are technical and complex. The following
discussion sets forth only the material aspects of those requirements. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Shearman & Sterling, commencing with the
Company's taxable year ended December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. However, no transaction closely
comparable to that contemplated herein has been the subject of any
administrative pronouncement or judicial decision and this opinion is based on
certain factual assumptions relating to the organization and operation of the
Company and is conditioned upon certain representations made by the Company as
to factual matters, such as the organization and expected manner of operation of
the Company. In addition, this opinion is based upon the factual representations
of the Company concerning its business and Mortgage Assets set forth in this
Offering Memorandum and certain legal
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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 New Preferred Shares could be
significantly reduced or eliminated.
The following is a brief summary of certain of the technical
requirements that the Company must meet on an ongoing basis in order to qualify,
and remain qualified, as a REIT under the Code:
Stock Ownership Tests
The capital stock of the Company must be held by at least 100
persons during approximately 90% or more of the taxable year and no more than
50% of the value of such capital stock may be owned, directly or indirectly, by
five or fewer individuals at all times during the last half of the taxable year.
Under the Code, certain tax-exempt entities, such as private foundations and
certain unemployment compensation trusts, are treated as individuals for
purposes of the latter test. These stock ownership requirements must be
satisfied in the Company's second taxable year and in each subsequent taxable
year. The Charter provides restrictions regarding the transfer of the Company's
shares in order to aid in meeting the stock ownership requirements. See
"Description of Capital Stock Restrictions on Ownership and Transfer." The
Company has also issued shares of Senior Preferred Stock to meet the 100 person
ownership requirement for REIT status.
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 will be a
Qualified REIT Real Estate Asset. In addition, the Company does not expect that
the value of any security (other than a Qualified REIT Real Estate Asset) of any
one entity would ever exceed 5% of the Company's total assets, and the Company
does not expect to own more than 10% of any one issuer's voting securities.
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Gross Income Tests
The Company must generally meet the following gross income
tests (the "REIT Gross Income Tests") for each taxable year.
(a) at least 75% of the Company's gross income must be derived
from certain specified sources including interest on obligations
secured by mortgages on real property, gain from the disposition of
Qualified REIT Real Estate Assets or "qualified temporary investment
income" (i.e., income derived from "new capital" within one year of the
receipt of such capital) (the "75% Gross Income Test"); and
(b) at least 95% of the Company's gross income must consist of
income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain
interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business (the "95% Gross Income
Test").
The Company intends to maintain its REIT status by carefully
monitoring its income, including income from sales of Mortgage Assets, to comply
with the REIT Gross Income Tests. Under certain circumstances, such as an
unanticipated decrease in the qualifying income of the Company, which may result
in the Company's nonqualifying income exceeding 5% of its gross income, the
Company may be unable to comply with certain of the REIT Gross Income Tests. See
"Taxation of the Company" for a discussion of the tax consequences of a failure
to comply with the REIT Gross Income Tests.
Distribution Requirement
The Company must generally distribute dividends (other than
capital gain dividends) to its stockholders in an amount at least equal to (A)
the sum of (i) 95% of the Company's REIT taxable income (which is defined
generally as the taxable income of the Company computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular dividend payment after such declaration.
The Company intends to monitor on an ongoing basis its
compliance with the REIT requirements described above. In order to maintain its
REIT status, the Company will be required to limit the types of assets that it
might otherwise acquire, or hold certain assets at times when it might otherwise
have determined that the sale or other disposition of such assets would be
desirable.
Taxation of the Company
In any year in which the Company qualifies as a REIT, the
Company will generally not be subject to United States federal income tax on
that portion of its REIT taxable income or capital gain which is distributed to
its stockholders. The Company will, however, be subject to United States federal
income tax at normal corporate income tax rates upon any undistributed REIT
taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may
be subject to tax in certain circumstances. If the Company fails to satisfy
either the 75% Gross Income Test or the 95% Gross Income Test, but nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will generally be subject to a 100% tax on the greater of the amount by
which the Company fails either the 75% Gross Income Test or the 95% Gross Income
Test (multiplied by a fraction intended to reflect the Company's
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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.
Tax Treatment of Automatic Exchange
Upon the occurrence of an Exchange Event, the outstanding New
Preferred Shares will be automatically exchanged on a one-for-one basis for the
Bank Preferred Shares. See "Description of New Preferred Shares--Automatic
Exchange." The Automatic Exchange will be a taxable exchange with respect to
which each holder of the New Preferred Shares will recognize a gain or loss, as
the case may be, measured by the difference between the adjusted basis of such
holder in its New Preferred Shares and the fair market value of the Bank
Preferred Shares received in the Automatic Exchange. Assuming that such holder's
New Preferred Shares were held as capital assets prior to the Automatic
Exchange, any such gain or loss will be capital gain or loss. The basis of a
holder in the Bank Preferred Shares received in the Automatic Exchange will be
their fair market value at the time of the Automatic Exchange.
Taxation of New Preferred Shares
Distributions (including constructive distributions) made to
holders of the New Preferred Shares other than tax-exempt entities, will
generally be subject to United States federal income tax as ordinary income to
the extent of the Company's current and accumulated earnings and profits as
determined for United States federal income tax purposes. If the amount
distributed to a holder of the New Preferred Shares exceeds the holder's
allocable share of such earnings and profits, the excess will be treated first
as a nontaxable return of capital to the extent of such holder's adjusted basis
in the New Preferred Shares and, thereafter, as a gain from the sale or exchange
of a capital asset.
Distributions designated by the Company as capital gain
dividends will generally be subject to tax as long-term capital gain to the
extent that the distribution does not exceed the Company's actual net capital
gain for the taxable year (although corporations may be required to treat up to
20% of certain capital gain dividends as ordinary income). Distributions by the
Company, whether characterized as ordinary income or as capital gain, are not
eligible for the corporate dividends received deduction. In the event that the
Company realizes a loss for a taxable year, holders of the New Preferred Shares
will not be permitted to deduct any share of that loss. Future Treasury
Regulations may require that holders of the New Preferred Shares take into
account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the Company.
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Dividends declared during the last quarter of a calendar year
and actually paid during January of the following year will generally be treated
as having been received by the holders of New Preferred Shares on December 31st
of the year in which the dividends were declared and not on the date actually
received. In addition, the Company may elect to treat certain other dividends
distributed after the close of a taxable year as having been paid during such
taxable year, but holders of the New Preferred Shares will be treated as having
received such dividends in the taxable year in which the distribution is made.
Upon a sale or other disposition of the New Preferred Shares,
a holder of the New Preferred Shares will generally recognize a capital gain or
loss in an amount equal to the difference between the amount realized and such
holder's adjusted basis in such stock, which gain or loss will be long-term if
the stock has been held for more than the applicable holding period. Any loss on
the sale or exchange of the New Preferred Shares held by the holder thereof for
six months or less will generally be treated as a long-term capital loss to the
extent of any long-term capital gain dividends received by such holder.
In any year in which the Company does not qualify as a REIT,
distributions made to its stockholders would be taxable in the same manner
discussed above, except that (i) no distributions could be designated as capital
gain dividends, (ii) distributions would be eligible for the corporate dividends
received deduction, (iii) the excess inclusion income rules would not apply, and
(iv) stockholders would not receive any share of the Company's tax preference
items. In such event, however, the Company would likely be subject to a
substantial United States federal income tax liability, and the amount of income
available for distribution to its stockholders (including holders of the New
Preferred Shares) would be significantly reduced or eliminated.
The Company is required under Treasury Regulations to demand
annual written statements from the record holders of designated percentages of
its stock disclosing the actual and constructive ownership of such stock and to
maintain permanent records showing the information it has received as to the
actual and constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.
Taxation of Tax-Exempt Entities
Subject to the discussion below regarding a "pension-held
REIT," a tax-exempt holder of the New Preferred Shares will generally not be
subject to tax on distributions from the Company or gain realized on the sale of
the New Preferred Shares, provided that such holder has not incurred
indebtedness to purchase or hold its New Preferred Shares, that such shares are
not otherwise used in an unrelated trade or business of such holder, and that
the Company, consistent with its present intent, does not hold a residual
interest in a REMIC that gives rise to "excess inclusion" income as defined
under section 860E of the Code.
If a qualified pension trust (i.e., any pension or other
retirement trust that qualifies under section 401(a) of the Code) holds more
than 10% by value of the interests in a "pension-held REIT" at any time during a
taxable year, a substantial portion of the dividends paid to the qualified
pension trust by such REIT may constitute UBTI. For these purposes, a
"pension-held REIT" is any REIT (i) that would not have qualified as a REIT but
for the provisions of the Code which look through qualified pension trust
stockholders in determining ownership of stock of the REIT and (ii) in which at
least one qualified pension trust holds more than 25% by value of the interests
in the REIT or one or more qualified pension trusts (each owning more than a 10%
interest by value in the REIT) hold in the aggregate more than 50% by value of
the interests in the REIT. Assuming compliance with the Ownership Limit
described in "Description of Capital Stock Restrictions on Ownership and
Transfer," it is unlikely that pension plans will accumulate sufficient stock to
cause the Company to be treated as a pension-held REIT.
Distributions to certain types of stockholders exempt from
United States federal income taxation under sections 501(c)(7), (c)(9), (c)(17),
and (c)(20) of the Code may also constitute UBTI, and such prospective investors
should consult their tax advisors concerning the applicable "set aside" and
reserve requirements.
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State and Local Taxes
The Company and its stockholders may be subject to state or
local taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the United States federal income tax
consequences discussed above. Consequently, prospective holders of New Preferred
Shares should consult their tax advisors regarding the effect of state and local
tax laws on an investment in the New Preferred Shares.
Taxation of Bank Preferred Shares
Dividends on the Bank Preferred Shares (including any Canadian
nonresident withholding tax with respect thereto) generally will be includible
in the gross income of a holder of the Bank Preferred Shares as ordinary income
at the time such dividends are received. Dividends on the Bank Preferred Shares
will be foreign source income and, subject to certain limitations and
conditions, a holder of the Bank Preferred Shares will be eligible to claim a
foreign tax credit (or, alternatively, a deduction) in respect of any Canadian
nonresident withholding tax imposed thereon. Dividends on the Bank Preferred
Shares will not be eligible for a corporate dividends received deduction.
Holders of the Bank Preferred Shares will generally recognize
gain or loss upon the sale or exchange of the Bank Preferred Shares equal to
difference between the amount realized on the sale or exchange and the holder's
adjusted basis in the Bank Preferred Shares. Any gain realized on the sale or
exchange of the Bank Preferred Shares will generally be U.S. source.
The Bank does not believe that it is currently, for United
States federal income tax purposes, a passive foreign investment company (a
"PFIC"), and does not expect to become a PFIC in the future. If, however, the
Bank does become a PFIC, holders of the Bank Preferred Shares could be subject
to additional United States federal income tax with respect to certain
distributions on, or gains from the disposition of, the Bank Preferred Shares.
Certain United States Federal Income Tax Considerations Applicable to Foreign
Holders
The following discussion summarizes certain United States
federal income tax consequences of the acquisition, ownership and disposition of
the New Preferred Shares by an exchanging stockholder that, for United States
federal income tax purposes, is not a "United States person" (a "Non-United
States Holder"). For purposes of this discussion, a "United States person"
means: a citizen or individual resident of the United States; a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof; an estate the income of
which is includible in gross income for United States federal income tax
purposes regardless of its source; or a trust if both: (i) a United States court
is able to exercise primary supervision over the administration of the trust,
and (ii) one or more United States trustees or fiduciaries have the authority to
control all substantial decisions of the trust. This discussion is necessarily
of a general nature and does not consider any specific facts or circumstances
that may apply to a particular Non-United States Holder. Prospective investors
are urged to consult their tax advisors regarding the United States federal tax
consequences of acquiring, holding and disposing of the New Preferred Shares as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.
Dividends.
Dividends paid by the Company out of current and accumulated
earnings and profits, as determined for United States federal income tax
purposes, to a Non-United States Holder will generally be subject to withholding
of United States federal income tax at the rate of 30%, unless reduced or
eliminated by an applicable tax treaty or unless such dividends are treated as
effectively connected with a United States trade or business of the Non-United
States Holder. Distributions paid by the Company in excess of its current and
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accumulated earnings and profits will be treated first as a nontaxable return of
capital to the extent of the holder's adjusted basis in his New Preferred Shares
and, thereafter, as gain from the sale or exchange of a capital asset as
described "Gain on Disposition." If it cannot be determined at the time a
distribution is made whether such distribution will exceed the current and
accumulated earnings and profits of the Company, the distribution will be
subject to withholding at the same rate as dividends. Amounts so withheld,
however, will be refundable or creditable against the Non-United States Holder's
United States federal income tax liability if it is subsequently determined that
such distribution was, in fact, in excess of the current and accumulated
earnings and profits of the Company. If the receipt of a dividend is treated as
being effectively connected with the conduct of a United States trade or
business by a Non-United States Holder, the dividend received by such holder
will be subject to United States federal income tax in the same manner as United
States persons generally (and, in the case of a corporate holder, possibly the
branch profits tax).
Gain on Disposition.
A Non-United States Holder will generally not be subject to
United States federal income tax on gain recognized on a sale or other
disposition of the New Preferred Shares unless (i) the gain is effectively
connected with the conduct of a United States trade or business by the
Non-United States Holder, (ii) in the case of a Non-United States Holder who is
a nonresident alien individual and holds the New Preferred Shares as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year and certain other requirements are met, or (iii) the New Preferred
Shares constitute "United States real property interests" ("USRPIs"). The
Company does not believe that the New Preferred Shares are, or are likely to
become, USRPIs. Gain that is effectively connected with the conduct of a United
States trade or business by a Non-United States Holder will be subject to United
States federal income tax in the same manner as United States persons generally
(and, in the case of a corporate holder, possibly the branch profits tax) but
will not be subject to withholding. Non-United States Holders should consult
applicable treaties, which may provide for different rules.
Information Reporting and Backup Withholding
A holder of the New Preferred Shares may be subject to
information reporting and to backup withholding at a rate of 31% in respect of
dividends on, or proceeds from the sale or disposition of, the New Preferred
Shares. Certain holders of the New Preferred Shares (such as corporations and
tax-exempt entities) are not subject to backup withholding.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a holder of the
New Preferred Shares will generally be allowed as a refund or a credit against
such holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Desjardins Ducharme Stein Monast, the
following summary describes, as of the date hereof, the material Canadian
federal income tax consequences that would generally be applicable to a holder
of the Bank Preferred Shares in the event that the New Preferred Shares of the
Company are exchanged for the Bank Preferred Shares pursuant to the Automatic
Exchange. See "Description of New Preferred Shares--Automatic Exchange." The
discussion is based on the assumption that the holder of the Bank Preferred
Shares, for the purpose of the Income Tax Act (Canada) (the "Income Tax Act")
and at all relevant times, is not a resident of Canada, deals at arm's length
with the Bank, does not use or hold and is not deemed to use or hold the Bank
Preferred Shares in carrying on a business in Canada and is not an insurer that
carries on an insurance business in Canada.
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This summary is based on the current provisions of the Income
Tax Act and the regulations thereunder, our understanding of the current
administrative practices of Revenue Canada and all specific proposals to amend
the Income Tax Act and the regulations thereunder announced by the Minister of
Finance prior to the date hereof. This summary does not otherwise take into
account any changes in governing law, nor does it take into account tax
legislation or considerations of any province or territory of Canada or any
jurisdiction other than Canada.
This summary is of general nature only and is not intended to
be, and should not be interpreted as, legal or tax advice to any particular
holder of the Bank Preferred Shares. Holders of the New Preferred Shares are
advised to consult their own tax advisors with respect to their particular tax
position.
Automatic Exchange
In the event of the Automatic Exchange, the exchange will not
give rise to any immediate Canadian income tax consequences to a holder of the
New Preferred Shares. The Bank Preferred Shares received pursuant to the
Automatic Exchange will have a cost, for Canadian tax purposes, equal to their
fair market value at the time of the Automatic Exchange, expressed in Canadian
dollars.
Taxation of Dividends
Dividends paid on the Bank Preferred Shares to a non-resident
of Canada will be subject to Canadian withholding tax at the general rate of 25%
or such lesser rate as may be provided by an applicable income tax treaty.
Pursuant to the Canada-United States Income Tax Convention (1980) (the
"Treaty"), dividends paid by the Bank to a holder of the Bank Preferred Shares
that is resident in the United States for purposes of the Treaty would generally
be subject to withholding tax at the rate of 15%. Dividends paid to an "Exempt
Organization," as defined in the Treaty, would generally be exempt from Canadian
withholding tax.
Disposition of Bank Preferred Shares
A disposition or deemed disposition of the Bank Preferred
Shares by a resident of the United States for purposes of the Treaty, will
generally not result in any Canadian income or capital gains taxes being payable
by the holder.
Redemption of Bank Preferred Shares
A redemption of the Bank Preferred Shares could result in a
deemed dividend to the holder, equal to the excess of the amount paid for the
Bank Preferred Shares over their paid-up capital. The "paid-up capital" would
generally be considered to be the fair market value of the New Preferred Shares
received by the Bank at the time of the Automatic Exchange. A deemed dividend
would be subject to Canadian withholding tax, as described above under "Taxation
of Dividends."
ERISA CONSIDERATIONS
ERISA and the Code impose certain restrictions on (a)
employee benefit plans (as defined in Section 3(3) of ERISA) subject to Title I
of ERISA, (b) plans described in Section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans, (c) any entities whose underlying
assets include "plan assets" under the Plan Asset Regulation (as defined below)
(each a "Plan") and (d) persons and entities who have certain specified
relationships to such Plans ("Parties-in-Interest" under ERISA and "Disqualified
Persons" under the Code). Moreover, based on the reasoning of the United States
Supreme Court in John Hancock Mutual Life Insurance Co. v. Harris Trust &
Savings Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account (e.g.,
through the purchase of an annuity contract), and the insurance company might be
treated as a Party-in-Interest or
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Disqualified Person with respect to a Plan by virtue of such investment. ERISA
also imposes certain duties on persons who are fiduciaries of Plans subject to
ERISA, and ERISA and the Code prohibit certain transactions between a Plan and
Parties-in-Interest or Disqualified Persons with respect to such Plan.
Status Under Plan Asset Regulations
The Department of Labor has issued a regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulation"). The Plan Asset Regulation provides that,
as a general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan purchases an
equity interest will be deemed for purposes of ERISA and Section 4975 of the
Code to be assets of the investing Plan unless certain exceptions apply. Under
one such exception, the assets of such an entity are not considered to be Plan
assets where a Plan makes an investment in an equity interest that is a
"publicly-offered security." As described in more detail below, the Company
anticipates that the New Preferred Shares will, following the consummation of
the Exchange Offer or the effectiveness of a Shelf Registration Statement be
"publicly-offered securities" for purposes of the Plan Asset Regulation. Prior
to the consummation of the Exchange Offer or (if no Exchange Offer is
consummated) the effectiveness of a Shelf Registration Statement, however, the
New Preferred Shares will not be "publicly-offered securities" and, accordingly,
the assets of the Company may be treated as assets of a Plan that purchases the
New Preferred Shares.
Under the terms of the Plan Asset Regulation, if the Company
were deemed to hold plan assets by reason of a Plan's investment in the New
Preferred Shares, such plan assets would include an undivided interest in the
assets held by the Company including the Mortgage Assets. In such event, the
persons providing services, or exercising any discretionary authority or
control, with respect to the assets of the Company may become
Parties-in-Interest or Disqualified Persons with respect to such an investing
Plan and may be subject to the fiduciary responsibility provisions of Title I of
ERISA (including the general prohibition against maintaining the indicia of
ownership of Plan assets outside the jurisdiction of the U.S. district courts)
and the prohibited transaction provisions of ERISA and Section 4975 of the Code
with respect to transactions involving such assets. In this regard, if the
person or persons with discretionary responsibilities with respect to the
Mortgage Assets were affiliated with the Company, any such discretionary actions
taken with respect to such Mortgage Assets could be deemed to constitute a
prohibited transaction under ERISA or the Code (e.g., the use of such fiduciary
authority or responsibility in circumstances under which such persons have
interests that may conflict with the interests of the Plans for which they act
and affect the exercise of their best judgment as fiduciaries). In order to
avoid such prohibited transactions or other breaches of fiduciary duty, and to
delineate fiduciary responsibility appropriately, each investing Plan, by
purchasing the New Preferred Shares, will be deemed to have (i) directed the
Company to invest in the Initial Mortgage Assets (as well as the other assets
held by the Company and identified at the time of purchase) and (ii) in the
event that the New Preferred Shares are not treated as "publicly-offered
securities" as of the date on which the Exchange Offer is consummated or a Shelf
Registration Statement is declared effective, then during the period commencing
on such date and ending on the date on which the New Preferred Shares become
"publicly-offered securities," appointed the Independent Fiduciary (an entity
unaffiliated with and independent of the Bank and the Company) as a fiduciary of
such Plan to exercise any discretionary authority reserved to the Company, to
the extent that the duties of such entity involve discretionary authority or
control respecting transactions with the Bank or the Bank's affiliates. The
Independent Fiduciary will be identified by the Company prior to any such
transaction and will be subject to removal and replacement by a majority of the
holders of the New Preferred Shares.
The Company may from time to time invest the proceeds received
in connection with the repayment or disposition of the Initial Mortgage Assets,
the issuance of additional shares of Preferred Stock or additional capital
contributions with respect to the Common Stock. To the extent that the
investment of such proceeds occurs prior to the consummation of the Exchange
Offer or the effectiveness of a Shelf Registration Statement, such proceeds will
be invested in Canadian or U.S. government guaranteed, mortgage-backed
certificates and other Canadian or U.S. government obligations, which will be
purchased on the open market or
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from entities unaffiliated with the Bank or the Company. In addition, in the
event that the New Preferred Shares are not treated as "publicly-offered
securities" as of the date on which the Exchange Offer is consummated or a Shelf
Registration Statement is declared effective, then during the period commencing
on such date and ending on the date on which the New Preferred Shares become
"publicly-offered securities," such proceeds may be invested in additional
Mortgage Assets, provided that, to the extent any such proceeds are invested in
Mortgage Assets in a transaction with the Bank or any Bank affiliate, any
discretionary authority reserved to the Company in respect of such transaction
will be exercised by the Independent Fiduciary.
Publicly-Offered Security Exception
For purposes of the Plan Asset Regulation, a "publicly-offered
security" is a security that is (a) "freely transferable," (b) part of a class
of securities that is "widely held," and (c) sold to the Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may be
allowed by the Commission) after the end of the fiscal year of the issuer during
which the offering of such securities to the public occurred. It is anticipated
that, in connection with the Exchange Offer, the New Preferred Shares will be
registered under the Securities Act and the Exchange Act within the time periods
specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely
held" only if it is a part of the class of securities that is owned by 100 or
more investors independent of the issuer and of one another. A security will not
fail to be "widely held" because the number of independent investors falls below
100 subsequent to the initial offering as a result of events beyond the control
of the issuer. The Company anticipates that the New Preferred Shares will be
"widely held" upon the consummation of the Exchange Offer or the effectiveness
of a Shelf Registration Statement.
The Plan Asset Regulation provides that whether a security is
"freely transferable" is a factual question to be determined on the basis of all
the relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
US$10,000 or less, as is expected to be the case with respect to the Exchange
Offer or a Shelf Registration Statement, certain restrictions ordinarily will
not, alone or in combination, affect the finding that such securities are
"freely transferable." The Company believes that any restrictions imposed on the
transfer of the New Preferred Shares following the consummation of the Exchange
Offer or the effectiveness of a Shelf Registration Statement, will be limited to
the restrictions on transfer generally permitted under the Plan Asset Regulation
and are not likely to result in the failure of the New Preferred Shares to be
"freely transferable."
Exemptions from Prohibited Transactions
Any purchaser that is an insurance company using the assets of
an insurance company general account should note that the Small Business Job
Protection Act of 1996 added new Section 401(c) of ERISA relating to the status
of the assets of insurance company general accounts under ERISA and Section 4975
of the Code. Pursuant to Section 401(c), the Department of Labor is required to
issue final regulations (the "General Account Regulations") with respect to
insurance policies issued on or before December 31, 1998 that are supported by
an insurer's general account. The General Account Regulations, which were issued
in proposed form on December 22, 1997, are to provide guidance on which assets
held by the insurer constitute "Plan Assets" for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code. Section 401(c)
also provides that, except in the case of avoidance of the General Account
Regulations and actions brought by the Secretary of Labor relating to certain
breaches of fiduciary duties that also constitute breaches of state or federal
criminal law, until the date that is 18 months after the General Account
Regulations become final, no liability under the fiduciary responsibility and
prohibited transaction provisions of ERISA and Section 4975 of the Code may
result on the basis of a claim that the assets of the general account of an
insurance company constitute Plan Assets. The Plan Asset status of insurance
company separate accounts is unaffected by
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new Section 401(c) of ERISA, and separate account assets continue to be treated
as the assets of any such Plan invested in a separate account except to the
extent provided in the Plan Asset Regulation.
In addition, if the Bank, or in certain circumstances an
obligor with respect to a Mortgage Asset or other debt instrument held by the
Company, is a Party-in-Interest or Disqualified Person with respect to an
investing Plan, such Plan's investment could be deemed to constitute a
transaction prohibited under Title I of ERISA or Section 4975 of the Code (e.g.,
the extension of credit or sale of property between a Plan and a
Party-in-Interest or Disqualified Person). Such transactions may, however, be
subject to a statutory or administrative exemption such as Prohibited
Transaction Class Exemption ("PTCE") 90-1, which exempts certain transactions
involving insurance company pooled separate accounts; PTCE 95-60, which exempts
certain transactions involving insurance company general accounts; PTCE 91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager"; and PTCE 96-23, which exempts certain
transactions effected on behalf of a Plan by an "in-house asset manager"; or
pursuant to any other available exemption. Such exemptions may not, however,
apply to all of the transactions that could be deemed prohibited transactions in
connection with such Plan's investment.
Each exchanging stockholder will, by its exchange of Old
Preferred Shares for New Preferred Shares, be deemed to have represented and
agreed that either (i) no part of the assets to be used by it to acquire and
hold such New Preferred Shares constitutes the assets of any Plan or (ii) one or
more prohibited transaction statutory or class exemptions applies such that the
use of such assets to acquire and hold the New Preferred Shares will not
constitute a non-exempt prohibited transaction under ERISA or the Code. Any Plan
fiduciary that proposes to cause a Plan to acquire New Preferred Shares should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment and whether any exemption would be applicable
and determine on its own whether all conditions of such exemption or exemptions
have been satisfied such that the acquisition and holding of New Preferred
Shares by the purchaser Plan are entitled to the full exemptive relief
thereunder. Any such Plan fiduciary should also determine whether the exchange
of New Preferred Shares is permitted under the governing Plan instruments and is
appropriate for the Plan in view of the overall investment policy and the
composition and diversification of its portfolio.
Unrelated Business Taxable Income
Plan fiduciaries should also consider the consequences of
holding more than 10% of the New Preferred Shares if the Company is
"predominantly held" by qualified trusts. See "United States Federal Income Tax
Considerations Treatment of Tax-Exempt Entities."
RATINGS
The Old Preferred Shares are rated "a2" by Moody's Investors
Service, Inc. and "BBB+" by Standard & Poor's Ratings Services. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. No person is obligated to maintain any rating on the New Preferred
Shares, and, accordingly, there can be no assurance that the ratings assigned to
the New Preferred Shares upon exchange will not be lowered or withdrawn by the
assigning rating organization at any time thereafter.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Preferred Shares for its
own account pursuant to the exchange offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Preferred Shares. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Preferred Shares received
in exchange for Old Preferred Shares where such Old Preferred Shares were
acquired as a result of market-making activities or other trading
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activities. To the extent any such broker-dealer participates in the Exchange
Offer, the Company has agreed that for a period of up to six months after the
date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to such broker-dealer for use in connection with any
such resale, will update this Prospectus, as required, during such six-month
period and will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents.
The Company will not receive any proceeds from any sale of New
Preferred Shares by broker-dealers. New Preferred Shares received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Preferred
Shares or a combination of such methods of resale, at prevailing market prices
at the time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers or any
such New Preferred Shares. Any broker-dealer that resells New Preferred Shares
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such New Preferred
Shares may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any such resale of New Preferred Shares and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay certain expenses incident to the
Exchange Offer and will indemnify the holders of the Old Preferred Shares
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
LEGAL MATTERS
The validity of the New Preferred Shares offered hereby will
be passed upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore,
Maryland, with respect to certain matters governed by Maryland law.
EXPERTS
The balance sheet of the Company as of August 20, 1997
included in this Prospectus has been audited by Deloitte & Touche, a general
partnership, independent auditors as set forth in their report thereon included
therein.
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GLOSSARY
Adjusted Treasury Rate: With respect to any redemption date, the rate
per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such prepayment date plus 0.50%.
Administrative Action: Any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations).
Advisory Agreement: The Advisory Agreement dated as of September 3,
1997 between the Company and the Bank.
Automatic Exchange: The automatic exchange of each New Preferred Share
for one Bank Preferred Share upon the occurrence of an Exchange Event.
Bank: National Bank of Canada.
Bank Act: The Bank Act (Canada), as amended.
Bank Preferred Shares: The 8.45% Noncumulative First Preferred Shares,
Series Z of the Bank.
BHCA: The Bank Holding Company Act of 1956.
Board of Directors: The Board of Directors of the Company.
Branch: The Bank's only United States branch located in New York and
licensed by the New York Superintendent under the NYBL.
business day: Any day other than Saturday, Sunday or a date on which
banking institutions are required or authorized by New York State law to be
closed.
Bylaws: The bylaws of the Company.
C$ or $: Canadian dollars.
Capital Guidelines: Guidelines issued by the Superintendent with
respect to the maintenance of adequate capital by Canadian banking institutions.
Charter: The Company's charter.
CMHC: Canada Mortgage and Housing Corporation.
Code: The Internal Revenue Code of 1986, as amended.
Commission: The U.S. Securities and Exchange Commission.
Common Stock: The Company's common stock, par value US$.01 per share.
Company: NB Capital Corporation.
79
<PAGE>
Comparable Treasury Issue: The United States Treasury security selected
by the Quotation Agent as having a maturity comparable to the Make-Whole Term
that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the Make-Whole Term.
Comparable Treasury Price: With respect to any redemption date, (i) the
average of the bid and asked prices for the Comparable Treasury Issue (expressed
in each case as a percentage of its principal amount) on the third Business Day
preceding such redemption date, as set forth in the daily statistical release
published by the Federal Reserve Bank of New York and designated "Composite 3:30
p.m. Quotation for U.S. Government Securities" (or any successor release) or
(ii) if such release is not published or does not contain such prices on such
Business Day, (a) the average of the Reference Treasury Dealer Quotations for
such redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (b) if the Company obtains fewer than three such
Reference Treasury Dealer Quotations, the average of all such Quotations.
Depositor: Any person having tendered Old Preferred Shares in exchange
for New Preferred Shares in the Exchange Offer.
Disqualified Persons: Under the Code, persons and entities who have
certain specified relationships to Plans.
DTC: The Depository Trust Company.
Eligible Institution: A bank, broker, dealer, credit union, savings
association, clearing agency or other institution that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act.
ERISA: The Employee Retirement Income Security Act of 1974, as
amended.
Excess Shares: Shares of any class or series of Preferred Stock owned,
or deemed to be owned, by, or transferred to, a stockholder in violation of the
Ownership Limit, or which would otherwise cause the Company to fail to qualify
as a REIT, which have been automatically transferred, by operation of law, to a
trustee in trust for the exclusive benefit of a charity to be named by the
Company as of the day prior to the day the prohibited transfer took place.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Agent: The Bank of Nova Scotia Trust Company of New York
Exchange Event: An Exchange Event shall occur (i) immediately prior to
such time, if any, at which the Bank fails to declare and pay or set aside for
payment when due any dividend on any issue of its cumulative First Preferred
Shares or the Bank fails to pay or set aside for payment when due any declared
dividend on any of its non-cumulative First Preferred Shares, (ii) in the event
that the Bank has a Tier 1 risk-based capital ratio of less than 4.0% or a total
risk-based capital ratio of less than 8.0%, (iii) in the event that the
Superintendent takes control of the Bank pursuant to the Bank Act (Canada), as
amended (the "Bank Act"), or proceedings are commenced for the winding-up of the
Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the
event that the Superintendent, by order, directs the Bank to act pursuant to
subsection 485(3) of the Bank Act and the Bank elects to cause the exchange.
Exchange Offer: The offering by the Company to exchange up to 300,000
shares of its New Preferred Shares for up to all of its outstanding Old
Preferred Shares at the rate of one New Preferred Share for each Old Preferred
Share tendered.
80
<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 New
Preferred Shares registered in the name of Cede & Co.
hypothecation loans: secured by the pledge of mortgages as security
therefor.
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, in the aggregate, 12,101
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.
81
<PAGE>
Make-Whole Amount: With respect to a New Preferred Share, the greater
of (i) 100% of the Maturity Amount of such New Preferred Share and (ii) the sum
of the present values of the remaining scheduled payments of dividends on such
New Preferred Share to September 3, 2007, plus the present value of the Maturity
Amount at September 3, 2007, discounted to the date fixed for redemption of such
New Preferred Share on a quarterly basis (assuming a 360-day year consisting of
30-day months), computed using a discount rate equal to the Adjusted Treasury
Rate.
Make-Whole Term: The period from the redemption date to September 3,
2007.
Maturity Amount: The liquidation preference of the New Preferred
Shares.
MGCL: The Maryland General Corporation Law.
Monthly Payment Date: The 1st day of each month through July 2001 or
such earlier date on which payment in full of the Initial Mortgage Loans is made
or, if the 1st day of a month is not a business day, on the first business day
following the 1st day of such month.
Mortgage Assets: Assets consisting of obligations secured by real
property, as well as other qualifying REIT assets.
Mortgage Loan Assignment Agreement: The Mortgage Loan Assignment
Agreement dated September 3, 1997 between the Company and NB Finance.
Mortgage Loans: CMHC insured residential first mortgages that are
secured by real property located in Canada.
NB Finance: NB Finance, Ltd., a Bermuda corporation.
New Preferred Shares: 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, par value US$.01 per share, of NB Capital Corporation issued under the
Registration Statement.
NHA: National Housing Act.
NHA-Approved Lender: A lender approved under the NHA.
NHA MBS: A NHA Mortgage-Backed Security.
Non-United States Holder: An exchanging stockholder that, for United
States federal income tax purposes, is not a "United States person."
Notice of Guaranteed Delivery: The notice of guaranteed delivery
available to holders of Old Preferred Shares in connection with the Exchange
Offer.
NYBL: The Banking laws of the State of New York.
Offering: The offering of Old Preferred Shares by the Company on the
Issue Date.
82
<PAGE>
Old Preferred Shares: 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, par value US$.01 per share, of NB Capital Corporation issued on the
Issue Date.
One Hundred Persons Test: To qualify as a REIT under the Code the stock
of a company must be beneficially owned by 100 or more persons during at least
335 days of a taxable year (other than the first year) or during a proportionate
part of a shorter taxable year.
Other Series of First Preferred Shares: Various series of first
preferred shares which the Bank currently has outstanding, and may in the future
issue.
Ownership Limit: Under the Charter, subject to certain exceptions
specified therein, any natural person or entity that is considered to be an
individual under Section 542(a)(2) of the Code is prohibited from owning
(including shares deemed to be owned by virtue of the relevant attribution
provisions of the Code) more than 5% of any issued and outstanding class or
series of Preferred Stock.
Parity Stock: Any series of equity securities of the Company expressly
designated as being on a parity with or senior to the New Preferred Shares as to
dividend rights and rights upon liquidation, winding up or dissolution.
Participants: Securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations that hold securities on
behalf of DTC.
Participating Broker-Dealer: Any broker-dealer who acquired the New
Preferred Shares for its own account as a result of market-making or other
trading activities.
Parties-in-Interest: Under ERISA, persons and entities who have certain
specified relationships to Plans.
Partnership Interests: Limited partnership interests in partnerships
the only activities of which are to purchase and own Mortgage Loans.
PFIC: Passive foreign investment company.
Plan Asset Regulations: U.S. Department of Labor regulations (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan.
Plans: Any (I) employee benefit plan (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) subject
to Title I of ERISA, (II) plan (as defined in section 4975(e)(1) of the Code) or
(III) entity whose underlying assets include "plan assets" under Department of
Labor Regulation 29 C.F.R. Section 2510.3-101.
Preferred Shares: The Old Preferred Shares, together with the New
Preferred Shares.
Preferred Stock: The Shares of preferred stock of the Company.
Primary Treasury Dealer: A primary U.S. Government securities dealer in
New York City.
Prospectus: This Prospectus dated January __, 1998 with respect to the
Exchange Offer.
PTCE: Prohibited Transaction Class Exemption.
83
<PAGE>
Purchase Agreement: The Purchase Agreement dated August 22, 1997, among
NB Capital Corporation, the Bank and the Initial Purchaser.
Quotation Agent: The Reference Treasury Dealer appointed by the
Company.
redemption date: The date fixed for redemption for a New Preferred
Share.
Reference Treasury Dealer: (i) Merrill Lynch Government Securities,
Inc. and their respective successor; provided, however, that if the foregoing
shall cease to be a primary U.S. Government securities dealer in New York City
(a "Primary Treasury Dealer"), the Company shall substitute therefor another
Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer selected by
the Company.
Reference Treasury Dealer Quotations: With respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Company, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Company by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third Business Day preceding such redemption date.
Registration Rights Agreement: The Registration Rights Agreement dated
September 3, 1997, among the Company, the Bank and the Initial Purchaser.
Registration Statement: The registration statement filed by the Company
on Amendment No. 2 to Form S-4/Amendment No. 1 to Form F-9/Form S-1 dated
January __, 1998.
REIT: Real estate investment trust.
REIT Asset Tests: The Company must generally meet the following asset
tests at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, Government
securities, cash, and cash items (the "75% Asset Test"); and
(b) not more than 25% of the Company's total assets may
consist of securities other than those taken into account for purposes
of the 75% Asset Test and, of those securities, (i) the value of the
securities of any one issuer (other than another REIT) may not exceed
5% of the value of the Company's total assets and, (ii) the Company may
not own more than 10% of the outstanding voting securities of any such
issuer.
REIT Gross Income Tests: The Company must generally meet the following
gross income tests for each taxable year:
(a) at least 75% of the Company's gross income must be derived
from certain specified sources including interest on obligations
secured by mortgages on real property, gain from the disposition of
Qualified REIT Real Estate Assets or "qualified temporary investment
income" (i.e., income derived from "new capital" within one year of the
receipt of such capital) (the "75% Gross Income Test"); and
(b) at least 95% of the Company's gross income must consist of
income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain
interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business.
84
<PAGE>
REIT Requirements or REIT Provisions: Sections 856 through 860 of the
Code and the applicable Treasury Regulations.
REIT taxable income: A REIT's taxable income computed without regard to
the dividends paid deduction and the REIT's net capital gain.
Residential Mortgage Loans: Individual residential mortgages other than
Mortgage Loans.
Securities Act: The Securities Act of 1993, as amended.
Senior Preferred Stock: A series of the Company's cumulative, senior
preferred stock with an aggregate liquidation preference of up to US$450,000.
Series Z Preferred Shares: The 8.45% Noncumulative First Preferred
Shares, Series Z of National Bank of Canada.
Servicer: The Bank in its role as servicer under the terms of the
Servicing Agreement.
Servicing Agreement: The Servicing Agreement dated as of September 3,
1998 between the Company and NB Finance.
Shelf Registration Statement: A shelf registration covering resales of
the Old Preferred Shares (and underlying interests in the Bank Preferred
Shares).
Superintendent: The Office of Superintendent of Financial Institutions
Canada.
Tax Event: The receipt by the Company of an opinion of a nationally
recognized law firm experienced in such matters to the effect that, as a result
of (i) any amendment to, clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any regulations thereunder) of
the United States or Canada, or any political subdivision or taxing authority
thereof or therein, affecting taxation, (ii) any judicial decision, official
administrative pronouncement, published or private ruling, regulatory procedure,
notice or announcement (including any notice or announcement of intent to adopt
such procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the interpretation
of such Administration Action or interpretation or pronouncement that provides
for a position with respect to such Administrative Action that differs from the
theretofore generally accepted position, in each case, by any legislative body,
court, governmental authority or regulatory body, irrespective of the manner in
which such amendment, clarification or change is made known, which amendment,
clarification or change is effective or such pronouncement or decision is
announced on or after the date of this Prospectus, there is more than an
insubstantial risk that (a) dividends paid or to be paid by the Company with
respect to the stock of the Company are not, or will not be, fully deductible by
the Company for United States federal income tax purposes or (b) the Company is,
or will be, subject to more than an insignificant amount of other taxes, duties
or other governmental charges and shall include an assessment by the Internal
Revenue Service that (a) dividends paid or to be paid by the Company with
respect to the stock of the Company are not, or will not be, fully deductible by
the Company for United States federal income tax purposes or (b) the Company is,
or will be, subject to more than an insignificant amount of other taxes, duties
or other governmental charges.
Time of Exchange: The Automatic Exchange shall occur as of 8:00 a.m.
Eastern Time on the date for such exchange set forth in the requirements of the
Superintendent or, if such date is not set forth in such requirements as of 8:00
a.m. on the earliest possible date such exchange could occur consistent with
such requirements as evidenced by the issuance by the Bank of a press release
prior to such time.
Transferor: Any holder tendering Old Preferred Shares in the Exchange
Offer.
85
<PAGE>
Treaty: The Canada-United States Income Tax Convention (1980).
United States person: For purposes of this discussion, a citizen or
individual resident of the United States; a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof; an estate the income of which is includible in
gross income for United States federal income tax purposes regardless of its
source; or a trust if both: (i) a United States court is able to exercise
primary supervision over the administration of the trust, and (ii) one or more
United States trustees or fiduciaries have the authority to control all
substantial decisions of the trust.
U.S.$ or U.S. dollars: U.S. dollars.
USRPI: United States real property interests.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements
Independent Auditors' Report............................................F-2
Balance Sheet...........................................................F-3
Unaudited Interim Financial Statements
Balance Sheet...........................................................F-6
Statement of Income.....................................................F-7
Statement of Retained Earnings (Deficit)................................F-8
Statement of Changes in Financial Position..............................F-9
F-1
<PAGE>
Deloitte & Touche, S.E.N.C.
Chartered Accountants
1 Place Ville-Marie Telephone: (514) 393-7115
Suite 3000 Facsimile: (514) 393-7140
Montreal QC H3B 4T9
Independent Auditors' Report
To the Board of Directors and Stockholder of
NB Capital Corporation
We have audited the accompanying balance sheet of NB Capital Corporation as of
August 20, 1997. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company as of August 20, 1997 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE
Chartered Accountants
Montreal, Canada
January 7, 1998
F-2
<PAGE>
NB CAPITAL CORPORATION
Balance Sheet
as of August 20, 1997
(in U.S. dollars)
Assets
Promissory note $ 1,000
Stockholder's equity (Note 2)
Common Stock, US$0.01 par value per share;
1,000 shares authorized,
100 shares issued and outstanding $ 1
Additional paid-in capital $ 999
--------
$ 1,000
========
See accompanying notes.
F-3
<PAGE>
NB CAPITAL CORPORATION
Notes to the Balance Sheet
as of August 20, 1997
1. Incorporation and nature of operations
The Company, a wholly-owned subsidiary of National Bank of Canada (the
"Bank"), a bank chartered under the Bank Act (Canada), is a Maryland
corporation incorporated on August 20, 1997. The Company was formed for
the purpose of carrying on any business.
2. Subsequent events
a) Articles of Amendment and Restatement
Subsequent to August 20, 1997, the Company amended and
restated its charter.
The authorized share capital was modified in order for the
Company to have the authority to issue 10,001,000 shares of
stock, consisting of 1,000 shares of Common Stock, $0.01 par
value per share, and 10,000,0000 shares of Preferred Stock,
$0.01 par value per share.
The Company's principal business objective will be to acquire,
hold, finance and manage mortgage assets. The Company will
elect to be taxable as a Real Estate Investment Trust (a
"REIT") under the Internal Revenue Code of 1986, as amended,
and generally will not be liable for United States federal
income tax to the extent that it distributes at least 95% of
its taxable income to its stockholders and maintains its
qualification as a REIT.
b) Offering Circular and capital contribution
Through an Offering Circular dated August 22, 1997, the
Company issued $300 million of the 8.35% Noncumulative
Exchangeable Preferred Stock, Series A.
Simultaneously with the consummation of the offering of the
Preferred Stock, the Bank made a capital contribution
approximately in the amount of $183 million.
c) Acquisition of Mortgage Assets
In September 1997, the Company used the aggregate net proceeds
of approximately $477 million received in connection with both
the offering and capital contribution to acquire mortgage
assets which consists of obligations of NB Finance, Ltd., a
wholly-owned subsidiary of the Bank. The mortgage assets are
collateralized only by mortgage loans, which are secured by
residential first mortgages.
d) Agreements with the Parent Company
In September 1997, the Company entered into agreements with
the Bank in relation to the administration of the Company's
operations.
e) Registration Statement with the U.S. Securities of Exchange
Commission ("SEC")
On November 25, 1997, the Company filed a Registration
Statement - Form S-4 with the SEC pertaining to the
registration of 300,000 shares of its 8.35% Noncumulative
Exchangeable Preferred Stock, Series A. These shares will be
offered in exchange for up to 300,000 Preferred Shares issued
through the Offering Circular dated August 22, 1997 referred
to in Note 2b) above.
F-4
<PAGE>
NB CAPITAL CORPORATION
Unaudited Interim Financial Statements
The financial statements presented below are the unaudited
interim financial statements of the Company which, in the opinion of management,
include all adjustments, which consist of only normally recurring adjustments,
necessary for a fair presentation of the financial position and the results of
operations of the Company as of September 30, 1997.
F-5
<PAGE>
NB CAPITAL CORPORATION
BALANCE SHEET
as at September 30, 1997
(in dollars)
(Unaudited)
Assets
Cash $ 3,667,213
Hypothecation note with affiliated company 473,681,802
Accrued interest hypothecation note 3,042,708
------------
$480,391,723
============
Liabilities
Other liabilities
Accrued dividends $ 1,875,000
Income tax payable 471,307 $ 2,346,307
------------
Equity
Preferred stock 3,000
Common stock 1
Contribution Surplus 477,335,453
Retained Earnings 706,962
------------
$480,391,723
============
See accompanying Notes to Unaudited Interim Financial Statement.
F-6
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF INCOME
for the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
Interest income
Hypothecation note $3,042,708
Bank interest 10,561
----------
TOTAL $3,053,269
==========
Expenses
Other fees(1) 0
----------
Income before income taxes 3,053,269
Income taxes 1,221,307
----------
NET INCOME $1,831,962
==========
See accompanying Notes to Unaudited Interim Financial Statement.
F-7
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF RETAINED EARNINGS
For the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
Beginning of the period $ --
Net income 1,831,962
Dividends on preferred notes net of $750,000 income taxes (1,125,000)
-----------
End of the period $ 706,962
===========
See accompanying Notes to Unaudited Interim Financial Statement.
F-8
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF CHANGES IN FINANCIAL POSITION
For the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,831,962
Items note affecting cash:
accrued interest receivable (3,042,708)
accrued liabilities 2,346,307
income taxes charged to retained earnings 750,000
-------------
$ 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 $ 3,667,213
-------------
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, no expenses had been paid directly
by the Bank on behalf of the Company. The Bank expects to pay certain
expenses (comprised mainly of administration fees, legal and audit
costs) on behalf of the Company. As of September 30, 1997, information
regarding such expenses was not available and, accordingly, accruals
not determinable. All such expenses will be properly reflected in the
December 31, 1997 financial statements of the Company. With respect to
an allocation of compensation expense by the Bank to the Company in
respect of employees of the Bank serving as officers and employees of
the Company, no such allocation is required since all such expenses are
accounted for through the C$50,000 advisory fee charged the Company by
the Bank for advisory services.
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 January __, 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
23, 1997 and contained in the Bank's Annual Report
for the year ended October 31, 1997;
(b) Management's Discussion and Analysis of Operating
Results and Financial Condition of the Bank dated
December 23, 1997, and contained in the Bank's Annual
Report for the year ended October 31, 1997;
(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 December 23, 1997 in
connection with the Bank's annual meeting of
shareholders held on March 11, 1998.
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>
c 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 JANUARY __, 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 January __, 1998
- --------------------------------------------------------------------------------
<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 JANUARY __, 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." The
Initial Mortgage Loans consist of sixteen pools of, in the aggregate, 12,101
"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 11 for a discussion of
certain factors that should be considered by potential holders of Series A
Preferred Shares, including the following:
o 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
<PAGE>
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.
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.
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 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'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 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 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, and in certain circumstances, CMHC
insurance may not be available or receipt of payment thereof
may be delayed.
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 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 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
<PAGE>
amendments or revisions even though the ultimate effect to the
holders of Series A Preferred Shares may be negative.
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 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.
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 January __, 1998.
<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 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.
v
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY......................................................... 1
The Company............................................................. 1
The Bank ............................................................... 2
Business and Strategy................................................... 3
Tax Status of the Company............................................... 4
Series A Preferred Shares............................................... 6
Selected Financial Data.................................................10
RISK FACTORS...............................................................11
Absence of Public Market................................................11
Dividends Not Cumulative................................................11
Interest Rate Risk and Maturity of Initial Mortgage Loans...............11
Currency Exchange Rate Risk.............................................12
Dividend and Other Regulatory Restrictions on Operations
of the Company........................................................12
Real Estate Market Conditions...........................................12
Geographic Concentration of the Real Property Securing the Initial
Mortgage Assets.......................................................13
Limited Recourse Nature of Certain Mortgage Assets; Limitations
on CMHC Insurance.....................................................13
Balloon Payments........................................................13
No Third Party Valuation of the Mortgage Assets; No Arm's-Length
Negotiations with Affiliates..........................................13
Relationship with the Bank and Its Affiliates; Conflicts of
Interest..............................................................14
Dependence upon the Bank................................................14
Risk of Future Revisions in Policies and Strategies by
Board of Directors....................................................15
Certain Risks Associated with the Bank..................................15
Tax Risks...............................................................15
Canadian Legal Considerations...........................................17
THE COMPANY................................................................19
USE OF PROCEEDS............................................................19
CAPITALIZATION.............................................................20
MANAGEMENT DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES......20
BUSINESS AND STRATEGY......................................................21
General ..............................................................21
Description of Dividend Policy.........................................21
Description of the Company's Investment Policy.........................22
Description of the Initial Mortgage Assets.............................28
Effect of Interest Rate Fluctuation on Assets and Earnings.............31
Servicing..............................................................31
Employees..............................................................32
Competition............................................................33
Legal Proceedings......................................................33
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MANAGEMENT.................................................................33
Directors and Executive Officers......................................33
Summary Compensation Table............................................34
Independent Directors.................................................35
Audit Committee.......................................................35
Compensation of Directors and Officers................................35
Limitation of Liability and Indemnification of Directors
and Officers.........................................................35
The Bank as Advisor...................................................36
DESCRIPTION OF THE SERIES A PREFERRED SHARES...............................37
General .............................................................37
Dividends.............................................................37
Automatic Exchange....................................................38
Ranking .............................................................40
Voting Rights.........................................................40
Redemption............................................................41
Rights upon Liquidation...............................................43
Independent Director Approval.........................................43
REGISTRATION RIGHTS........................................................44
DESCRIPTION OF CAPITAL STOCK...............................................47
Common Stock..........................................................47
Preferred Stock.......................................................48
Power to Issue Additional Shares of Common Stock and
Preferred Stock....................................................49
Restrictions on Ownership and Transfer................................49
Super-Majority Director Approval......................................50
Business Combinations.................................................50
Control Share Acquisitions............................................51
Form, Denomination, Book-Entry Procedures and Transfer................52
Depositary Procedures.................................................52
Certificated Series A Preferred Shares................................53
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS............................54
Qualification of the Company as a REIT................................54
Stock Ownership Tests.................................................55
Asset Tests...........................................................55
Gross Income Tests....................................................55
Distribution Requirement..............................................56
Taxation of the Company...............................................56
Tax Treatment of Automatic Exchange...................................57
Taxation of Series A Preferred Shares.................................57
Taxation of Tax-Exempt Entities.......................................58
State and Local Taxes.................................................59
Taxation of Bank Preferred Shares.....................................59
Certain United States Federal Income Tax Considerations
Applicable to Foreign Holders......................................59
Information Reporting and Backup Withholding..........................60
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS.................................60
Automatic Exchange....................................................61
Taxation of Dividends.................................................61
Disposition of Bank Preferred Shares..................................61
vii
<PAGE>
Redemption of Bank Preferred Shares..................................61
ERISA CONSIDERATIONS.......................................................61
Status Under Plan Asset Regulations..................................62
Publicly-Offered Security Exception..................................63
Exemptions from Prohibited Transactions..............................63
Unrelated Business Taxable Income....................................64
RATINGS ..................................................................64
INITIAL PURCHASER..........................................................64
PLAN OF DISTRIBUTION.......................................................65
LEGAL MATTERS..............................................................66
EXPERTS ..................................................................66
GLOSSARY...................................................................67
FINANCIAL STATEMENTS......................................................F-1
ANNEX A
-----------------------------
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.
viii
<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.
ix
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus. The offering by NB
Capital Corporation (the "Company") of up to 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") issued to the Company by
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 in the aggregate, 12,101
"Mortgage Loans." 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 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 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 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.
1
<PAGE>
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. The Bank is a Schedule I bank under the Bank Act (Canada), as amended (the
"Bank Act"). 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, 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 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
2
<PAGE>
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.
At October 31, 1997, the Tier 1 risk-based capital ratio and
total risk-based capital ratio levels of the Bank were 6.8% and 9.7%,
respectively. 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 that date 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 Structure
The following diagram outlines the organizational structure of
the Bank relevant to the Exchange Offer: [Description of diagram: National Bank
of Canada on the top level of a two-tier diagram connected to NB Capital
Corporation and NB Finance Ltd. on the second level of the two-tier diagram.]
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 of US$477 million, issued by NB Finance to the Company that
are recourse only to the Initial Mortgage Loans (which are sixteen pools of, in
the aggregate, 12,101 CMHC-insured residential first mortgages, in an aggregate
amount of C$828 million (US$596 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
3
<PAGE>
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 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 and
obligations that are comparable to the Initial Mortgage Assets. 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 Companies 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 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
4
<PAGE>
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."
5
<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." 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."
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
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<PAGE>
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.
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."
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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 (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 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
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<PAGE>
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.
9
<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.
August 20, 1997
(date of inception) to
September 30, 1997
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
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.
10
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before purchasing Series A Preferred Shares. 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.
Absence of Public Market
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 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 Company is
under no obligation, and currently has no intention, to list the Series A
Preferred Shares on a national exchange. The Initial Purchaser has informed the
Company that the Initial Purchaser intends to 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.
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 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."
Interest Rate Risk and Maturity of Initial Mortgage Loans
The Company's income consists principally of interest payments
from the Initial Mortgage Assets and obligations which are comparable to the
Initial Mortgage Assets. Interest and principal amounts generated by the Initial
Mortgage Loans and obligations that are comparable to the Initial Mortgage Loans
enable full payment with respect to the Initial Mortgage Loans. 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 in
respect of its Mortgage Assets or Mortgage Loans, 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) because the rate at which dividends on the Series A Preferred
Shares, if, when and as
11
<PAGE>
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.
Currency Exchange Rate Risk
The Company's income consists principally of interest payments
from the Initial Mortgage Assets and obligations which are comparable to the
Initial Mortgage Assets. 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.
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.
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, 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. 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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<PAGE>
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 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 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 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.
Consequently, in the event of nonpayment of interest or other default on the
Initial Mortgage Assets, 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), 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.
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
13
<PAGE>
The Company and the Bank believe that the fair market value of
the Initial Mortgage Assets was at least equal the amount that the Company paid
for the Initial Mortgage Assets (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 did not differ from the amount that the Company paid for
the Initial Mortgage Assets.
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."
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<PAGE>
Risk of Future Revisions in Policies and Strategies by Board of Directors
The Board of Directors has established the investment policies
and operating policies and strategies of the Company, certain of which are
described in this Prospectus. These policies 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."
Certain Risks Associated with the Bank
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.
An investment in the Bank is also subject to certain 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.
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 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.
Tax Risks
Adverse Consequences of Failure to Qualify as a REIT.
15
<PAGE>
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 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. Since the Company anticipates fewer than 100
holders of the Series A Preferred Shares, the Company has issued shares of its
Senior Preferred Stock to meet the 100 person ownership requirement for REIT
status.
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
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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."
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 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 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.
Consequently, there can be no assurance that the remaining payments on the
Initial Mortgage Assets 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.
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
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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, in the
aggregate, 12,101 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.
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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.
September 30, 1997
(In thousands,
except share data)
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
==========
- ---------------------------
(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
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.
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.
The US$477 million of Initial Mortgage Assets are over-collateralized by the
C$828 million (US$596 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 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
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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.
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, in the aggregate, 12,101 CMHC-insured residential first
mortgages secured by real property located in Canada (the "Initial Mortgage
Loans"). The Company acquired the Initial Mortgage Assets 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 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.
The US$477 million of Initial Mortgage Assets are overcollateralized by C$828
million (US$596 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. 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". In order to
remain qualified as a REIT, the Company must distribute annually at least 95% of
its REIT taxable income (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the Series A Preferred Shares and none
or no material portion of the dividends on the Common Stock will constitute
non-taxable returns of capital.
Dividends will be 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,
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<PAGE>
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.
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." There is no specific policy with respect to the amount or percentage
of assets which will be invested in any specific property. All investments will
be made primarily for income.
The general policy of the Bank with respect to uninsured loans
is to lend no more than 75% of the appraised value of the asset securing such
loan.
Initial Mortgage Assets.
Percentage of current portfolio: 100%. The Company's
investments currently consist solely of the Initial Mortgage Assets (i.e.,
sixteen hypothecation loans, in the aggregate amount of US$477 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 of C$828 million (US$596 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 are secured by residential
real property located in Quebec underlying the Initial Mortgage Loans. See
"--Description of the Initial Mortgage Assets." 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. The
maturities of the Initial Mortgage Assets range from January 2000 to July 2001.
Accordingly, after July 2001, the Company's portfolio will not include any
Initial Mortgage Assets.
Mortgage Loans.
Percentage of current portfolio: 0%. While no Mortgage Loans
are included in the Initial Mortgage Assets 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, will be virtually
free of credit risk. 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.
Residential Mortgage Loans.
Percentage of current portfolio: 0%. While no residential
mortgages are included in the Initial Mortgage Assets and while the Company has
no current intention to acquire residential mortgages, the
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<PAGE>
Company may from time to time acquire individual residential mortgages other
than Mortgage Loans ("Residential Mortgage Loans"). These Residential Mortgage
Loans are expected to meet the requirements for sale to governmental or private
mortgage conduit programs or other investors in the secondary mortgage market
(i.e., such Residential Mortgages must be rated "A" (or better) by at least one
major rating agency (a Canadian rating agency for Canadian-based mortgages or a
U.S. rating agency for U.S.-based mortgages) or include some form of credit
enhancement (such as over-collateralization, letter of credit or accumulated
cash)).
While Mortgage Loans benefit from CMHC insurance, there can be
no assurance that any Residential Mortgage Loans acquired by the Company will be
similarly protected. Some Residential Mortgage Loans are, however, insured by
Mortgage Insurance Company of Canada (now part of GE Capital), therefore
considerably mitigating any credit risk relating to those mortgages. Moreover,
large (i.e., more than four housing units) residential uninsured mortgage loans
sold to the Company must have a Bank (as of the time of a sale) "credit score"
of five or better. The Bank has an internal credit scoring system whereby the
risk of large residential loans is ranked from one (the least risk) to ten (the
most risk) according to different factors such as the cash flow derived from the
mortgaged property. Potentially, up to 10% of the Company's portfolio could be
comprised of Residential Mortgage Loans.
Mortgage-Backed Securities.
Percentage of current portfolio: 0%. While no Mortgage-Backed
Securities are included in the Initial Mortgage Assets 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
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MBS rated "A" or better are credit enhanced by over-collateralization, a letter
of credit, an initial deposit into a cash collateral account or the presence of
one or more subordinated classes. Prepayment risk is the risk of receiving
unscheduled principal payments while the Mortgage-Backed Security is worth more
than par. For example, a sale will usually trigger a prepayment. More
importantly for investors, prepayments are motivated by a decline in interest
rates. In Canada, however, prepayment risk is mitigated by two factors: (a)
lenders usually charge prepayment penalties, thereby reducing the incentive to
prepay and (b) almost all mortgages are relatively short-term (typically, 6
month to 5 years) balloon mortgages, also reducing the impact of prepayments.
Commercial Mortgage Loans.
Percentage of current portfolio: 0%. While no Commercial
Mortgage Loans are included in the Initial Mortgage Assets 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 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.
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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.
25
<PAGE>
At least 90% of the Company's portfolio will consist of the
Initial Mortgage Assets and obligations which are comparable to the Initial
Mortgage Assets. The Company may, however, invest in other assets eligible to be
held by 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. 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
26
<PAGE>
Company's policy that the terms of any dealings with the Bank and its affiliates
will be consistent with those available from third parties. In addition, neither
the Advisory Agreement nor the Servicing Agreement may be renewed, terminated or
modified by the Company without the approval of a majority of the Independent
Directors.
Conflicts of interest between the Company and the Bank and its
affiliates may also arise in connection with making decisions that bear upon the
credit arrangements that the Bank or one of its affiliates may have with a
borrower. Conflicts could also arise in connection with actions taken by the
Bank as a controlling stockholder in the Company. It is the intention of the
Company and the Bank that any agreements and transactions between the Company,
on the one hand, and the Bank or its affiliates, on the other hand, including,
without limitation, the Servicing Agreement, be fair to all parties and
consistent with market terms for such types of transactions. The Servicing
Agreement provides that foreclosures and dispositions in connection with
Mortgage Loans will be performed with a view toward maximizing the recovery by
the Company of amounts due on its Mortgage Assets and the Bank will be required
to service Mortgage Loans solely with a view toward the interests of the
Company, and without regard to the interests of the Bank or any of its other
affiliates. The requirement in the terms of the 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 or (b)
underwrite securities of other issuers. The Company intends, and has the
ability, to hold the Mortgage Assets and the underlying Mortgage Loans until
maturity. Although the Company has no current intention to do so, the Company
may, pursuant to the terms of its Charter, redeem the Preferred Shares. See
"Description of the 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. The Company acquired
the Initial Mortgage Assets pursuant to the terms of a loan agreement with NB
Finance. Each Initial Mortgage Asset is recourse only to the Initial Mortgage
Loan securing such Initial Mortgage Asset. Each Initial Mortgage Loan is a pool
of between 130 and 2,561 CMHC- insured residential first mortgages. See
"Description of the Initial Mortgage Loans." Each Initial Mortgage Asset 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 principal
amount of the Initial Mortgage Assets equals approximately US$477 million. The
Initial Mortgage Assets pay interest at rates ranging from 6.90% to 9.77%, with
an average rate of approximately 8.40% per annum.
<TABLE>
<CAPTION>
The following table summarizes the Initial Mortgage Assets:
Initial Mortgage Assets
Outstanding Maturity Interest Monthly
Amount Date Rate* Interest Payments
- ----------------------------- ---------------------------- ---------------------------- -----------------------
<S> <C> <C> <C>
US$ 24,175,420 Jan. 2000 6.895% US$ 136,954
23,250,251 Jan. 2000 7.471% 142,550
48,236,245 Jan. 2000 8.047% 318,171
16,364,955 Jan. 2000 8.622% 115,524
43,894,121 July 2000 6.895% 248,660
29,713,817 July 2000 7.471% 182,178
7,246,742 July 2000 8.622% 51,156
9,511,225 July 2000 8.047% 62,737
33,305,900 Jan. 2001 9.198% 250,531
46,882,784 Jan. 2001 9.774% 374,309
5,257,516 Jan. 2001 8.047% 34,679
6,342,462 Jan. 2001 8.622% 44,773
22,146,227 July 2001 8.047% 146,079
104,830,848 July 2001 8.622% 740,026
23,008,093 July 2001 9.198% 173,070
32,421,747 July 2001 9.774% 258,853
US$ 476,588,453 8.404% US$ 3,280,250
</TABLE>
- ----------
* All rates quoted on a 30/360 semiannual basis
Payments of interest are made monthly out of payments on the
Initial Mortgage Loans. Pursuant to an agreement between the Company and NB
Finance (the "Mortgage Loan Assignment Agreement"), dated September 3, 1997, the
Company receives all scheduled payments made on the Initial Mortgage Loans,
retains a portion of any such payments equal to the amount due and payable on
the Initial Mortgage Assets and remits the balance, if any, to NB Finance. The
Company also retains a portion of any prepayments of principal in respect of the
Initial Mortgage Loans equal to the proportion of such prepayments that the
outstanding principal amount of the Initial Mortgage Loans bears to the
outstanding principal amount of the Initial Mortgage Assets, which amount would
be applied to reduce the outstanding principal amount of the Initial Mortgage
Assets. Repayment of the Initial Mortgage Assets is secured by an assignment of
the Initial
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<PAGE>
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 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, 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 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.
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 2,561
CMHC-insured residential first mortgages and is secured by the underlying
residential real property located in Canada, primarily in Quebec. See "Risk
Factors--All of the Real Property Securing the Initial Mortgage Assets is
Located Outside of the United States." In aggregate, 12,101 CMHC-insured
residential first mortgages comprise the sixteen pools. Generally, the
CMHC-insured residential first mortgages comprising any individual are less than
C$100,000. Accordingly, no individual CMHC-insured residential first mortgage is
material to the Company, its operation or its business.
Payments on the Initial Mortgage Loans are due monthly in
arrears on the 1st day of each month through July 2001 or such earlier date on
which payment in full of the Initial Mortgage Loans is made (the "Final Payment
Date") or, if the 1st day of a month is not a business day, on the first
business day following the 1st day of such month (a "Monthly Payment Date").
Payments of interest and principal on the Initial Mortgage Loans are made in
Canadian dollars.
The Initial Mortgage Loans mature monthly beginning in 1999
and bear interest at rates ranging from approximately 6.0% to 8.99% with an
average interest rate of 7.53% per annum. The Final Payment Date may occur at an
earlier date if final payment on the Initial Mortgage Loans occurs earlier than
such date, because of unscheduled prepayments.
The following table summarizes the Initial Mortgage Loans:
29
<PAGE>
<TABLE>
<CAPTION>
Initial Mortgage Loans
Outstanding Number
Amount* Maturity Min. Max. Avg. Min. Max. Avg. of Loans
------- -------- ---- ---- ---- ---- ---- ---- --------
Interest rate** Remaining Term (months)
--------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 42,004,792 Jan. 2000 6.000% 6.499% 6.225% 24.00 29.00 28.15 644
40,397,485 Jan. 2000 6.500% 6.999% 6.772% 24.00 29.00 27.79 547
83,810,476 Jan. 2000 7.000% 7.499% 7.166% 24.00 29.00 27.57 1,318
28,434,108 Jan. 2000 7.500% 7.999% 7.791% 24.00 29.00 25.38 411
76,266,035 July 2000 6.000% 6.499% 6.199% 30.00 35.00 32.80 1,083
51,627,757 July 2000 6.500% 6.999% 6.639% 30.00 35.00 33.42 848
12,591,214 July 2000 7.500% 7.999% 7.608% 30.00 35.00 32.03 166
16,525,754 July 2000 7.000% 7.499% 7.188% 30.00 35.00 30.84 251
9,134,934 Jan. 2001 7.000% 7.499% 7.234% 36.00 41.00 39.50 130
11,020,027 Jan. 2001 7.500% 7.999% 7.776% 36.00 41.00 39.14 135
57,869,002 Jan. 2001 8.000% 8.499% 8.287% 36.00 41.00 38.85 697
81,458,837 Jan. 2001 8.500% 8.999% 8.718% 36.00 41.00 38.17 1,266
38,479,070 July 2001 7.000% 7.499% 7.299% 41.00 47.00 44.84 417
182,143,599 July 2001 7.500% 7.999% 7.768% 41.00 47.00 44.81 2,561
39,976,562 July 2001 8.000% 8.499% 8.204% 41.00 47.00 45.17 546
56,332,785 July 2001 8.500% 8.999% 8.523% 41.00 47.00 45.89 1,081
$828,072,438 7.310% 7.809% 7.526% 34.34 39.34 37.32 12,101
</TABLE>
- ----------
* All amounts quoted in Canadian $
** All rates quoted on a 30/360 semiannual basis
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
30
<PAGE>
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. 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. The Initial Mortgage Assets 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 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
31
<PAGE>
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 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
32
<PAGE>
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 mortgage 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 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.
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 1, 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
Roger Smock Director; Chairman of the Board; Chief Executive Officer;
President
Tom Doss Director; Chief Financial Officer; Treasurer
John Richter Director; Vice President
Francois Bourassa (Vice President--Legal; Secretary), Andree
Grimard (Assistant Secretary) and Martin Ouillet (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:
33
<PAGE>
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 June 1994, Vice President, Finance
of Canadian Pacific Forest Products Ltd. (now known as Avenor Inc.) since
September 1990, and a 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.
Mr. Smock has been Senior Vice President, United States of the
Bank since 1988. In this position, he functions as the Bank's senior
representative in the United States. Mr. Smock is Chairman of the Board of
several of the Bank's U.S. subsidiaries, including National Canada Finance Corp.
and National Canada Corporation. He is also Chairman of the Bank's Management
Committee in the United States.
Mr. Doss joined the Bank in 1981 and has served as Chairman,
Credit Committee (United States) since 1981. He was elected Vice President,
Credit (U.S.) in 1988. He is an officer of several of the Bank's U.S.
subsidiaries and is a director of National Canada Finance Corp. and NB Finance.
He is also a member of the Board of Trustees for Soundview Preparatory School.
Mr. Richter has been Vice President--Eastern United States of
the Bank since 1988. In this position he functions as the Bank's senior lender
officer in the United States. Mr. Richter is President of National Canada
Finance Corp., a United States subsidiary of the Bank. He is also a member of
the Bank's management committee in the United States.
Summary Compensation Table
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 table below sets forth the compensation paid or
accrued by the Bank and its subsidiaries for the year ended December 31, 1997 to
Roger Smock, the President of the Company.
Annual Compensation
Name and -------------------------------------------
Principal Position Year Salary Bonus
- ------------------ ---- ------ -----
Roger Smock 1997
President (1)
- ------------------------
(1) Roger Smock was elected Chairman of the Board; Chief Executive Officer;
President of the Company effective January 1, 1998.
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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.
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
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corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by the Company and (b) a
written statement by or on his behalf to repay the amount paid or reimbursed by
the Company if it shall ultimately be determined that the standard of conduct
was not met.
The Bank as Advisor
The Company entered into the Advisory Agreement with the Bank
to administer the day-to-day operations of the Company. The Bank is responsible
for (i) monitoring the credit quality of Mortgage Assets held by the Company,
(ii) advising the Company with respect to the reinvestment of income from and
payments on, and with respect to the acquisition, management, financing and
disposition of, Mortgage Assets held by the 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 C$50,000 payable in equal quarterly installments with respect to the advisory
and management services provided by it to the Company. Payment of such fees is
subordinated to payments of dividends on the Series A Preferred Shares.
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<PAGE>
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
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
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<PAGE>
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.
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
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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.
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
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<PAGE>
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."
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
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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:
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
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<PAGE>
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).
"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.
"Adjusted Treasury Rate" means, with respect to any redemption
date, the rate per annum equal to the semi-annual equivalent yield to maturity
of the Comparable Treasury Issue (as defined herein), assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price (as defined herein) for such prepayment
date plus 0.50%.
"Comparable Treasury Issue" means the United States Treasury
security selected by the Quotation Agent as having a maturity comparable to the
Make-Whole Term that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Make-Whole Term.
"Comparable Treasury Price" means, with respect to any
redemption date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third business day preceding such redemption date, as set forth in the
daily statistical release published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotation for U.S. Government Securities" (or
any successor release) or (ii) if such release is not published or does not
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 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
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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.
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.
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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 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.
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
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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.
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
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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 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;
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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 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.
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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 outstanding
shares of the Old Preferred Shares, 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 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
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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
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 compliance with the One Hundred Persons Test.
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
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cause the Company to fail to qualify as a REIT (the "Excess Shares"), will
automatically be transferred, by operation of law, to a trustee in trust for the
exclusive benefit of a charity to be named by the Company as of the day prior to
the day the prohibited transfer took place. Any distributions paid with respect
to such Excess Shares prior to the discovery of the prohibited transfer or
ownership are to be repaid by the original transferee to the Company and by the
Company to the trustee; subject to applicable law, any vote of the Excess Shares
while the Excess Shares were held by the original transferee prior to the
Company's discovery of the prohibited transfer shall be void and the original
transferee shall be deemed to have given its proxy to the trustee. In
liquidation, the original transferee's ratable share of the Company's assets
would be limited to the price paid by the original transferee for the Excess
Shares or, if no value was given, the price per share equal to the closing
market price on the date of the purported transfer. The trustee of the trust
shall promptly sell the Excess Shares to any person whose ownership thereof is
not prohibited, whereupon the interest of the trust shall terminate. Proceeds of
such sale shall be paid to the original transferee up to its purchase price (or,
if the original transferee did not purchase the shares, the value on the date of
the purported transfer) and any remaining proceeds shall be paid to the
beneficiary of the trust.
The constructive ownership rules of the Code are complex and
may cause Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by a
particular individual or entity. As a result, the acquisition or ownership of
less than 5% of a class 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.
Super-Majority 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
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Interested Stockholder are prohibited for five years after the most recent date
on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be (i) approved by the board of
directors of such corporation and (ii) approved by the affirmative vote of at
least (a) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the corporation and (b) two-thirds of the votes entitled to be cast by
holders of voting shares other than voting shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the statute) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Bank beneficially
owns more than 10% of the Company's voting shares and would, therefore, together
with its affiliates, be subject to the business combination provision of the
MGCL. However, pursuant to the statute, the Company has exempted any business
combinations involving the Bank and any present or future affiliate thereof and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between any of them and the Company. As
a result, the Bank and any present or future affiliate thereof may be able to
enter into business combinations with the Company that may not be in the best
interest of its stockholders without compliance by the Company with the
super-majority vote requirements and the other provisions of the statute.
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.
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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.
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.
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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 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).
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States federal
income tax considerations with respect to the Offer is for general information
only and is not tax advice. The discussion set forth below, to the extent that
it constitutes a summary of legal matters or legal conclusions, has been
reviewed by Shearman & Sterling, and it is such firm's opinion that such
discussion is accurate in all material respects. In rendering such opinion,
Shearman & Sterling has relied on Desjardins Ducharme Stein Monast, with respect
to certain matters of Quebec law, Osler Hoskin & Harcourt, with respect to
certain matters of Ontario law, and Conyers Dill & Pearman, with respect to
certain matters of Bermuda law. The discussion below is based on the Code,
existing and proposed Treasury Regulations issued thereunder, and administrative
and judicial interpretations thereof, all as of the date hereof and all of which
are subject to change, possibly with retroactive effect. The discussion below
does not address all aspects of taxation that may be relevant in the particular
circumstances of each stockholder or to certain types of stockholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers persons that hold stock in the Company other than as a capital
asset, foreign corporations and persons who are not citizens or residents of the
United States, except to the extent discussed) subject to special treatment
under the United States federal income tax laws.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH
BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE
DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF OWNERSHIP
AND DISPOSITION OF SERIES A PREFERRED SHARES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER 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."
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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:
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 meet the 100 person
ownership requirement for REIT status.
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 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
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disposition of Qualified REIT Real Estate Assets or "qualified
temporary investment income" (i.e., income derived from "new capital"
within one year of the receipt of such capital) (the "75% Gross Income
Test"); and
(b) at least 95% of the Company's gross income must consist of
income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain
interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business (the "95% Gross Income
Test").
The Company intends to maintain its REIT status by carefully
monitoring its income, including income from sales of Mortgage Assets, to comply
with the REIT Gross Income Tests. Under certain circumstances, such as an
unanticipated decrease in the qualifying income of the Company, which may result
in the Company's nonqualifying income exceeding 5% of its gross income, the
Company may be unable to comply with certain of the REIT Gross Income Tests. See
"Taxation of the Company" for a discussion of the tax consequences of a failure
to comply with the REIT Gross Income Tests.
Distribution Requirement
The Company must generally distribute dividends (other than
capital gain dividends) to its stockholders in an amount at least equal to (A)
the sum of (i) 95% of the Company's REIT taxable income (which is defined
generally as the taxable income of the Company computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular dividend payment after such declaration.
The Company intends to monitor on an ongoing basis its
compliance with the REIT requirements described above. In order to maintain its
REIT status, the Company will be required to limit the types of assets that it
might otherwise acquire, or hold certain assets at times when it might otherwise
have determined that the sale or other disposition of such assets would be
desirable.
Taxation of the Company
In any year in which the Company qualifies as a REIT, the
Company will generally not be subject to United States federal income tax on
that portion of its REIT taxable income or capital gain which is distributed to
its stockholders. The Company will, however, be subject to United States federal
income tax at normal corporate income tax rates upon any undistributed REIT
taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may
be subject to tax in certain circumstances. If the Company fails to satisfy
either the 75% Gross Income Test or the 95% Gross Income Test, but nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will generally be subject to a 100% tax on the greater of the amount by
which the Company fails either the 75% Gross Income Test or the 95% Gross Income
Test (multiplied by a fraction intended to reflect the Company's profitability).
The Company will also be subject to a tax of 100% on net income derived from any
"prohibited 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
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subject to a 4% United States federal excise tax on the excess of such required
distribution over the amounts actually distributed during the year. The Company
may also be subject to the corporate alternative minimum tax, as well as other
taxes in certain situations not presently contemplated.
If the Company fails to qualify as a REIT in any taxable year
and certain relieving provisions of the Code do not apply, the Company would be
subject to United States federal income tax (including any applicable
alternative minimum tax) in the same manner as a regular, domestic corporation.
Distributions to stockholders in any year in which the Company fails to qualify
as a REIT would not be deductible by the Company and would generally not be
required to be made under the Code. Further, unless entitled to relief under
certain provisions of the Code, the Company would be disqualified from
re-electing REIT status for the four taxable years following the year during
which it became disqualified.
Tax Treatment of Automatic Exchange
Upon the occurrence of an Exchange Event, the outstanding
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.
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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 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.
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State and Local Taxes
The Company and its stockholders may be subject to state or
local taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the United States federal income tax
consequences discussed above. Consequently, prospective holders of 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.
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
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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 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
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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.
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.
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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 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 (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,
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
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"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 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.
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In addition, if the Bank, or in certain circumstances an
obligor with respect to a Mortgage Asset or other debt instrument held by the
Company, is a Party-in-Interest or Disqualified Person with respect to an
investing Plan, such Plan's investment could be deemed to constitute a
transaction prohibited under Title I of ERISA or Section 4975 of the Code (e.g.,
the extension of credit or sale of property between a Plan and a
Party-in-Interest or Disqualified Person). Such transactions may, however, be
subject to a statutory or administrative exemption such as Prohibited
Transaction Class Exemption ("PTCE") 90-1, which exempts certain transactions
involving insurance company pooled separate accounts; PTCE 95-60, which exempts
certain transactions involving insurance company general accounts; PTCE 91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager"; and PTCE 96-23, which exempts certain
transactions effected on behalf of a Plan by an "in-house asset manager"; or
pursuant to any other available exemption. Such exemptions may not, however,
apply to all of the transactions that could be deemed prohibited transactions in
connection with such Plan's investment.
Each 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.
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As of January __, 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.
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
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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.
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 300,000
shares of its New Preferred Shares for up to all of its outstanding Old
Preferred Shares 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.
hypothecation loans: secured by the pledge of mortgages as
security therefor.
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, in the aggregate, 12,101
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.
69
<PAGE>
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.
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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<PAGE>
Old Preferred Shares: 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, par value US$.01 per share, of NB Capital Corporation issued on the
Issue Date.
One Hundred Persons Test: To qualify as a REIT under the Code the stock
of a company must be beneficially owned by 100 or more persons during at least
335 days of a taxable year (other than the first year) or during a proportionate
part of a shorter taxable year.
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 January __, 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 Amendment No. 2 to Form S-4/Amendment No. 1 to Form F-9/Form S-1 dated
January __, 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
72
<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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<PAGE>
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.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements
Independent Auditors' Report...........................................F-2
Balance Sheet..........................................................F-3
Unaudited Interim Financial Statements
Balance Sheet..........................................................F-6
Statement of Income....................................................F-7
Statement of Retained Earnings (Deficit)...............................F-8
Statement of Changes in Financial Position.............................F-9
F-1
<PAGE>
Deloitte & Touche, S.E.N.C.
Chartered Accountants
1 Place Ville-Marie Telephone: (514) 393-7115
Suite 3000 Facsimile: (514) 393-7140
Montreal QC H3B 4T9
Independent Auditors' Report
To the Board of Directors and Stockholder of
NB Capital Corporation
We have audited the accompanying balance sheet of NB Capital Corporation as of
August 20, 1997. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company as of August 20, 1997 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE
Chartered Accountants
Montreal, Canada
January 7, 1998
F-2
<PAGE>
NB CAPITAL CORPORATION
Balance Sheet
as of August 20, 1997
(in U.S. dollars)
Assets
Promissory note $ 1,000
Stockholder's equity (Note 2)
Common Stock, US$0.01 par value per share;
1,000 shares authorized, $ 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
F-4
<PAGE>
Preferred Shares issued through the Offering Circular dated
August 22, 1997 referred to in Note 2b) above.
F-5
<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-6
<PAGE>
NB CAPITAL CORPORATION
BALANCE SHEET
as at September 30, 1997
(in dollars)
(Unaudited)
Assets
Cash $ 3,667,213
Hypothecation note with affiliated company 473,681,802
Accrued interest hypothecation note 3,042,708
-----------------
$ 480,391,723
Liabilities
Other liabilities
Accrued dividends $ 1,875,000
Income tax payable 471,307 $2,346,307
---------------
Equity
Preferred stock 3,000
Common stock 1
Contribution Surplus 477,335,453
Retained Earnings 706,962
----------------
$ 480,391,723
See accompanying Notes to Unaudited Interim Financial Statement.
F-7
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF INCOME
for the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
Interest income
Hypothecation note $ 3,042,708
Bank interest 10,561
--------------
TOTAL $ 3,053,269
==============
Expenses
Other fees(1) 0
Income before income taxes 3,053,269
Income taxes 1,221,307
NET INCOME $ 1,831,962
==============
See accompanying Notes to Unaudited Interim Financial Statement.
F-8
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF RETAINED EARNINGS
For the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
Beginning of the period $ --
Net income 1,831,962
Dividends on preferred notes net of $750,000 income taxes (1,125,000)
------------
End of the period $ 706,962
=============
See accompanying Notes to Unaudited Interim Financial Statement.
F-9
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF CHANGES IN FINANCIAL POSITION
For the period from August 20, 1997 to September 30, 1997
(in dollars)
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,831,962
Items note affecting cash:
accrued interest receivable (3,042,708)
accrued liabilities 2,346,307
income taxes charged to retained earnings 750,000
----------------
$ 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 $ 3,667,213
----------------
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-10
<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, no expenses had been paid directly
by the Bank on bahalf of the Company. The Bank expects to pay certain
expenses (comprised mainly of administration fees, legal and audit
cost(s) on behalf of the Company. As of September 30, 1997, information
regarding such expenses was not available and, accordingly, accruals
not determinable. All such expenses will be properly reflected in the
December 31, 1997 financial statements of the Company. With respect to
an allocation of compensation expense by the Bank to the Company in
respect of employees of the Bank serving as officers and employees of
the Company, no such allocation is required since all expenses are
accounted for through the C$50,000, advisory fee charged the Company by
the Bank for advisory services.
F-11
<PAGE>
AMENDMENT NO. 2 TO
FORM S-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Indemnification under Maryland Law and under the Company's
Charter and Bylaws
The Maryland General Corporation Law ("MGCL") permits a
Maryland corporation to include in its charter a provision limiting the
liability of the corporation's directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. The Charter contains such a provision which
eliminates such liability to the maximum extent permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of the Company. The Bylaws of the
Company (the "Bylaws") obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary
II-1
<PAGE>
for indemnification by the Company and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Item 21. Exhibits and Financial Statement Schedules
3(i) -- Articles of Incorporation and Articles of Amendment and
Restatement of NB Capital Corporation*
3(ii) -- By-Laws of NB Capital Corporation*
4.1 -- Registration Rights Agreement dated as of September 3, 1997
by and among NB Capital Corporation, National Bank of Canada
and Merrill Lynch, Pierce, Fenner & Smith
Incorporated*
5.1 -- Opinion letter of Ballard, Spahr, Andrews & Ingersoll as
Special Counsel to NB Capital Corporation and its Consent*
8.1 -- Tax Opinion of Shearman & Sterling and its Consent
10.1 -- Advisory Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Capital Corporation*
10.2 -- Servicing Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Finance, Ltd.**
10.3 -- Loan Agreement dated as of September 3, 1997 between
NB Finance, Ltd. and NB Capital Corporation*
10.4 -- Custodial Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Capital Corporation*
23.1 -- Consent of Deloitte & Touche
23.2 -- Consent of Desjardins Ducharme Stein Monast, Special Counsel
to the Bank**
23.3 -- Consent of Conyers Dill & Pearman, Special Bermuda Counsel
to the Company**
23.4 -- Consent of Osler, Hoskin & Harcourt, Canadian Counsel to the
Initial Purchaser**
99.1 -- Letter of Transmittal
99.2 -- Notice of Guaranteed Delivery
99.3 -- Opinion letter of Desjardins Ducharme Stein Monast**
99.4 -- Opinion letter of Conyers Dill & Pearman**
99.5 -- Opinion letter of Osler, Hoskin & Harcourt**
- ----------
* Previously filed.
** To be filed by amendment.
II-2
<PAGE>
Item 22. Undertakings
(a) The undersigned hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of
this section do not apply if the registration statement is on
Form S-3, Form S-8 or Form F-3, and the information required
to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(4) If the registrant is a foreign private issuer, to
file a post-effective amendment to the registration
statement to include any financial statements
required by ss. 210.3-19 of this chapter at the start
of any delayed offering or throughout a continuous
offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Act
need not be furnished, provided that the registrant
includes in the prospectus, by means of a
post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other
information necessary to ensure that all other
information in the prospectus is at least as current
as the date of those financial statements.
Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective
amendment need not be filed to include financial
statements and
II-3
<PAGE>
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>
AMENDMENT NO. 1 TO
FORM F-9
PART II
INFORMATION NOT REQUIRED
TO BE DELIVERED TO OFFEREES OR PURCHASERS
Indemnification of Directors and Officers
Under the Bank Act, the Bank may indemnify a present or former
director or officer or another person who acts or acted at the Bank's request as
a director or officer of another entity of which the Bank is or was a
shareholder or creditor, and his heirs or personal representatives, against all
costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by the person in respect of any civil,
criminal or administrative action or proceeding to which he is made a party by
reason of such person's position with the Bank or such other corporation, except
for actions or proceedings brought by or on behalf of the Bank or such entity,
to procure a judgment in its favour, and provided that the director or officer
acted honestly and in good faith with a view to the best interests of the Bank
and, in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, had reasonable grounds for believing that the
person's conduct was lawful. Such indemnification may be made in connection with
a derivative action only with court approval. Such a director or officer or
person is entitled to indemnification from the Bank as a matter of right if such
person was substantially successful on the merits and fulfilled the conditions
set forth above.
In accordance with the Bank Act, the by-laws of the Bank
provide that the Bank shall indemnify out of its funds a director or officer, a
former director or officer, or a person who acts or acted at the Bank's request
as a director or officer of an entity of which the Bank is or was a shareholder
or creditor and the assigns, heirs and personal representatives of such person,
from and against all costs, charges and expenses, including amounts paid to
settle an action or satisfy a judgment reasonably incurred by the person in
respect of any civil, criminal or administrative action or proceeding to which
the person is made a party by reason of being or having been director or officer
of the Bank or such entity, except for actions or proceedings brought by or on
behalf of the Bank or such entity, to procure a judgment in its favour, if the
person acted honestly and in good faith with a view to the best interest of the
Bank and in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for believing that
his conduct was lawful. Such indemnification may be made in connection with a
derivative action only with court approval. Such person is also entitled to
indemnification from the Bank for all of its costs, charges and expenses
reasonably incurred during or as a result of business as a director or officer
of the Bank or of the entity. No indemnification is available, however, for
costs, charges and expenses resulting from the person's own fault, negligence or
willful omission.
A policy of directors and officers' liability insurance is
maintained by the Bank which insures directors and officers of the Bank and its
subsidiaries for losses as a result of claims based upon the acts or omissions
as directors and officers of the Bank and also reimburses the Bank for payments
made pursuant to the indemnity provisions under the Bank Act.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Bank pursuant to the foregoing provisions, the Bank has been
informed that in the opinion of the U.S. Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
II-1
<PAGE>
Exhibits.
Exhibit
Number
- -------
4.1 Annual Report for the year ended October 31, 1997.*
4.2 Annual Information Form dated December 23, 1997 (included in Exhibit
4.1 hereto).*
4.3 Management's Discussion and Analysis of Operating Results and Financial
Condition dated December 23, 1997 (included in Exhibit 4.1 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 hereto).*
4.5 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**
- -----------
* As filed with the Quebec Securities Commission.
** Previously filed
II-2
<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 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 -- Letter of Transmittal
99.2 -- Notice of Guaranteed Delivery
99.3 -- Opinion letter of Desjardin Ducharme Stein Monast**
99.4 -- Opinion letter of Conyers Dill & Pearman**
99.5 -- Opinion letter of Osler, Hoskin & Harcourt**
- ---------------
* Filed or previously filed on a Registration Statement on Form S-4 of
which this Registration Statement constitutes a part.
** To be filed by amendment.
II-2
<PAGE>
Item 22. Undertakings
The undersigned hereby undertakes:
(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.
II-3
<PAGE>
Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective
amendment need not be filed to include financial
statements and information required by Section
10(a)(3) of the Act or ss. 210.3-19 of this chapter
if such financial statements and information are
contained in periodic reports filed with or furnished
to the Commission by the registrant pursuant to
section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by
reference in the Form F-3.
(b) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to provide to
the underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each
purchaser.
(d) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
(e) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was
not the subject of and included in the registration statement when it
became effective.
II-4
<PAGE>
AMENDMENT NO. 1 TO
FORM F-9
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
Item 1. Undertaking
The registrant undertakes to make available, in person or by
telephone, representatives to respond to inquiries made by the Commission staff,
and to furnish promptly, when requested to do so by the Commission staff,
information relating to the securities registered pursuant to Form F-9 or to
transactions in said securities.
Item 2. Consent to Service of Process.
The registrant is concurrently filing with the Commission a
written irrevocable consent and power of attorney on Form F-X.
Any change to the name or address of the agent for service of
the F-X referencing the file number of the relevant registration statement.
III-1
<PAGE>
AMENDMENT NO. 2 TO
FORM S-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on January 27, 1998.
NB CAPITAL CORPORATION
By: /s/ Roger Smock
---------------------------
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.
Signature Title Date
--------- ----- ----
/s/ Roger Smock
- -------------------------- Chairman of the Board; Chief
Roger Smock Executive Officer; President and
Director January 27, 1998
(Principal Executive Officer)
/s/ Tom Doss
- -------------------------- Chief Financial Officer, January 27, 1998
Tom Doss Treasurer and Director
(Principal Financial Officer
and Principal Accounting Director)
/s/ John Richter
- -------------------------- Vice President January 27, 1998
John Richter
/s/ Michael Hanley
- -------------------------- Director January 27, 1998
Michael Hanley
/s/ Alain Michel
- -------------------------- Director January 27, 1998
Alain Michel
<PAGE>
AMENDMENT NO. 1 TO
FORM F-9
SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of
1993 (the "Securities Act", as amended), the registrant certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form F-9 and has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Montreal,
Country of Canada, on January 27, 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.
Signature Title Date
--------- ----- ----
* Chairman of the Board and January 27, 1998
- ----------------------------- Chief Executive Officer and
Andre Berard Director
(Principal Executive Officer)
* Director January 27, 1998
- -----------------------------
Leon Courville
* Director January 27, 1998
- -----------------------------
Maurice J. Closs
* Director January 27, 1998
- -----------------------------
Gerard Coulombe
* Director January 27, 1998
- -----------------------------
Shirley A. Dawe
<PAGE>
* Director January 27, 1998
- -----------------------------
Jean Douville
* Director January 27, 1998
- -----------------------------
Donald M. Green
* Director January 27, 1998
- -----------------------------
Suzanne Leclair
* Director January 27, 1998
- -----------------------------
Gaston Malette
* Director January 27, 1998
- -----------------------------
Leonce Montambault
* Director January 27, 1998
- -----------------------------
J.-Robert Ouimet
* Director January 27, 1998
- -----------------------------
Robert Parizeau
* Director January 27, 1998
- -----------------------------
Lino Saputo
* Senior Executive January 27, 1998
- ----------------------------- Vice-President,
Jean Turmel Treasury, Brokerage and
Corporate Banking
(Principal Financial Officer)
* Vice-President and Chief January 27, 1998
- ----------------------------- Accounting Officer,
Jean Dagenais (Principal Accounting Officer)
* By: /s/ Francoise Bureau
------------------------
As Attorney-in-Fact
<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 27th day
of January, 1998.
By: NB Capital Corporation
Authorized Representative in the United States
125 West 55th Street
New York, New York 10019
By: /s/ Roger Smock
----------------------------------
Name: Roger Smock
Title: Chairman of the Board;
Chief Executive Officer;
President
<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 January 27, 1998.
NB CAPITAL CORPORATION
By: /s/ Roger Smock
---------------------------------
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.
Signature Title Date
--------- ----- ----
/s/ Roger Smock
- -------------------------- Chairman of the Board,Chief
Roger Smock Executive Officer,President and
Director January 27, 1998
(Principal Executive Officer)
/s/ Tom Doss
- -------------------------- Chief Financial Officer, January 27, 1998
Tom Doss Treasurer and Director
(Principal Financial Officer
and Principal Accounting Director)
/s/ John Richter
- -------------------------- Vice President and Director January 27, 1998
John Richter
/s/ Michael Hanley
- -------------------------- Director January 27, 1998
Michael Hanley
/s/ Alain Michel
- -------------------------- Director January 27, 1998
Alain Michel
<PAGE>
AMENDMENT NO. 2 TO
FORM S-4
EXHIBITS
Exhibit Page
Number Description Number
- ------ ----------- ------
3(i) Articles of Incorporation and Articles of Amendment and
Restatement of NB Capital Corporation
3(ii) By-Laws of NB Capital Corporation*
4.1 Registration Rights Agreement dated as of September 3, 1997
by and among NB Capital Corporation, National Bank of Canada
and Merrill Lynch, Pierce, Fenner & Smith Incorporated*
5.1 Opinion letter of Ballard, Spahr, Andrews & Ingersoll as
Special Counsel to NB Capital Corporation and its Consent*
8.1 Tax Opinion of Shearman & Sterling and its Consent
10.1 Advisory Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Capital Corporation*
10.2 Servicing Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Finance, Ltd.**
10.3 Loan Agreement dated as of September 3, 1997 between NB
Finance, Ltd. and NB Capital Corporation*
10.4 Custodial Agreement dated as of September 3, 1997 between
National Bank of Canada and NB Capital Corporation*
23.1 Consent of Deloitte & Touche
23.2 Consent of Desjardins Ducharme Stein Monast, Special Counsel
to the Bank**
23.3 Consent of Conyers Dill & Pearman, Special Bermuda Counsel to
the Company**
23.4 Consent of Osler, Hoskin & Harcourt, Canadian Counsel to the
Initial Purchaser**
99.1 Letter of Transmittal
99.2 Notice of Guaranteed Delivery
99.3 Opinion letter of Desjardins Ducharme Stein Monast**
99.4 Opinion letter of Conyers Dill & Pearman**
99.5 Opinion letter of Osler, Hoskin & Harcourt**
- -----------------------
* Previously filed.
** To be filed by amendment.
<PAGE>
AMENDMENT NO. 1 TO
FORM F-9
EXHIBITS
Exhibit Page
Number Description Number
- ------ ----------- ------
4.1 Annual Report for the year ended October 31, 1997.*
4.2 Annual Information Form dated December 23, 1997 (included in
Exhibit 4.1 hereto).*
4.3 Management's Discussion and Analysis of Operating Results and
Financial Condition dated December 23, 1997 (included in
Exhibit 4.1 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 hereto).*
4.5 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)**
=9.1 Form F-X of National Bank of Canada**
- ------------------------
* As filed with the Quebec Securities Commission.
** Previously filed
<PAGE>
FORM S-1
EXHIBITS
Exhibit Page
Number Description Number
- ------ ----------- ------
3(i) Articles of Incorporation and Articles of Amendment of and
Restatement 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 Letter of Transmittal.
99.2 Notice of Guaranteed Delivery.
99.3 Opinion letter of Desjardin Ducharme Stein Monast.**
99.4 Opinion letter of Conyers Dill & Pearman.**
99.5 Opinion letter of Osler, Hoskin & Harcourt.**
- ------------------------
* Previously filed with Registration Statement on Form S-4.
** To be filed by amendment.
LETTER OF TRANSMITTAL
for
8.35% Noncumulative Exchangeable Preferred Stock, Series A
of
NB CAPITAL CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON __________,
1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY NB CAPITAL CORPORATION.
EXCHANGE AGENT:
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C>
By Hand or Overnight Facsimile Transmissions: By Registered or Certified Mail:
Delivery: Eligible Institutions Only
The Bank of Nova Scotia Trust (212) 225-5436 The Bank of Nova Scotia Trust
Company of New York Company of New York
One Liberty Plaza One Liberty Plaza
New York, New York 10006 New York, New York 10006
Attention: George Timmes Attention: George Timmes
</TABLE>
To Confirm by Telephone or for
Information Call:
(212) 225-5422
Delivery of this Letter of Transmittal to an address other
than as set forth above or transmission via a facsimile transmission to a number
other than as set forth above will not constitute a valid delivery.
The undersigned acknowledges receipt of the Prospectus dated
January __, 1998 (the "Prospectus") of NB Capital Corporation (the "Company")
and the National Bank of Canada (the "Bank"), and this Letter of Transmittal
(the "Letter of Transmittal"), which together describe the Company's offer (the
"Exchange Offer") to exchange $1,000 liquidation preference of its 8.35%
Noncumulative Preferred Stock, Series A, par value U.S.$.01 per share (the "New
Preferred Shares") which have been registered under the Securities Act of 1933,
as amended (the "Securities Act") for each $1,000 liquidation preference of its
8.35%
<PAGE>
2
Noncumulative Exchangeable Preferred Stock, Series A issued on September 3, 1997
(the "Old Preferred Shares"). The terms of the New Preferred Shares are
identical in all material respects (including interest rate and maturity) to the
terms of the Old Preferred Shares for which they may be exchanged pursuant to
the Exchange Offer, except that the New Preferred Shares are freely transferable
by holders thereof (except as provided herein or in the Prospectus).
The undersigned has checked the appropriate boxes below and
signed this Letter of Transmittal to indicate the action the undersigned desires
to take with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY BEFORE
CHECKING ANY BOX BELOW.
<PAGE>
3
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Preferred Shares to which this Letter of
Transmittal relates. If the space provided below is inadequate, the Certificate
Numbers and the Number of Shares should be listed on a separate signed schedule
affixed hereto.
DESCRIPTION OF OLD PREFERRED SHARES TENDERED HEREWITH
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Liquidation Preference
Name(s) and Address(es) Aggregate Liquidation of Old Preferred
of Registered Holder(s) Certificate Preference of Shares
(Please fill in) Number(s)* Old Preferred Shares* Tendered**
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Need not be completed by book-entry holders.
** Need not be completed if tendering for exchange all Old Preferred
Shared delivered to the Exchange Agent. All Old Preferred Shares
delivered shall be deemed tendered unless a lesser number is specified
in this column. See instruction 2.
This Letter of Transmittal is to be used either if
certificates representing Old Preferred Shares are to be forwarded herewith or
if delivery of Old Preferred Shares is to be made by book-entry transfer to an
account maintained by the Exchange Agent at The Depository Trust Company
("DTC"), pursuant to the procedures set forth in "The Exchange Offer--Procedures
for Tendering Old Preferred Shares" in the Prospectus. Delivery of documents to
the book-entry transfer facility does not constitute delivery to the Exchange
Agent.
Unless the context requires otherwise, the term "holder" for
purposes of this Letter of Transmittal means any person in whose name Old
Preferred Shares are registered or any other person who has obtained a properly
completed stock power from the registered holder or any person whose Old
Preferred Shares are held of record by DTC.
<PAGE>
4
Holders whose Old Preferred Shares are not immediately
available or who cannot deliver their Old Preferred Shares and all other
documents required hereby to the Exchange Agent on or prior to the Expiration
Date must tender their Old Preferred Shares according to the guaranteed delivery
procedure set forth in the Prospectus under the caption "The Exchange
Offer--Procedures for Tendering Old Preferred Shares."
- ---- CHECK HERE IF TENDERED OLD PREFERRED SHARES ARE BEING
DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT
MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
----------------------------------------
The Depository Trust Company
Account Number
-------------------------------------------------------
Transaction Code Number
----------------------------------------------
- ---- CHECK HERE IF TENDERED OLD PREFERRED SHARES ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND
COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
------------------------------------------
Name of Eligible Institution that Guaranteed Delivery
----------------
Date of Execution of Notice of Guaranteed Delivery
-------------------
If Delivered by Book-Entry Transfer:
Account Number
-------------------------------------------------------
- ---- CHECK HERE IF NEW PREFERRED SHARES ARE TO BE DELIVERED TO
PERSON OTHER THAN PERSON SIGNING THE LETTER OF TRANSMITTAL:
Name
----------------------------------------------------------------
(Please Print)
Address
--------------------------------------------------------------
(Including Zip Code)
- ---- CHECK HERE IF NEW PREFERRED SHARES ARE TO BE DELIVERED TO
ADDRESS DIFFERENT FROM THAT LISTED ELSEWHERE IN THIS LETTER
OF TRANSMITTAL:
Address
--------------------------------------------------------------
(Including Zip Code)
- ---- CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THIS PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO:
Name
-----------------------------------------------------------------
Address
--------------------------------------------------------------
<PAGE>
5
If the undersigned, or the person receiving such New Preferred
Shares, whether or not such person is the undersigned, is not a broker-dealer,
the undersigned represents that neither it nor such person is engaged in, and
does not intend to engage in, a distribution of New Preferred Shares. If the
undersigned, or the person receiving such New Preferred Shares, whether or not
such person is the undersigned, is a broker-dealer that will receive New
Preferred Shares for its own account in exchange for Old Preferred Shares that
were acquired as a result of market-making activities or other trading
activities, the undersigned acknowledges that it or such person, as the case may
be, will deliver a prospectus in connection with any resale of such New
Preferred Shares; however, by so acknowledging and by delivering a prospectus,
neither the undersigned nor such person will be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Any holder who is an
"affiliate" of the Company or who has an arrangement or understanding with
respect to the distribution of the New Preferred Shares to be acquired pursuant
to the Exchange Offer, or any broker-dealer who purchased Old Preferred Shares
from the Company to resell pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act, must comply with the
registration and prospectus delivery requirements under the Securities Act.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange
Offer, the undersigned hereby tenders to the Company the above described
aggregate liquidation preference of the Old Preferred Shares indicated above in
exchange for a like aggregate liquidation preference of the Old Preferred
Shares. Subject to, and effective upon, the acceptance for exchange of the Old
Preferred Shares tendered herewith, the undersigned hereby exchanges, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Preferred Shares. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that said Exchange
Agent acts as the agent of the Company, in connection with the Exchange Offer)
to cause the Old Preferred Shares to be assigned, transferred and exchanged. The
undersigned represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Preferred Shares and to acquire
New Preferred Shares issuable upon the exchange of such tendered Old Preferred
Shares, and that, when the same are accepted for exchange, the Company will
acquire good and unencumbered title to the tendered Old Preferred Shares, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim. The undersigned also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the exchange, assignment and
transfer of tendered Old Preferred Shares or transfer ownership of such Old
Preferred Shares on the account books maintained by the book-entry transfer
facility. The undersigned further agrees that acceptance of any and all validly
tendered Old Preferred Shares by the Company and the issuance of New Preferred
Shares in exchange therefor shall constitute performance in full by the Company
of its obligations
<PAGE>
6
under the Registration Rights Agreement (as defined in the Prospectus) and that
the Company shall have no further obligations or liabilities thereunder except
as provided in the first paragraph of Section 2 of said agreement.
The Exchange Offer is subject to certain conditions as set
forth in the Prospectus under the caption "The Exchange Offer--Certain
Conditions to the Exchange Offer." The undersigned recognizes that as a result
of these conditions (which may be waived, in whole or in part, by the Company),
as more particularly set forth in the Prospectus, the Company may not be
required to exchange any of the Old Preferred Shares tendered hereby and, in
such event, the Old Preferred Shares not exchanged will be returned to the
undersigned at the address shown above. In addition, the Company may amend the
Exchange Offer at any time prior to the Expiration Date if any of the conditions
set forth under "The Exchange Offer--Certain Conditions to the Exchange Offer"
occur.
By tendering, each holder represents to the Company that,
among other things, (a) the New Preferred Shares acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such New Preferred Shares, whether or not such person is the
holder, (b) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Preferred Shares and (c) neither the holder nor any such other person is an
"affiliate" of the Company as defined under Rule 405 of the Securities Act, or
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. Any holder
of Old Preferred Shares using the Exchange Offer to participate in a
distribution of the New Preferred Shares (i) cannot rely on the position of the
staff of the Securities and Exchange Commission (the "Commission") enunciated in
its interpretive letter with respect to Exxon Capital Holdings Corporation
(available April 13, 1989) or similar letters and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
If the undersigned, or the person receiving such New Preferred
Shares, whether or not such person is the undersigned, is not a broker-dealer,
the undersigned represents that neither it nor such person is engaged in, and
does not intend to engage in, a distribution of New Preferred Shares. If the
undersigned, or the person receiving such New Preferred Shares, whether or not
such person is the undersigned, is a broker-dealer that will receive New
Preferred Shares for its own account in exchange for Old Preferred Shares that
were acquired as a result of market-making activities or other trading
activities, the undersigned acknowledges that it or such person, as the case may
be, will deliver a prospectus in completion with any resale of such New
Preferred Shares; however, by so acknowledging and by delivering a prospectus,
neither the undersigned nor such person will be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, legal representatives,
successors, assigns, executors and administrators of the undersigned. Tendered
Old Preferred Shares may be withdrawn at any
<PAGE>
7
time prior to the Expiration Date in accordance with the terms of this Letter of
Transmittal. See Instruction 2.
Certificates for all New Preferred Shares delivered in
exchange for tendered Old Preferred Shares and any Old Preferred Shares
delivered herewith but not exchanged, and in each case registered in the name of
the undersigned, shall be delivered to the undersigned at the address shown
below the signature of the undersigned.
TENDERING HOLDER(S) SIGN HERE
(Complete accompanying substitute Form W-9)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature(s) of Holder(s)
Dated
--------------------
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) for Old Preferred Shares. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, please set forth the
full title of such person.) See Instruction 3.
Name(s)
------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please Print)
Capacity (full title)
---------------------------------------------------------
Address
----------------------------------------------------------------------
(Including Zip Code)
Area Code and Telephone No.
---------------------------------------------------
Taxpayer Identification No.
---------------------------------------------------
GUARANTEE OF SIGNATURE(S) (If
Required See Instruction 3)
Authorized Signature
----------------------------------------------------------
Name
--------------------------------------------------------------------------
Title
-------------------------------------------------------------------------
Address
-----------------------------------------------------------------------
Name of Firm
------------------------------------------------------------------
Area Code and Telephone No.
---------------------------------------------------
Dated
-------------------------------------------------------------------------
<PAGE>
8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Certificates.
A holder of Old Preferred Shares may tender the same by (i)
properly completing and signing this Letter of Transmittal or a facsimile hereof
(all references in the Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Old Preferred Shares being tendered
and any required signature guarantees and any other documents required by this
Letter of Transmittal, to the Exchange Agent at its address set forth above on
or prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
The method of delivery of this Letter of Transmittal, the Old
Preferred Shares and any other required documents is at the election and risk of
the holder, and except as otherwise provided below, the delivery will be deemed
made only when actually received or confirmed by the Exchange Agent. If such
delivery is by mail, it is suggested that registered mail with return receipt
requested, properly insured, be used. In all cases sufficient time should be
allowed to permit timely delivery. No Old Preferred Shares or Letters of
Transmittal should be sent to the Company.
If tendered Old Preferred Shares are registered in the name of
the signer of the Letter of Transmittal and the New Preferred Shares to be
issued in exchange therefor are to be issued (and any untendered Old Preferred
Shares are to be reissued) in the name of the registered holder (which term, for
the purposes described herein, shall include any participant in The Depository
Trust Company (also referred to as a "book-entry transfer facility") whose name
appears on a security listing as the owner of Old Preferred Shares), the
signature of such signer need not be guaranteed. In any other case, the tendered
Old Preferred Shares must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Company and duly executed by the registered
holder, and the signature on the endorsement or instrument of transfer must be
guaranteed by a bank, broker, dealer, credit union, savings association,
clearing agency or other institution (each an "Eligible Institution") that is a
member of a recognized signature guarantee medallion program within the meaning
of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. If the
New Preferred Shares and/or Old Preferred Shares not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Preferred Shares, the signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business
days after the date of receipt of this Prospectus to establish accounts with
respect to the Old Preferred Shares at the book-entry transfer facility for the
purpose of facilitating the Exchange Offer,
<PAGE>
9
and subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of Old Preferred Shares by causing such book-entry transfer facility to
transfer such Old Preferred Shares into the Exchange Agent's account with
respect to the Old Preferred Shares in accordance with the book-entry transfer
facility's procedures for such transfer. Although delivery of Old Preferred
Shares may be effected through book-entry transfer into the Exchange Agent's
account at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will
not permit a Letter of Transmittal or Old Preferred Shares to reach the Exchange
Agent before the Expiration Date or the procedure for book-entry transfer cannot
be completed on a timely basis, a tender may be effected if the Exchange Agent
has received on or prior to the Expiration Date, a letter, telegram or facsimile
transmission (receipt confirmed by telephone and an original delivered by
guaranteed overnight courier) from an Eligible Institution setting forth the
name and address of the tendering holder, the names in which the Old Preferred
Shares are registered and, if possible, the certificate numbers of the Old
Preferred Shares to be tendered, and stating that the tender is being made
thereby and guaranteeing that within three business days after the Expiration
Date, the Old Preferred Shares in proper form for transfer (or a confirmation of
book-entry transfer of such Old Preferred Shares into the Exchange Agent's
account at the book-entry transfer facility), will be delivered by such Eligible
Institution together with a properly completed and duly executed Letter of
Transmittal (and any other required documents). Unless Old Preferred Shares
being tendered by the above-described method are deposited with the Exchange
Agent within the time period set forth above (accompanied or preceded by a
properly completed and duly executed Letter of Transmittal and any other
required documents), the Company may, at its option, reject the tender. Copies
of the notice of guaranteed delivery ("Notice of Guaranteed Delivery") which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date
when (i) the tendering holder's properly completed and duly executed Letter of
Transmittal accompanied by the Old Preferred Shares (or a confirmation of
book-entry transfer of such Old Preferred Shares into the Exchange Agent's
account at the book-entry transfer facility) is received by the Exchange Agent,
or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Preferred Shares in exchange
for Old Preferred Shares tendered pursuant to a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Preferred
Shares (or a confirmation of book-entry transfer of such Old Preferred Shares
into the Exchange Agent's account at the book-entry transfer facility).
<PAGE>
10
If the Letter of Transmittal is signed by a person or persons
other than the registered holder or holders of Old Preferred Shares, such Old
Preferred Shares must be endorsed or accompanied by appropriate powers of
attorney in a form satisfactory to the Company, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old
Preferred Shares.
No alternative, conditional, irregular or contingent tenders
will be accepted. All tendering holders, by execution of this Letter of
Transmittal (or facsimile thereof), shall waive any right to receive notice of
the acceptance of the Old Preferred Shares for exchange.
2. Partial Tenders; Withdrawals.
If less than all of the shares of Old Preferred Shares
evidenced by a submitted certificate are tendered, the tendering holder should
fill in the liquidation preference of shares of Old Preferred Shares to be
tendered in the box entitled "Number of Shares." A newly issued certificate for
the number of shares of Old Preferred Shares submitted but not tendered will be
sent to such holder as soon as practicable after the Expiration Date. All Old
Preferred Shares delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise clearly indicated.
Tenders of Old Preferred Shares may be withdrawn at any time
prior to the Expiration Date.
For a withdrawal to be effective, a written notice of
withdrawal sent by telegram, facsimile transmission (receipt confirmed by
telephone) or letter must be received by the Exchange Agent at the address set
forth herein prior to the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having tendered the Old Preferred Shares to
be withdrawn (the "Depositor"), (ii) identify the Old Preferred Shares to be
withdrawn (including the certificate number or numbers of such Old Preferred
Shares, (iii) specify the number of shares of Old Preferred Shares to be
withdrawn, (iv) include a statement that such holder is withdrawing its election
to have such Old Preferred Shares exchanged, (v) be signed by the holder in the
same manner as the original signature on the Letter of Transmittal by which such
Old Preferred Shares were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Transfer Agent under the Transfer Agent and Registrar
Agreement register the transfer of such Old Preferred Shares into the name of
the person withdrawing the tender and (vi) specify the name in which any such
Old Preferred Shares are to be registered, if different from that of the
Depositor. The Exchange Agent will return the properly withdrawn Old Preferred
Shares promptly following receipt of notice of withdrawal. If Old Preferred
Shares have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at the
book-entry transfer facility to be credited with the withdrawn Old Preferred
Shares or otherwise comply with the book-entry transfer facility procedure. All
questions as to the validity of notices of withdrawals, including time of
receipt, will be determined by the Company and such determination will be final
and binding on all parties.
<PAGE>
11
Any Old Preferred Shares so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer. Any
Old Preferred Shares which have been tendered fox exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Old Preferred Shares tendered by book-entry
transfer into the Exchange Agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described above, such Old
Preferred Shares will be credited to an account with such book-entry transfer
facility specified by the holder) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Withdrawals of tenders
of Old Preferred Shares may not be rescinded; however, properly withdrawn Old
Preferred Shares may be retendered by following one of the procedures described
under the caption "The Exchange Offer--Procedures for Tendering Old Preferred
Shares" in the Prospectus at any time on or prior to the Expiration Date.
3. Signature on this Letter of Transmittal; Written Instruments and
Endorsements; Guarantee of Signatures.
If this Letter of Transmittal is signed by the registered
holder(s) of the Old Preferred Shares tendered hereby, the signature must
correspond with the name(s) as written on the face of the certificates without
alteration, enlargement or any change whatsoever.
If any of the Old Preferred Shares tendered hereby are owned
of record by two or more joint owners, all such owners must sign this Letter of
Transmittal.
If a number of Old Preferred Shares registered in different
names are tendered, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal as there are different
registrations of Old Preferred Shares.
When this Letter of Transmittal is signed by the registered
holder or holders (which term, for the purposes described herein, shall include
the book-entry transfer facility whose name appears on a security listing as the
owner of the Old Preferred Shares) of Old Preferred Shares listed and tendered
hereby, no endorsements of certificates or separate written instruments of
transfer or exchange are required.
If this Letter of Transmittal is signed by a person other than
the registered holder or holder of the Old Preferred Shares listed, such Old
Preferred Shares must be endorsed or accompanied by separate written instruments
of transfer or exchange in form satisfactory to the Company and duly executed by
the registered holder, in either case signed exactly as the name or names of the
registered holder or holders appear(s) on the Old Preferred Shares.
If this Letter of Transmittal, any certificates or separate
written instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity,
<PAGE>
12
such persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority so to act must be
submitted.
Endorsements on certificates or signatures on separate written
instruments of transfer or exchange required by this Instruction 3 must be
guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal need not be
guaranteed by an Eligible Institution, provided the Old Preferred Shares are
tendered: (i) by a registered holder of such Old Preferred Shares, for the
holder of such Old Preferred Shares; or (ii) for the account of an Eligible
Institution.
4. Transfer Taxes.
The Company shall pay all transfer taxes, if any, applicable
to the transfer and exchange of Old Preferred Shares pursuant to the Exchange
Offer. If, however, certificates representing New Preferred Shares or Old
Preferred Shares for shares not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Preferred Shares tendered, or if tendered Old
Preferred Shares are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of Old Preferred Shares pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
Except as provided in this Instruction 4, it will not be
necessary for transfer tax stamps to be affixed to the Old Preferred Shares
listed in this Letter of Transmittal.
5. Waiver of Conditions.
The Company reserves the right to waive in its reasonable
judgment, in whole or in part, any of the conditions to the Exchange Offer set
forth in the Prospectus.
6. Mutilated, Lost, Stolen or Destroyed Old Preferred Shares.
Any holder whose Old Preferred Shares have been mutilated,
lost, stolen or destroyed, should contact the Exchange Agent at the address
indicated above for further instructions.
7. Substitute Form W-9.
Each holder of Old Preferred Shares whose Old Preferred Shares
are accepted for exchange (or other payee) is required to provide a correct
taxpayer identification number
<PAGE>
13
("TIN"), generally the holder's Social Security or federal employer
identification number, and certain other information, on Substitute Form W-9,
which is provided under "Important Tax Information" below, and to certify that
the holder (or other payee) is not subject to backup withholding. Failure to
provide the information on the Substitute Form W-9 may subject the holder (or
other payee) to a $50 penalty imposed by the Internal Revenue Service and 31%
federal income tax backup withholding on payments made in connection with the
New Preferred Shares. The box in Part 3 of the Substitute Form W-9 may be
checked if the holder (or other payee) has not been issued a TIN and has applied
for a TIN or intends to apply for a TIN in the near future. If the box in Part 3
is checked and a TIN is not provided by the time any payment is made in
connection with the New Preferred Shares, 31% of all such payments will be
withheld until a TIN is provided.
8. Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering, as well as
requests for additional copies of the Prospectus and this Letter of Transmittal,
may be directed to the Exchange Agent at the address and telephone number set
forth above. In addition, all questions relating to the Exchange Offer, as well
as requests for assistance or additional copies of the Prospectus and this
Letter of Transmittal, may be directed to NB Capital Corporation, 125 West 55th
Street, New York, New York 10019, Attention: Investor Relations (telephone (212)
632-8500).
9. Special Issuance and Delivery Instructions.
If New Preferred Shares are to be issued in the name of a
person other than the signer of this Letter of Transmittal, or if New Preferred
Shares are to be sent to someone other than the signer of this Letter of
Transmittal or to an address other than that shown above, the appropriate boxes
on this Letter of Transmittal should be completed. Certificates for Old
Preferred Shares not exchanged will be returned by mail or, if tendered by
book-entry transfer, by crediting the account indicated above maintained at DTC.
10. Irregularities.
The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Preferred Shares,
which determination shall be final and binding on all parties. The Company
reserves the absolute right to reject any and all tenders determined by either
of them not to be in proper form or the acceptance of which, or exchange for
which, may, in the view of counsel to the Company, be unlawful. The Company also
reserves the absolute right, subject to applicable law, to waive any of the
conditions of the Exchange Offer set forth in the Prospectus under "The Exchange
Offer--Certain Conditions to the Exchange Offer" or any conditions or
irregularities in any tender of Old Preferred Shares of any particular holder
whether or not similar conditions or irregularities are waived in the case of
other holders. The Company's interpretation of the terms and conditions of the
Exchange Offer (including this Letter of Transmittal and the
<PAGE>
14
instructions hereto) will be final and binding. No tender of Old Preferred
Shares will be deemed to have been validly made until all irregularities with
respect to such tender have been cured or waived. The Company, any affiliates or
assigns of the Company, the Exchange Agent, or any other person shall not be
under any duty to give notification of any irregularities in tenders or incur
any liability for failure to give such notification.
IMPORTANT: This Letter of Transmittal or a facsimile hereof
(together with certificates for Old Preferred Shares (or confirmation of
book-entry transfer) and all other required documents) or a Notice of Guaranteed
Delivery must be received by the Exchange Agent on or prior to the Expiration
Date.
IMPORTANT TAX INFORMATION
Under U.S. Federal income tax law, a holder of Old Preferred
Shares whose Old Preferred Shares are accepted for exchange may be subject to
backup withholding unless the holder provides The Bank of Nova Scotia Trust
Company of New York (as payor) (the "Paying Agent"), through the Exchange Agent,
with either (i) such holder's correct taxpayer identification number ("TIN") on
Substitute Form W-9 attached hereto, certifying that the TIN provided on
Substitute Form W-9 is correct (or that such holder of Old Preferred Shares is
awaiting a TIN) and that (A) the holder of Old Preferred Shares has not been
notified by the Internal Revenue Service that he or she is subject to backup
withholding as a result of a failure to report all interest or dividends or (B)
the Internal Revenue Service has notified the holder of Old Preferred Shares
that he or she is no longer subject to backup withholding; or (ii) an adequate
basis for exemption from backup withholding. If such holder of Old Preferred
Shares is an individual, the TIN is such holder's social security number. If the
Paying Agent is not provided with the correct TIN, the holder of Old Preferred
Shares may be subject to certain penalties imposed by the Internal Revenue
Service.
Certain holders of Old Preferred Shares (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and reporting requirements. However, exempt holders of
Old Preferred Shares should indicate their exempt status on Substitute Form W-9.
For example, a corporation must complete the Substitute Form W-9, providing its
TIN and indicating that it is exempt from backup withholding. In order for a
foreign individual to qualify as an exempt recipient, the holder must submit a
Form W-8, signed under penalties of perjury, attesting to that individual's
exempt status. A Form W-8 can be obtained from the Paying Agent. See the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for more instructions.
If backup withholding applies, the Paying Agent is required to
withhold 31% of any such payments made to the holder of Old Preferred Shares or
other payee. Backup withholding is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the Internal Revenue Service.
<PAGE>
15
The box in Part 3 of the Substitute Form W-9 may be checked if
the surrendering holder of Old Preferred Shares has not been issued a TIN and
has applied for a TIN or intends to apply for a TIN in the near future. If the
box in Part 3 is checked, the holder of Old Preferred Shares or other payee must
also complete the Certificate of Awaiting Taxpayer Identification Number below
in order to avoid backup withholding. Notwithstanding that the box in Part 3 is
checked and the Certificate of Awaiting Taxpayer Identification Number is
completed, the Paying Agent will withhold 31%, of all payments made prior to the
time a properly certified TIN is provided to the Paying Agent.
The holder of Old Preferred Shares is required to give the
Paying Agent the TIN (e.g., Social Security number or employer identification
number) of the record owner of the Old Preferred Shares. If the Old Preferred
Shares are in more than one name or are not in the name of the actual owner,
consult the enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9" for additional guidance on which number to
report.
PAYOR'S NAME: THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW
YORK, AS PAYING AGENT
- -------------------------------------------------------------------------------
SUBSTITUTE Part 1 PLEASE PROVIDE YOUR Social Security number(s) or
TIN IN THE BOX AT RIGHT Employer Identification
AND CERTIFY BY SIGNING Number(s)
AND DATING BELOW -----------------------------
------------------------------------------------------------
Form W-9 Part 2 Certification Under penalties of perjury, I certify
that:
Department of the (1) The number shown on this form is my correct taxpayer
Treasury Internal identification number (or I am waiting for a number to be
Revenue Service issued for me), and
(2) I am not subject to backup withholding
because: (a) I am exempt from backup
withholding, or (b) I have not been
notified by the Internal Revenue Service
(IRS) that I am subject to backup
withholding as a result of a failure to
report all interest or dividends, or (c)
the IRS has notified me that I am no
longer subject to backup withholding.
<PAGE>
16
Payor's Request for Certification Instructions. You must cross out item (2)
Taxpayer above if you have been notified by the IRS that you are
Identification currently subject to backup withholding because of
Number ("TIN") underreporting interest or dividends on your tax return.
----------------------------------------------------------
Signature Part 3 Awaiting TIN --
--------------------------
Date
------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50
PENALTY IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP
WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer
identification number has not been issued to me, and either (1) I have mailed or
delivered an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security Administration
Officer or (2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the time
of payment, 31% of all reportable cash payments made to me thereafter will be
withheld until I provide a taxpayer identification number.
- ------------------------------ ----------------------
Signature Date
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF ANY AND ALL OUTSTANDING
8.35% NONCUMULATIVE EXCHANGEABLE
PREFERRED STOCK, SERIES A
OF
NB CAPITAL CORPORATION
As set forth in the Prospectus, dated January __, 1998 (the
"Prospectus"), of NB Capital Corporation (the "Company"), in the accompanying
Letter of Transmittal and instructions thereto (the "Letter of Transmittal"),
this form or one substantially equivalent hereto must be used to accept the
Company's exchange offer (the "Exchange Offer") to purchase all of its
outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Old
Preferred Shares") if (i) certificates representing the Old Preferred Shares to
be tendered for purchase and payment are not lost but are not immediately
available, (ii) time will not permit the Letter of Transmittal, certificates
representing such Old Preferred Shares or other required documents to reach the
Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date. This form
may be delivered by an Eligible Institution by mail or hand delivery or
transmitted, via telegram, telex or facsimile, to the Exchange Agent as set
forth below. This Notice of Guaranteed Delivery may be delivered by hand,
overnight courier or mail, or transmitted by facsimile transmission, to the
Exchange Agent. See "The Exchange Offer-- Procedures for Tendering Old Preferred
Shares" in the Prospectus. In addition, in order to utilize the guaranteed
delivery procedure to tender Old Preferred Shares pursuant to the Exchange
Offer, a completed, signed and dated Letter of Transmittal relating to the Old
Preferred Shares (or facsimile thereof) must also be received by the Exchange
Agent prior to 5:00 P.M., New York City time, on the Expiration Date. All
capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ________,
1998 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD
PREFERRED SHARES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE BUSINESS
DAY PRIOR TO THE EXPIRATION DATE.
<PAGE>
2
<TABLE>
<CAPTION>
<S> <C> <C>
The Exchange Agent:
THE BANK OF NOVA SCOTIA
TRUST COMPANY OF NEW YORK
BY REGISTERED OR FACSIMILE TRANSMISSIONS: BY HAND OR OVERNIGHT
CERTIFIED MAIL: (ELIGIBLE INSTITUTIONS ONLY) DELIVERY:
The Bank of Nova Scotia Trust (212) 225-5436 The Bank of Nova Scotia
Company of New York Trust Company of New York
One Liberty Plaza TO CONFIRM BY TELEPHONE: One Liberty Plaza
New York, New York 10006 OR FOR YOUR INFORMATION New York, New York 10006
Attn: George Timmes (212) 225-5436 Attn: George Timmes
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE OR TRANSMISSIONS OF THIS NOTICE OF GUARANTEED
DELIVERY VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO
GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO
BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
3
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the
terms and subject to the conditions set forth in the Exchange Offer and the
Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate
principal amount of Old Preferred Shares set forth below pursuant to the
guaranteed delivery procedures set forth in the Prospectus.
The undersigned understands that tenders of Old Preferred
Shares will be accepted only in principal amounts equal to $1,000 or integral
multiples thereof. The undersigned understands that tenders of Old Preferred
Shares pursuant to the Exchange Offer may not be withdrawn after 5:00 P.M., New
York City time on the business Day prior to the Expiration Date. Tenders of Old
Preferred Shares may also be withdrawn if the Exchange Offer is terminated
without any such Old Preferred Shares being purchased thereunder or as otherwise
provided in the Prospectus.
All authority herein conferred or agreed to be conferred by
this Notice of Guaranteed Delivery shall survive the death or incapacity of the
undersigned and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assigns, trustees in bankruptcy and other
legal representatives of the undersigned.
PLEASE SIGN AND COMPLETE
<TABLE>
<CAPTION>
<S> <C>
Signature(s) of Registered Owner(s) or Name(s) of Registered Holder(s):
Authorized Signatory:
- ----------------------------------------------------------- ---------------------------------
Principal Amount of Old Preferred Shares Tendered: Address:
- ----------------------------------------------------------- ---------------------------------
Certificate No(s). of Old Preferred Shares (if available): Area Code and Telephone No.:
- ----------------------------------------------------------- ---------------------------------
If Old Preferred Shares will be
delivered by book-entry transfer at
The Depository Trust Company,
insert, Depository Account No.:
Date:
------------------------ --------------------------------
</TABLE>
<PAGE>
4
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Old Preferred Shares exactly as its (their) name(s) appear on
certificates for Old Preferred Shares or on a security position listing as the
owner of Old Preferred Shares, or by person(s) authorized to become registered
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
Please print name(s) and address(es)
Name(s):
----------------------------------------------------------------
----------------------------------------------------------------
Capacity:
----------------------------------------------------------------
Address(es):
----------------------------------------------------------------
----------------------------------------------------------------
DO NOT SEND OLD PREFERRED SHARES WITH THIS FORM. OLD PREFERRED SHARES SHOULD BE
SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL.
<PAGE>
5
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (i) a bank; (ii) a
broker, dealer, municipal securities broker, municipal securities dealer,
government securities broker, government securities dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
learning agency; or (v) a savings association that is a participant in a
Securities Transfer Association recognized program (each of the foregoing being
referred to as an "Eligible Institution"), hereby guarantees to deliver to the
Exchange Agent, at one of its addresses set forth above, either the Old
Preferred Shares tendered hereby in proper form for transfer, or confirmation of
the book-entry transfer of such Old Preferred Shares to the Exchange Agent's
account at The Depository Trust Company, pursuant to the procedures for
book-entry transfer set forth in the Prospectus, in either case together with
one or more properly completed and duly executed Letter(s) of Transmittal (or
facsimile thereof) and any other required documents within five business days
after the date of execution of this Notice of Guaranteed Delivery.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF
TRANSMITTAL AND OLD PREFERRED SHARES TENDERED HEREBY TO THE EXCHANGE AGENT
WITHIN THE TIME PERIOD SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN
FINANCIAL LOSS TO THE UNDERSIGNED.
Name of Firm:
----------------------------------- -------------------------
Authorized Signature
Address: Name:
----------------------------------- -------------------
Area Code and Telephone No: Title:
---------------------- -------------------
Date: -------------------
NOTE: DO NOT SEND CERTIFICATES FOR OLD PREFERRED SHARES WITH THIS FORM.
CERTIFICATES FOR OLD PREFERRED SHARES SHOULD ONLY BE SENT WITH YOUR LETTER OF
TRANSMITTAL.
Deloitte & Touche, S.E.N.C.
Chartered Accountants
1 Place Ville-Marie
Suite 3000
Montreal QC H3B 4T9
Independent Auditors' Consent
We consent to the use in and incorporation by reference in
this Amendment No. 2 to Form S-4 and Form S-1 Registration Statement No.
333-41009 of NB Capital Corporation ("Corporation") of our report dated January
7, 1998, relating to the balance sheet of the Corporation as of August 20, 1997,
appearing in the preliminary prospectuses, which are parts of this Registration
Statement.
We consent to the reference to us under the heading "Experts"
included in such prospectuses.
Chartered Accountants
Montreal, Canada
January 27, 1998
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
AND MANAGEMENT PROXY CIRCULAR
A WHOLE NEW WAY
[GRAPHIC]
[LOGO] NATIONAL
BANK
OF CANADA
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the Annual Meeting of Holders of Common Shares of
National Bank of Canada will be held on Wednesday, March 11, 1998
at 8:30 a.m. at The Queen Elizabeth Hotel, 900 Rene- Levesque Blvd. West,
Montreal, Quebec, for the following purposes:
a) to receive the Annual Report including the Consolidated Financial
Statements for the financial year ended October 31, 1997 and the Auditors'
Report thereon;
b) to elect Directors;
c) to appoint Auditors;
d) to examine and to vote on the proposals submitted by Shareholders
regarding the following matters:
- Form of Proxy allowing a separate vote for each person proposed as a
director;
- Stated number of directors fixed at 24;
- Cumulative voting for the purpose of electing directors;
- Adoption of a code of procedure for shareholder meetings;
- Appointment of an ombudsman who is not a current or retired employee
of the Bank;
- Ineligibility of candidates as directors if they sit on more than five
other boards of directors;
- Increase in proportion of women candidates for the board of directors,
up to one-third by the year 2000; and
e) to transact such other business as may properly be brought before the
Meeting.
By Order of the Board,
/s/ Francoise Bureau
Francoise Bureau, Assistant Secretary
Montreal, December 23, 1997
Holders of Common Shares of the Bank who are unable to attend the Meeting are
requested to complete, date and sign the enclosed Form of Proxy. In order to be
valid, proxies must be returned to: General Trust of Canada, Stock and Bond
Transfer Services, P.O. Box 888, Station B, Montreal, Quebec, H3B 9Z9, in the
postage-paid envelope provided or by fax to (514) 871-7442, no later than 5:00
p.m. on March 9, 1998.
<PAGE>
MANAGEMENT PROXY CIRCULAR
as at December 23, 1997
SOLICITATION OF PROXIES
This Management Proxy Circular is furnished in connection with the solicitation
by the Management of National Bank of Canada (the "Bank") of proxies to be used
at the Annual Meeting (the "Meeting") of Holders of Common Shares of the Bank,
to be held at the time and place and for the purposes set forth in the Notice of
Meeting accompanying this Management Proxy Circular and at any adjournment
thereof. The solicitation will be done by mail and by telephone by employees or
agents of the Bank. The costs of the solicitation by Management will be borne by
the Bank. The Bank also reserves the option of calling on the services of an
external firm to solicit proxies on its behalf; it estimates that the costs
which might be incurred for such solicitation would be nominal.
APPOINTMENT AND REVOCATION OF PROXIES
The proxyholders designated in the enclosed Form of Proxy are Directors or
Officers of the Bank. If a Shareholder wishes to appoint a person not designated
in the Form of Proxy, he or she may do so by striking out the names appearing
thereon and inserting the name of such person in the blank space provided.
A proxyholder is not required to be a Shareholder of the Bank. In order to be
valid, proxies must be returned to General Trust of Canada ("General Trust"),
Stock and Bond Transfer Services, P.O. Box 888, Station B, Montreal, Quebec,
H3B 9Z9, in the postage-paid envelope provided or by fax to (514) 871-7442, no
later than 5:00 p.m. on March 9, 1998.
A Shareholder may revoke a proxy by depositing an instrument in writing executed
by him or her or by his or her duly authorized agent:
i) at the Head Office of the Bank, c/o Secretary's Office, 600 de La
Gauchetiere West, 4th Floor, Montreal, Quebec, H3B 4L2, no later than the
last business day preceding the day of the Meeting or any adjournment
thereof; or
ii) with the Chairman of the Meeting on the day of the Meeting or of any
adjournment thereof.
VOTING BY PROXIES
Common Shares represented by a proxy are to be voted by the proxyholders
designated in the enclosed Form of Proxy in accordance with the directions of
the Shareholders.
If no instructions are given, the voting rights attached to the Common Shares
will be exercised by the Management of the Bank FOR the election of Directors
and the appointment of Auditors and AGAINST the proposals presented by
Shareholders. If no instructions are given, any other Proxyholder will exercise
the voting rights attached to the shares at his or her discretion.
The Form of Proxy, if duly signed, confers discretionary authority with respect
to any changes or amendments proposed with respect to the matters set out
therein or any other matters which may properly come before the Meeting. Any
proxy previously given is thereby revoked.
As at the date hereof, the Management of the Bank knows of no amendments or
other matters which may come before the Meeting.
NATIONAL BANK OF CANADA 1
<PAGE>
VOTING COMMON SHARES
As at December 15, 1997, 170,905,446 Common Shares of the Bank were issued and
outstanding. Holders of Common Shares of record on January 20, 1998 or their
duly authorized agents are entitled to receive notice of the Annual Meeting and
to vote at the Meeting. However, any transferee of any share after that date who
requests, no later than 10 days before the Meeting, that his or her name be
included in the list is also entitled to vote upon presentation of evidence of
ownership.
Unless restricted as hereinafter provided, each holder of Common Shares of
record is entitled to one vote per share held. To the knowledge of the Directors
and Officers of the Bank, no individual or corporation beneficially owns or
exercises control over Common Shares carrying more than 10% of the voting rights
attached to all of the Common Shares of the Bank.
VOTING RESTRICTIONS
The BANK ACT (Canada) (the "Act") contains provisions which prevent the voting
rights attaching to the common shares of a bank from being exercised if the
shares are held by the government of Canada or of a province or an agency
thereof or by the government of a foreign country or any political subdivision
thereof or an agency thereof.
CONFIDENTIALITY OF VOTES
In order to protect the confidential nature of voting by proxy, General Trust,
the registrar and transfer agent of the Bank, receives the votes exercised by
proxy and compiles the results for the Meeting. It submits a Form of Proxy to
the Bank only when a Shareholder clearly wants his or her personal opinion made
known to Management or when it is required to do so by law.
PRESENTATION OF FINANCIAL STATEMENTS
The Annual Report including the Consolidated Financial Statements of the Bank
for the financial year ended October 31, 1997 and the Auditors' Report on these
financial statements will be submitted to the Meeting.
ELECTION OF DIRECTORS
The Management of the Bank recommends voting FOR the election of the nominees to
the Board of Directors proposed on pages 3 and 4. Each Director elected at the
Meeting will hold office until the subsequent Annual Meeting of the Bank, the
election or appointment of a replacement, or until the position is vacated,
whichever event occurs first.
During the financial year ended October 31, 1997, the Board of Directors of the
Bank held 14 meetings.
The number of meetings held by each Committee of the Board during this period
was as follows:
Executive Committee: 7
Conduct Review and Corporate
Governance Committee: 6
Credit Committee: 9
Audit Committee: 4
In accordance with the requirements of the Act, the table below also presents a
record of attendance by Directors at meetings of the Board of Directors and of
its committees during the financial year ended October 31, 1997. It should be
noted that the table includes attendance by Directors as guests at meetings of
the committees and that Mr. Montambault was a member of the Executive Committee
until June 1997.
This table provides a list of the names of the nominees to the Board of
Directors, their principal occupation and sector of activity, the number of
shares of the Bank which they beneficially own or over which they exercise
control, as well as the date of their initial appointment as Director of the
Bank.
2 NATIONAL BANK OF CANADA
<PAGE>
<TABLE>
<CAPTION>
NAME AND PLACE PRINCIPAL DIRECTOR COMMON (A) AND
OF RESIDENCE OCCUPATION SINCE FIRST PREFERRED (B)
SHARES BENEFICIALLY OWNED,
CONTROLLED OR DIRECTED
(14)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ANDRE BERARD (E) (C) Chairman of the Board and July 1985 102,453 (a)
Montreal, Quebec Chief Executive Officer
National Bank of Canada
PIERRE BOURGIE President and Chief Executive Officer - 506 (a)
Montreal, Quebec Societe Financiere Bourgie Inc.
(Investment company)
GERARD COULOMBE (R) Senior Partner February 1994 1,680 (a)
Sainte-Marthe, Quebec Desjardins Ducharme Stein Monast
(Barristers and solicitors)
MICHELLE COURCHESNE General Manager - -
Laval, Quebec Montreal Symphony Orchestra
LEON COURVILLE (E) (C) President and Chief Operating Officer November 1993 33,260 (a)
Outremont, Quebec National Bank of Canada
FRANCOIS JEAN COUTU (C) President and Chief Operating Officer January 1993 1,500 (a)
Outremont, Quebec The Jean Coutu Group (PJC) Inc.
(Franchisor of a chain of pharmacies
and distributor of pharmaceuticals
and other products)
SHIRLEY A. DAWE President July 1988 1,500 (a)
Toronto, Ontario Shirley Dawe Associates Inc.
(Consultants)
NICOLE DIAMOND-GELINAS Vice-President and - 2,000 (a)
St-Barnabe-Nord General Manager
Quebec Aspasie Inc.
(Hair colour chart manufacturer)
JEAN DOUVILLE Chairman of the Board and January 1992 2,000 (a)
Montreal, Quebec Chief Executive Officer
UAP Inc.
(Distributor of automotive parts)
MARCEL DUTIL (E) Chairman of the Board, President January 1982 88,418 (a)
Outremont, Quebec and Chief Executive Officer
Canam Manac Group Inc.
(Industrial and holding company:
frames, joists, steel decks
and transportation equipment)
PAUL GOBEIL (R) (A) Vice-Chairman of the Board February 1994 4,000 (a)
Montreal, Quebec Metro-Richelieu Inc.
(Distributor of food products)
DONALD M. GREEN(C) Chairman of the Board July 1988 2,000 (a)
Burlington, Ontario ACD Tridon Inc.
(International automotive
parts manufacturer)
</TABLE>
<TABLE>
<CAPTION>
NAME AND PLACE ATTENDANCE ATTENDANCE
OF RESIDENCE AT MEETINGS AT MEETINGS
of the Board of Committees
of Directors
- --------------------------------------------------------------
<S> <C> <C>
ANDRE BERARD (E) (C) 14 12
Montreal, Quebec
PIERRE BOURGIE - -
Montreal, Quebec
GERARD COULOMBE (R) 14 11
Sainte-Marthe, Quebec
MICHELLE COURCHESNE - -
Laval, Quebec
LEON COURVILLE (E) (C) 14 9
Outremont, Quebec
FRANCOIS JEAN COUTU (C) 13 7
Outremont, Quebec
SHIRLEY A. DAWE 12 1
Toronto, Ontario
NICOLE DIAMOND-GElINAS - -
St-BarnabE-Nord
Quebec
JEAN DOUVILLE 13 1
Montreal, Quebec
MARCEL DUTIL (E) 12 7
Outremont, Quebec
PAUL GOBEIL (R) (A) 12 8
Montreal, Quebec
DONALD M. GREEN(C) 13 7
Burlington, Ontario
</TABLE>
NATIONAL BANK OF CANADA 3
<PAGE>
<TABLE>
<CAPTION>
NAME AND PLACE PRINCIPAL DIRECTOR COMMON (A) AND
OF RESIDENCE OCCUPATION SINCE0 FIRST PREFERRED (B)
SHARES BENEFICIALLY OWNED,
CONTROLLED OR DIRECTED
(14)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUZANNE LECLAIR (A) President and Chief Executive Officer July 1989 5,150 (a)
Laval, Quebec Transit Truck Bodies Inc.
(Manufacturer of truck bodies)
BERNARD LEMAIRE (e) Chairman of the Board October 1983 40,000 (a)
Kingsey Falls, Quebec Cascades Inc.
(Manufacturer of paper and plastic)
GASTON MALETTE (R)(A) Chairman of the Board July 1988 26,460 (b)
Timmins, Ontario Malette Inc.
(Kraft pulp and forestry
products company)
LEONCE MONTAMBAULT Corporate Director January 1990 10,703 (a)
Sillery, Quebec
GORDON F. OSBALDESTON Professor Emeritus July 1988 2,070 (a)
London, Ontario Ivey School of Business
University of Western Ontario
(Educational institution)
J.-ROBERT OUIMET (C) President and Chief Executive Officer November 1972 65,500 (a)
Montreal, Quebec Ouimet-Cordon Bleu Inc.
(Manufacturing and marketing
of food products)
ROBERT PARIZEAU (E)(R) Chairman of the Board December 1978 10,073 (a)
Montreal, Quebec AON Parizeau Inc.
(Insurance brokerage)
MICHEL PERRON(R) Chairman of the Board and October 1979 50,000 (a)
Westmount, Quebec Chief Executive Officer
Somiper Inc.
(Investment company)
RAYMOND ROYER(C) President and Chief Executive Officer July 1989 23,496 (a)
Ile-Bizard, Quebec Domtar Inc.
(Manufacturer of pulp, paper and
forestry products)
LINO SAPUTO (E) (C) President and Chief Executive Officer July 1989 221,035 (a)
Montreal, Quebec Saputo Cheese Limited
(Manufacturer of dairy products)
CLAUDE F. SAVOIE (A) President January 1988 8,850 (a)
Moncton, New Brunswick Acadian Construction
(1991) Ltd.
(General contractors)
PAUL-GASTON TREMBLAY (A) President 0ctober 1978 5,665 (a)
Chicoutimi, Quebec Primo-Gestion Inc.
(Management Consultant and
Corporate Director)
<CAPTION>
NAME AND PLACE ATTENDANCE ATTENDANCE
OF RESIDENCE AT MEETINGS AT MEETINGS
OF THE BOARD OF COMMITTEES
OF DIRECTORS
- -----------------------------------------------------------------
<S> <C> <C>
SUZANNE LECLAIR (A) 12 6
Laval, Quebec
BERNARD LEMAIRE (E) 7 5
Kingsey Falls, Quebec
GASTON MALETTE (R)(A) 9 8
Timmins, Ontario
LEONCE MONTAMBAULT 12 11
Sillery, Quebec
GORDON F. OSBALDESTON 12 1
London, Ontario
J.-ROBERT OUIMET (C) 10 6
Montreal, Quebec
ROBERT PARIZEAU (E)(R) 14 13
Montreal, Quebec
MICHEL PERRON(R) 8 4
Westmount, Quebec
RAYMOND ROYER(C) 10 8
Ile-Bizard, Quebec
LINO SAPUTO (E) (C) 11 15
Montreal, Quebec
CLAUDE F. SAVOIE (A) 14 4
Moncton, New Brunswick
PAUL-GASTON TREMBLAY (A) 14 7
Chicoutimi, Quebec
</TABLE>
MEMBER OF THE EXECUTIVE COMMITTEE: (E)
MEMBER OF THE CONDUCT REVIEW AND CORPORATE GOVERNANCE COMMITTEE: (R)
MEMBER OF THE CREDIT COMMITTEE: (C)
MEMBER OF THE AUDIT COMMITTEE: (A)
4 NATIONAL BANK OF CANADA
<PAGE>
The above nominees provided the information as to the shares beneficially owned
or over which control was exercised by them.
Maurice J. Closs, Director since August 1988, and Guy St-Germain, Director
since November 1974, will not be standing for re-election. During the past
financial year, Mr. Closs and Mr. St-Germain attended 13 and 14 meetings of
the Board of Directors, respectively. Mr. St-Germain attended 4 meetings of
the Executive Committee and 6 meetings of the Conduct Review and Corporate
Governance Committee.
This year, the Bank is nominating three new candidates for election as
Directors: Pierre Bourgie, Michelle Courchesne and Nicole Diamond-Gelinas.
During the past five years, Pierre Bourgie has been President and Chief
Executive Officer of Urgel Bourgie Limitee and Societe Financiere Bourgie Inc.
and is currently the President and Chief Executive Officer of Societe Financiere
Bourgie Inc. Michelle Courchesne was Deputy Minister of the department of
culture and communications (Quebec) from 1991 to 1995 and has held the position
of General Manager of the Montreal Symphony Orchestra since that time. Nicole
Diamond-Gelinas has been Vice-President and General Manager of Aspasie Inc.
since 1976.
OTHER FUNCTIONS HELD BY DIRECTORS IN BANK SUBSIDIARIES
Andre Berard is a Director of Natcan International Trade Finance and Investment
Company Ltd. and Natcan Finance (Asia) Limited.
Leon Courville is a Director and Chairman of the Board of General Trust and of
National Bank Life Insurance Company, and a Director of Natcan (Nominees) Ltd.
and Natcan Finance (Asia) Limited.
Jean Douville and Robert Parizeau are Directors of Levesque, Beaubien and
Company Inc.
Suzanne Leclair, Gordon F. Osbaldeston and Michel Perron are Directors of Natcan
Trust Company.
Gerard Coulombe, Francois Jean Coutu, Jean Douville, Paul Gobeil, Leonce
Montambault and Claude F. Savoie are Directors of National Bank Life Insurance
Company.
Paul-Gaston Tremblay is a Director of General Trust.
APPOINTMENT OF AUDITORS
For the financial year beginning November 1, 1997 and ending October 31, 1998,
the Management of the Bank recommends voting for the appointment of Samson
Belair/Deloitte & Touche, General Partnership, and Mallette Maheu, General
Partnership, as auditors of the Bank.
In the past five years, Samson Belair/Deloitte & Touche, General Partnership,
acted as auditor in 1993, 1994 and 1997 and Mallette Maheu, General
Partnership, acted as auditor of the Bank in 1994 and 1995.
SHAREHOLDER PROPOSALS
Seven proposals made by Shareholders were received by the Bank within the time
limits prescribed in the Act.
The text of these proposals is presented in Appendix I of this Circular.
The Management of the Bank recommends voting AGAINST these proposals.
NATIONAL BANK OF CANADA 5
<PAGE>
REMUNERATION PAID BY THE BANK AND
ITS SUBSIDIARIES TO COMPENSATED DIRECTORS
AND OFFICERS
DEFINITIONS
In this Circular, the following expressions have the meanings set out below.
"COMPENSATED DIRECTORS" refers to the Directors of the Bank who are not Officers
and who receive compensation from the Bank in their capacity as Directors
thereof or of one of its subsidiaries, as applicable.
"EXECUTIVE OFFICERS" refers, within the meaning of applicable securities
legislation, to the Chairman of the Board and Chief Executive Officer, the
President and Chief Operating Officer, the Senior Executive Vice-President -
Treasury, Brokerage and Corporate Banking, the Executive Vice-Presidents and the
Senior Vice-Presidents.
"NAMED EXECUTIVE OFFICERS" refers, within the meaning of applicable securities
legislation, to the Chairman of the Board and Chief Executive Officer, the
President and Chief Operating Officer, the Senior Executive Vice-President -
Treasury, Brokerage and Corporate Banking, the President and Chief Executive
Officer of Levesque Beaubien Geoffrion Inc. and the Senior Vice-President and
Senior Executive Vice-President - Corporate Financing, Levesque Beaubien
Geoffrion Inc.
"OFFICERS" refers to the Officers of the Bank, namely, the Chairman of the Board
and Chief Executive Officer, the President and Chief Operating Officer, the
Senior Executive Vice-President - Treasury, Brokerage and Corporate Banking, the
Executive Vice-Presidents, the Senior Vice-Presidents and the Vice-Presidents.
AGGREGATE REMUNERATION
The information below is provided in compliance with the provisions of the
securities legislation of various Canadian provinces.
The Compensated Directors receive the following annual base remuneration and
attendance vouchers:
- - Annual base remuneration of $10,000 for the Board of Directors of the Bank,
$3,500 for the Executive Committee of the Board of Directors and $1,800 for
the other committees of the Bank's Board of Directors. Additional base
remuneration of $3,000 is paid to the Chair of each committee of the Bank.
The Compensated Directors receive a voucher of $1,000 per meeting attended;
- - Annual base remuneration of $1,800 for the Board of Directors of Levesque,
Beaubien and Company Inc. The Compensated Directors receive a voucher of
$1,000 per meeting attended;
- - Annual base remuneration of $6,000 for the Board of Directors of General
Trust and $1,000 for its committees. Additional base remuneration of $1,000
is paid to the Chair of each committee of General Trust. The Compensated
Directors receive a voucher of $500 per meeting attended;
- - Annual base remuneration of $2,500 for the Boards of Directors of Natcan
Insurance Company and National Bank Life Insurance Company and $1,800 for
their committees. Additional base remuneration of $3,000 is paid to the
Chair of each committee of National Bank Life Insurance Company. The
Compensated Directors receive a voucher of $1,000 per meeting attended.
The Bank and its subsidiaries pay the expenses incurred by Compensated Directors
to attend meetings.
6 NATIONAL BANK OF CANADA
<PAGE>
REMUNERATION OF COMPENSATED DIRECTORS AND OFFICERS OF THE BANK AND ITS
SUBSIDIARIES FOR THE FINANCIAL YEAR ENDED OCTOBER 31, 1997
The table below shows the aggregate remuneration paid during the last completed
financial year to Compensated Directors, as Directors of the Bank or one of its
subsidiaries, and to Officers of the Bank or one of its subsidiaries, who
received aggregate remuneration in excess of $75,000.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FEES SALARIES BONUSES OTHER TOTAL
$ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REMUNERATION OF DIRECTORS
Number of Compensated Directors: 25
(including those who ceased to be a Director
during the year)
Corporations incurring the expenses:
National Bank of Canada 687,782 687,782
Natcan Trust Company 22,000 22,000
Levesque, Beaubien and Company Inc. 15,700 15,700
General Trust of Canada 13,500 13,500
National Bank Life Insurance Company 49,000 49,000
- ------------------------------------------------------------------------------------------------------------------------
REMUNERATION OF OFFICERS
Number of Officers: 78
Corporation incurring the expenses:
National Bank of Canada 11,826,076 4,867,143(1) 645,973(2) 17,339,192
- ------------------------------------------------------------------------------------------------------------------------
TOTALS 787,982 11,826,076 4,867,143 645,973 18,127,174
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) BONUSES GRANTED UNDER THE SHORT-TERM INCENTIVE COMPENSATION PROGRAM.
(2) CONTRIBUTIONS MADE BY THE BANK TO THE PENSION PLAN FOR DESIGNATED EMPLOYEES
AND THE EMPLOYEE SHARE OWNERSHIP PLAN OF THE BANK.
During the past financial year, no severance payments were made to Officers of
the Bank.
SUMMARY OF COMPENSATION
For the last completed financial year, the Bank had 20 Executive Officers.
The following table, presented in accordance with applicable securities
legislation, shows the aggregate compensation paid by the Bank and its
subsidiaries during each of the three most recently completed financial years to
the persons who, as at October 31, 1997, were Named Executive Officers.
NATIONAL BANK OF CANADA 7
<PAGE>
SUMMARY OF AGGREGATE COMPENSATION OF NAMED EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-----------------------------------
NAME AND POSITION YEAR SALARY BONUS OTHER SECURITIES LONG-TERM ALL
$ $ ANNUAL UNDER INCENTIVE OTHER
COMPEN- OPTIONS/SARS PROGRAM COMPEN-
SATION(1) AWARDED(2) PAYOUTS(3) SATION
$ $ $
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANDRE BERARD, Chairman of
the Board and Chief Executive
Officer 1997 575,000 588,080 10,325 145,000 Nil Nil
----------------------------------------------------------------------------------------------------
1996 487,910 588,080 31,330 134,000 Nil Nil
----------------------------------------------------------------------------------------------------
1995 487,910 454,940 27,616 90,000 363,870 Nil
- ----------------------------------------------------------------------------------------------------------------------------------
LEON COURVILLE, President and
Chief Operating Officer 1997 385,000 360,000 4,155 74,000 Nil Nil
----------------------------------------------------------------------------------------------------
1996 329,096 360,000 10,228 75,000 Nil Nil
----------------------------------------------------------------------------------------------------
1995 329,096 275,000 11,303 48,000 134,134 Nil
- ----------------------------------------------------------------------------------------------------------------------------------
JEAN TURMEL, Senior Executive
Vice-President - Treasury,
Brokerage and Corporate Banking 1997 337,000 615,000 2,510 57,000 Nil Nil
----------------------------------------------------------------------------------------------------
1996 306,159 574,246 10,055 60,000 Nil Nil
----------------------------------------------------------------------------------------------------
1995 306,159 449,246 7,046 32,000 163,081 Nil
- ----------------------------------------------------------------------------------------------------------------------------------
PIERRE BRUNET, President and
Chief Executive Officer
Levesque Beaubien Geoffrion
Inc.(4) 1997 200,000 1,800,000 N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------
1996 200,000 1,306,000 N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------
1995 175,000 510,000 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
REAL RAYMOND, Senior
Vice-President and Senior
Executive Vice-President
Corporate Financing
Levesque Beaubien
Geoffrion Inc. 1997 219,397 115,000 82 29,000 Nil Nil
----------------------------------------------------------------------------------------------------
1996 199,452 100,000 3,046 32,000 Nil Nil
----------------------------------------------------------------------------------------------------
1995 186,507 70,000 2,608 20,000 54,172 Nil
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) THE AMOUNTS IN THIS COLUMN ONLY REPRESENT BENEFITS RELATING TO LOANS
GRANTED AT PREFERRED INTEREST RATES TO NAMED EXECUTIVE OFFICERS. THE NAMED
EXECUTIVE OFFICERS HAVE THE USE OF A LEASED CAR AND MAY, AT THEIR OPTION,
PARTICIPATE IN THE EMPLOYEE SHARE PURCHASE PLAN OF THE BANK; THE AGGREGATE
VALUE OF THESE BENEFITS FOR THE FINANCIAL YEAR ENDED OCTOBER 31, 1997 DOES
NOT EXCEED THE LESSER OF: $50,000 OR 10% OF THE ANNUAL SALARY AND BONUSES
PAID TO NAMED EXECUTIVE OFFICERS.
(2) THESE SECURITIES WERE GRANTED UNDER THE STOCK OPTION PLAN AND THE STOCK
APPRECIATION RIGHTS PLAN OF THE BANK. FOR FURTHER INFORMATION, REFER TO THE
"STOCK OPTION PLAN" AND "STOCK APPRECIATION RIGHTS PLAN" SECTIONS.
(3) THESE AMOUNTS REPRESENT LOANS GRANTED UNDER THE BANK'S FORMER LONG-TERM
BONUS PROGRAM FOR THE 1992-1995 CYCLE. FOR FURTHER INFORMATION, REFER TO
THE "LONG-TERM INCENTIVE COMPENSATION PROGRAMS" SECTION.
(4) THE HUMAN RESOURCES COMMITTEE OF THE BOARD OF DIRECTORS OF LEVESQUE,
BEAUBIEN AND COMPANY INC. APPROVES THE AGGREGATE REMUNERATION OF PIERRE
BRUNET.
8 NATIONAL BANK OF CANADA
<PAGE>
SHORT-TERM INCENTIVE COMPENSATION PROGRAM
The Bank has a short-term incentive compensation program which complements the
base salary of Officers. Under the terms of this program, bonuses are generally
granted once a year if so justified by the results of the Bank and the relevant
sector in relation to the objectives set.
LONG-TERM INCENTIVE COMPENSATION PROGRAMS
FORMER LONG-TERM BONUS PROGRAM
On November 1, 1993, the Bank decided to discontinue its Long-Term Bonus Program
described below.
Under the provisions of this former program based on three-year cycles,
interest-free loans were granted to Officers in accordance with their line
level, salary and individual performance. These loans were used to purchase
Common Shares of the Bank at the market price prevailing at the time of
purchase. Each of the loans remained in effect as long as it had not been
repaid, unless the participant ceased to be employed by the Bank or to be a
qualified Officer. A bonus, granted to participants at the end of the three-year
cycle, allowed them to repay all or part of the loan granted at the start of the
cycle. For the 1992-1995 cycle, 63 Officers participated in this program and
acquired shares for an aggregate consideration of $1,184,660.
At the end of the 1992-1995 cycle, total bonuses of $2,390,702 were paid to
participants, representing, before taxes, repayment of 100% of the loans granted
at the start of the 1992-1995 cycle. Repayment of these loans, approved by the
Board of Directors, was effected based on the performance objectives reached for
each cycle. All the loans granted under this program were repaid between
December 15, 1994 and December 22, 1995.
STOCK OPTION PLAN (THE "PLAN")
The Plan was introduced by the Bank on September 30, 1993 and was approved by
its Shareholders at the Annual Meeting held on February 3, 1994.
The purpose of the Plan is to give Officers and other selected managers an
opportunity to benefit from the appreciation in the value of the Common Shares
of the Bank, thereby ensuring their interests are compatible with those of the
Shareholders.
The Plan is administered by a Bank committee (the "Committee") which awards the
options to employees based on their performance and their contribution to the
Bank's success. Each year, this Committee is responsible for determining which
employees may participate, and for setting the terms and conditions of each
award.
The maximum number of Common Shares that may be issued under the Plan is
8,000,000. The maximum number of Common Shares reserved per participant may not
exceed 5% of the total number of Common Shares issued and outstanding.
The exercise price for each option awarded shall be equal to the closing price
of the Common Shares of the Bank on the Montreal Exchange or the Toronto Stock
Exchange, whichever is higher, on the business day preceding the date of the
award.
In accordance with the Plan, options may be exercised in whole or in part before
the termination date determined by the Committee at the time they are awarded,
without exceeding the limit of 10 years. They shall expire on the termination
date or, in the event of certain circumstances provided for in the Plan, shall
expire in a specific timeframe. No options may be exercised in the first year
after they are awarded.
A fourth award was granted under the Plan during the financial year ended
October 31, 1997, with options on a total of 833,000 Common Shares being awarded
to 344 Bank employees. In fact, options on a total of 302,500 and 233,000 Common
Shares were awarded to 18
NATIONAL BANK OF CANADA 9
<PAGE>
Executive Officers and 54 other Officers respectively, at an exercise price of
$13.50. These options, up to 25% of which will be exercisable by their holders
as of December 1997, with a further 25% exercisable as of December 1998, another
25% exercisable as of December 1999, and the remainder as of December 2000,
shall expire on December 31, 2006. During the 30-day period prior to the options
being awarded, the closing price of the Common Shares on the Montreal Exchange
and the Toronto Stock Exchange fluctuated between $12.90 and $14.40.
STOCK APPRECIATION RIGHTS PLAN (THE "SAR PLAN")
The SAR Plan, which complements the Stock Option Plan, was presented to the
Conduct Review and Corporate Governance Committee on October 30, 1996 and took
effect following approval by the Bank's Board of Directors on November 7, 1996.
This plan has the same objectives as the Stock Option Plan and enables the Bank
to award stock appreciation rights ("SARs") on a discretionary basis to Officers
and selected managers instead of options. Under this plan, participants entitled
to SARs may receive, on the exercise date of the SAR, a cash amount equal to the
difference between the value of a share on the exercise date of the SAR and the
exercise price of the SAR. The exercise price for each SAR awarded shall be
equal to the closing price of the Common Shares of the Bank on the Montreal
Exchange or the Toronto Stock Exchange, whichever is higher, on the business day
preceding the date of the award. Linking compensation to the appreciation in the
value of Common Shares in this way ensures that the interests of employees
awarded SARs are compatible with those of the Shareholders.
A first award was granted under the SAR Plan during the financial year ended
October 31, 1997, with a total of 828,000 SARs being awarded to 344 Bank
employees. In fact, a total of 302,500 and 228,000 SARs were awarded to 18
Executive Officers and 54 other Officers respectively, at an exercise price of
$13.50. These SARs, which are exercisable in the same proportions and during the
same periods as the options which were awarded during the financial year ended
October 31, 1997, shall expire on December 31, 2006. During the 30-day period
prior to the SARs being awarded, the closing price of the Common Shares on the
Montreal Exchange and the Toronto Stock Exchange fluctuated between $12.90 and
$14.40.
The table below specifies the number of stock options and SARs awarded to
Named Executive Officers under the two plans during the financial year ended
October 31, 1997.
OPTIONS/SARS AWARDED DURING THE FINANCIAL YEAR ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NAME NUMBER OF OPTIONS/ % OF TOTAL OPTIONS/ EXERCISE PRICE OF MARKET VALUE EXPIRY
SARS AWARDED SARS AWARDED OPTION/SAR OF SHARE ON DATE
TO EMPLOYEES AWARD DATE
DURING FINANCIAL $ $
YEAR
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ANDRE BERARD 145,000 8.7 13.50 13.50 2006/12/31
LEON COURVILLE 74,000 4.5 13.50 13.50 2006/12/31
JEAN TURMEL 57,000 3.4 13.50 13.50 2006/12/31
PIERRE BRUNET (1) N/A N/A N/A N/A N/A
REAL RAYMOND 29,00 1.7 13.50 13.50 2006/12/31
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) AS AN EMPLOYEE OF LEVESQUE BEAUBIEN GEOFFRION INC., PIERRE BRUNET DOES NOT
PARTICIPATE IN THE STOCK OPTION PLAN OR THE STOCK APPRECIATION RIGHTS PLAN
OF THE BANK.
10 NATIONAL BANK OF CANADA
<PAGE>
The following table lists the number of Common Shares of the Bank acquired by
each of the Named Executive Officers upon exercising stock options
during the financial year ended October 31, 1997, the total value realized on
exercise, and the number and value of Common Shares of the Bank affected by
unexercised options under the terms of the SAR Plan as at October 31, 1997.
The value realized on exercise is equal to the difference between the fair
market value of the Common Shares of the Bank on the exercise date and the
exercise price of the option. The value of unexercised options at financial year
end is equal to the difference between the exercise price of the options and the
fair market value of Common Shares of the Bank as at October 31, 1997, namely
$20.15 per share. It should be noted that the SARs awarded during the financial
year ended October 31, 1997 could not be exercised before December 1997.
<TABLE>
<CAPTION>
OPTIONS EXERCISED AND NUMBER AND VALUE OF UNEXERCISED OPTIONS FOR FINANCIAL YEAR ENDED OCTOBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Name Number of Shares Aggregate Number of Unexercised Value of Unexercised
Acquired on Value Realized Options at Financial Options at Financial
Exercise Year End Year End
$ $ $
Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Andre Berard 46,500 359,260 78,500 306,000 785,775 2,501,025
Leon Courville 0 0 66,750 162,250 640,763 1,333,588
Jean Turmel 0 0 50,500 124,500 481,200 1,019,050
Pierre Brunet N/A N/A N/A N/A N/A N/A
Real Raymond 20,500 116,925 8,000 66,500 73,200 550,100
</TABLE>
PENSION PLAN FOR NAMED EXECUTIVE OFFICERS
OF THE BANK
Four of the Named Executive Officers of the Bank participate in a defined
benefit pension plan. This plan is fully funded according to the most recent
actuarial valuation. For each year of service credited, the plan grants 2% of
the average eligible earnings, defined as the average earnings for the 60
highest-paid consecutive months, based on salary and 25% of the bonus paid as of
January 1, 1996 (except for the Senior Vice-President and Senior Executive
Vice-President - Corporate Financing, Levesque Beaubien Geoffrion Inc., for whom
it is 20% of his salary), less the pension acquired under the Canada or Quebec
pension plans ("CPP/QPP") while the Named Executive Officer participated in the
Bank pension plan. However, this benefit shall not exceed the maximum pension
prescribed under the INCOME TAX ACT (Canada), currently $1,722 per year of
service credited. The normal retirement age is 60. However, the plan does allow
for early retirement, with the employer's consent, as of 55 years of age. In
such case, the benefits payable shall be reduced by the lesser of: 5% for each
year of early retirement prior to age 60 or 2.5% for each year by which the sum
of the participant's age and years of service falls short of 90.
NATIONAL BANK OF CANADA 11
<PAGE>
POST-RETIREMENT ALLOWANCE PROGRAM
Named Executive Officers of the Bank are also entitled to receive a
post-retirement allowance for life.
This program, in which four of the Named Executive Officers participate, grants
an allowance which, for each year of service credited under this program
(maximum 35 years), is equal to the difference between the pension which would
be payable if there were no provision for a maximum pension and the pension
actually paid under the pension plan for the years recognized under the
Post-Retirement Allowance Program. For purposes of calculating the pension not
subject to a maximum, the average salary is limited to $250,000 for the Senior
Vice-President and Senior Executive Vice-President - Corporate Financing,
Levesque Beaubien Geoffrion Inc. The payment conditions of this allowance are
identical to those of the pension plan.
ESTIMATED ANNUAL BENEFITS PAYABLE AT RETIREMENT TO THE NAMED EXECUTIVE OFFICERS
OF THE BANK
The following tables show the estimated annual benefits payable under the Bank's
pension plan and the Post-Retirement Allowance Program to the Named Executive
Officers of the Bank, excluding the President and Chief Executive Officer of
Levesque Beaubien Geoffrion Inc.
PENSIONS PAYABLE AS OF AGE 60 TO THE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER, TO THE PRESIDENT AND CHIEF OPERATING OFFICER AND TO THE SENIOR
EXECUTIVE VICE-PRESIDENT - TREASURY, BROKERAGE AND CORPORATE BANKING
- --------------------------------------------------------------------------------
AVERAGE ELIGIBLE YEARS OF PARTICIPATION
EARNINGS ($)
15 20 25 30 35
- --------------------------------------------------------------------------------
$ $ $ $ $
225,000 64,027 85,369 106,712 128,735 151,235
250,000 71,527 95,369 119,212 143,735 168,735
300,000 86,527 115,369 144,212 173,735 203,735
400,000 116,527 155,369 194,212 233,735 273,735
500,000 146,527 195,369 244,212 293,735 343,735
600,000 176,527 235,369 294,212 353,735 413,735
700,000 206,527 275,369 344,212 413,735 483,735
- --------------------------------------------------------------------------------
THE SUM OF THE AMOUNTS IN THE "SALARY" COLUMN AND 25% OF THE AMOUNTS IN THE
"BONUS" COLUMN OF THE "SUMMARY OF AGGREGATE COMPENSATION OF NAMED EXECUTIVE
OFFICERS" TABLE IS USED TO CALCULATE THE AVERAGE ELIGIBLE EARNINGS FOR THE
PURPOSES OF THE ABOVE PROGRAMS.
YEARS OF SERVICE CREDITED ON THE NORMAL RETIREMENT DATE UNDER THE PENSION PLAN
HAVE BEEN ESTIMATED AS FOLLOWS:
- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER: 37 YEARS
- PRESIDENT AND CHIEF OPERATING OFFICER: 38 YEARS
- SENIOR EXECUTIVE VICE-PRESIDENT - TREASURY, BROKERAGE AND CORPORATE
BANKING: 24 YEARS
HOWEVER, THE MAXIMUM NUMBER OF YEARS RECOGNIZED UNDER THE POST-RETIREMENT
ALLOWANCE PROGRAM IS 35.
THE PENSION IS PAYABLE FOR LIFE. UPON THE PARTICIPANT'S DEATH, 50% OF THE
PENSION IS PAYABLE TO THE SPOUSE. IF THERE IS NO SPOUSE, PART OF THE PENSION IS
PAYABLE TO THE DEPENDENT CHILDREN.
12 NATIONAL BANK OF CANADA
<PAGE>
PENSION PAYABLE AS OF AGE 60 TO THE SENIOR VICE-PRESIDENT AND SENIOR EXECUTIVE
VICE-PRESIDENT - CORPORATE FINANCING, LEVESQUE BEAUBIEN GEOFFRION INC.
- --------------------------------------------------------------------------------
AVERAGE ELIGIBLE YEARS OF PARTICIPATION
EARNINGS ($)
15 20 25 30 35
- --------------------------------------------------------------------------------
$ $ $ $ $
100,000 26,334 34,945 43,556 52,414 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
- --------------------------------------------------------------------------------
THE SUM OF THE AMOUNTS IN THE "SALARY" COLUMN AND 25% OF THE AMOUNTS IN THE
"BONUS" COLUMN, UP TO 20% OF THE SALARY, IN THE "SUMMARY OF AGGREGATE
COMPENSATION OF NAMED EXECUTIVE OFFICERS" TABLE IS USED TO CALCULATE THE AVERAGE
ELIGIBLE EARNINGS FOR THE PURPOSES OF THE ABOVE PROGRAMS.
YEARS OF SERVICE CREDITED ON THE NORMAL RETIREMENT DATE HAVE BEEN ESTIMATED AT
35 YEARS. THE PENSION IS PAYABLE FOR LIFE. UPON THE PARTICIPANT'S DEATH, 50% OF
THE PENSION IS PAYABLE TO THE SPOUSE. IF THERE IS NO SPOUSE, PART OF THE PENSION
IS PAYABLE TO THE DEPENDENT CHILDREN.
PENSION PLAN FOR THE PRESIDENT AND CHIEF EXECUTIVE OFFICER OF LEVESQUE BEAUBIEN
GEOFFRION INC.
The President and Chief Executive Officer of Levesque Beaubien Geoffrion Inc.
participates in a defined benefit pension plan. This plan is fully funded
according to the most recent actuarial valuation. For the years of service
recognized as at December 31, 1992, the credited pension may not be less than 2%
of the average of the salaries earned between January 1, 1990 and December 31,
1992. For each year of service recognized as of January 1, 1993, the plan grants
2% of the salary for that year. For the purposes of the pension plan, salary is
defined as regular compensation up to a maximum of $60,000.
On December 31 of each financial year, the amount of the pension credited after
January 1, 1993, with the exception of the pension credited for the current
year, is increased by the Consumer Price Index, subject to a maximum of 2%. The
normal retirement age is 65. However, the plan does allow for early retirement
as of age 55. In such case, the benefits payable shall be reduced by the lesser
of: 6% for each year of early retirement prior to age 60 or 3% for each year of
early retirement between age 60 and 63.
The following table indicates the estimated annual benefits payable at
retirement under the pension plan to the President and Chief Executive Officer
of Levesque Beaubien Geoffrion Inc.
PENSION PAYABLE AS OF AGE 65 TO THE PRESIDENT AND CHIEF EXECUTIVE OFFICER OF
LEVESQUE BEAUBIEN GEOFFRION INC.
- --------------------------------------------------------------------------------
YEARS OF PARTICIPATION
SALARY ($)
15 20 25 30 35
- --------------------------------------------------------------------------------
$ $ $ $ $
200,000 19,985 27,999 36,014 42,264 48,514
250,000 19,985 27,999 36,014 42,264 48,514
300,000 19,985 27,999 36,014 42,264 48,514
350,000 19,985 27,999 36,014 42,264 48,514
400,000 19,985 27,999 36,014 42,264 48,514
- --------------------------------------------------------------------------------
THE SALARY IN THIS TABLE IS LIMITED TO $60,000 FOR CALCULATION PURPOSES UNDER
THE PENSION PLAN.
YEARS OF SERVICE CREDITED ON THE NORMAL RETIREMENT DATE UNDER THE PENSION PLAN
HAVE BEEN ESTIMATED AT 33 YEARS. THE PENSION IS PAYABLE FOR LIFE AND GUARANTEED
FOR A PERIOD OF 10 YEARS AFTER RETIREMENT.
NATIONAL BANK OF CANADA 13
<PAGE>
REPORT ON THE COMPENSATION OF THE
OFFICERS OF THE BANK
RESPECTIVE ROLES OF THE CONDUCT REVIEW AND CORPORATE GOVERNANCE COMMITTEE AND
THE EXECUTIVE COMMITTEE
The Conduct Review and Corporate Governance Committee of the Board of Directors
of the Bank is responsible for the annual review of the aggregate
compensation of the Named Executive Officers (except for Pierre Brunet,
President and Chief Executive Officer of Levesque Beaubien Geoffrion Inc. whose
compensation is approved by the Human Resources Committee of the Board of
Directors of Levesque, Beaubien and Company Inc.). It analyzes their
compensation conditions and submits timely recommendations to the Board of
Directors in that regard based on the objectives assigned to them and the
results achieved.
It is the responsibility of the Executive Committee of the Board of Directors of
the Bank to recommend to the Board of Directors the general guidelines for the
Bank in matters of aggregate compensation for Management, namely the Executive
Vice-Presidents, the Senior Vice-Presidents and the Vice-Presidents; it also
submits timely recommendations to the Board of Directors with respect to their
salaries and short-term bonuses.
COMPENSATION POLICIES OF THE BANK
Compensation policies are designed to attract, motivate and retain competent
Officers.
The basic principles underlying the Bank's current compensation policies are as
follows:
- - The aggregate compensation of Officers is aligned with corporate
performance;
- - Base salaries are generally below the median for the comparison market;
- - Short- and long-term incentive compensation programs support corporate
objectives and offer fully competitive aggregate compensation if justified
by financial and business development results;
- - The proportion of variable compensation increases in line with the level of
responsibility; and
- - The employee benefits and pension plan are comparable, on the whole, to
those of the Bank's comparison market.
The expression "comparison market" refers to a group of Canadian financial
institutions consisting of banks and trust companies, and encompasses all other
pertinent information obtained from compensation specialists at the Bank and
from external consultants.
All compensation programs must be submitted to the Board of Directors for
approval.
AGGREGATE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS
COMPONENTS OF AGGREGATE COMPENSATION
The aggregate compensation of the Named Executive Officers consists of the
following:
- - Base Salary
The salary of the Named Executive Officers is based mainly on salary
structures for positions with similar responsibilities and of similar
complexity. In its recommendations to the Board of Directors, the Conduct
Review and Corporate Governance Committee takes into account the aggregate
compensation policy of the Bank, its relative size, its results in relation
to the comparison market, the individual performance of each person
concerned, his or her experience and specific competencies.
- - Annual Incentive Compensation
The annual incentive compensation program offers Named Executive Officers
potential additional compensation based on financial objectives set at the
beginning of the year and the personal contribution of the persons
concerned during that year.
- - Long-Term Incentive Compensation
The purpose of the Stock Option Plan and the Stock Appreciation Rights Plan
is to motivate the Named Executive Officers by aligning their interests
with those of the Bank's Shareholders. The size of the annual awards is
determined in accordance with the aggregate compensation policy. For
further information in this regard, refer to the "Stock Option Plan" and
the "Stock Appreciation Rights Plan" sections.
14 NATIONAL BANK OF CANADA
<PAGE>
PERFORMANCE OF THE BANK IN 1997 AND BONUSES
The Bank performed strongly in the 1997 financial year as evidenced by its
profitability which continued to improve. Net income amounted to $342 million,
up 7.3% over the previous year. These results reflect the Bank's ability to
adapt to new market realities and client demands.
Stronger synergy between the Bank and its subsidiaries, the introduction of new
products for businesses and individuals, the implementation of a new credit risk
evaluation and control system in the Commercial Banking sector, the
diversification of distribution networks and the restructuring of the Bank's
management in accordance with its principal markets and strategic priorities,
are all achievements that will ensure the future growth of the Bank.
In light of these results, in December 1997 the Board of Directors approved the
payment of bonuses and the awarding of stock appreciation rights to the Named
Executive Officers of the Bank.
UPDATE OF PARAMETERS FOR AGGREGATE COMPENSATION OF NAMED EXECUTIVE OFFICERS
In 1997, the Conduct Review and Corporate Governance Committee updated the
parameters for the aggregate compensation of the Named Executive Officers of the
Bank (excluding Pierre Brunet), as follows:
- - Increase salaries within the parameters of the compensation policy of the
Bank;
- - Increase the scope of long-term incentive-based programs;
- - Adopt, as of the 1997-1998 financial year, a new methodology for managing
the composition and distribution of short-term incentive compensation,
taking into account the overall results of the Bank and the individual
performances of the persons concerned;
- - Adopt a process to refine, in the short and medium terms, the specific,
concrete assessment standards applicable to the senior executives.
COMPENSATION OF CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
The base salary of the Chairman of the Board and Chief Executive Officer was
increased in 1997. It remained unchanged from 1992 to 1996.
The Conduct Review and Corporate Governance Committee awarded Mr. Berard a bonus
of $588,080 in recognition of his special contribution as head of the Bank to
the 1997 financial results. The proportion of long-term incentive compensation
was increased with the award of 145,000 stock options and stock appreciation
rights.
In the opinion of the Conduct Review and Corporate Governance Committee, the
aggregate compensation paid to Mr. Berard is appropriate but remains below the
practices of the comparison market.
The table entitled "Summary of Aggregate Compensation of Named Executive
Officers" on page 8 presents the data pertaining to the compensation of the
Chairman of the Board and Chief Executive Officer, as approved by the Board of
Directors in December 1995, 1996 and 1997 under the incentive compensation
programs.
This report is submitted by the Conduct Review and Corporate Governance
Committee in accordance with applicable securities legislation. As at December
11, 1997, this Committee was made up of the six Directors indicated below. The
Committee met six times between November 1, 1996 and October 31, 1997.
The Chairman of the Board and Chief Executive Officer is not a member of this
Committee.
Paul Gobeil, Chair
Gerard Coulombe
Gaston Malette
Leonce Montambault
Robert Parizeau
Michel Perron
NATIONAL BANK OF CANADA 15
<PAGE>
INDEBTEDNESS OF EXECUTIVE OFFICERS
As at December 23, 1997, total loans outstanding (other than routine
indebtedness as defined by Canadian securities legislation) granted to Officers
and employees of the Bank and its subsidiaries amounted to $341,339,677. This
total includes mortgage loans for an aggregate amount of $324,343,129 and
personal loans for an aggregate amount of $16,996,548. None of these loans was
granted to a Director who was not an Officer.
The table below shows the loans granted by the Bank to Executive Officers.
TABLE OF INDEBTEDNESS OF EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Name and Occupation Largest Amount Outstanding During Balance as at
the Year Ended October 31, 1997 December 23, 1997
$ $
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harvey L. Brooks, Senior Vice-President
Ontario and Western Canada 201,668 193,736
- ------------------------------------------------------------------------------------------------------------------------
Richard Carter, Senior Vice-President and President
National Bank Information Corporation 112,798 57,656
- ------------------------------------------------------------------------------------------------------------------------
Gisele Desrochers, Senior Vice-President
Human Resources and Administration 184,986 179,507
- ------------------------------------------------------------------------------------------------------------------------
Roger P. Smock, Senior Vice-President - United States 760,329 745,088
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THESE LOANS ARE:
- LOANS SECURED BY A MORTGAGE EXCEEDING THE OFFICER'S ANNUAL SALARY AS
DEFINED BY SECURITIES LEGISLATION; THESE LOANS ARE GRANTED AT ONE-THIRD OF
PRIME ON THE FIRST $50,000 AND AT PRIME LESS 5% ON THE AMOUNT IN EXCESS
THEREOF BUT SUCH RATE CANNOT BE LOWER THAN THE RATE APPLIED TO THE FIRST
$50,000;
- PERSONAL LOANS GRANTED AT HALF OF PRIME AND FOR WHICH THE AGGREGATE BALANCE
EXCEEDS $25,000.
LIABILITY INSURANCE
The Bank purchases and maintains liability insurance for the benefit of its
Directors and Officers. This insurance is also for the benefit of the Bank, to
cover any and all indemnity it may have to pay to a Director or Officer for any
liability incurred by such person in his or her function. The policy provides
coverage in the amount of $20,000,000 and the deductible for the Bank under this
policy is $1,000,000. A premium of $179,000 was paid for the period from
December 31, 1996 to December 31, 1997.
16 NATIONAL BANK OF CANADA
<PAGE>
PERFORMANCE GRAPH FOR COMMON SHARES OF THE BANK
The following graph compares the cumulative total return of a $100 investment in
Common Shares of the Bank made on October 31, 1992 and the cumulative total
return on the TSE 300 Stock Index as well as the "TSE - Banks and Trusts" and
"TSE - Financial Services" components for the five most recently completed
financial years, assuming dividends are fully reinvested at the
market price on each dividend payment date.
[GRAPH]
<TABLE>
<CAPTION>
OCT. 1992 OCT. 1993 OCT. 1994 OCT. 1995 OCT. 1996 OCT. 1997
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
NATIONAL BANK OF CANADA 100.00 136.43 127.17 151.47 188.79 301.04
TSE - BANKS AND TRUSTS 100.00 120.33 123.17 143.11 211.60 340.52
TSE - FINANCIAL SERVICES 100.00 122.66 125.83 146.35 220.03 359.74
TSE 300 100.00 131.32 135.57 144.26 185.11 230.21
</TABLE>
DIRECTORS' APPROVAL
The Board of Directors of the Bank has approved
the contents of this Management Proxy Circular and
the mailing thereof to the Shareholders.
/s/ Francoise Bureau
FRANCOISE BUREAU, Assistant Secretary
Montreal, December 23, 1997
NATIONAL BANK OF CANADA 17
<PAGE>
APPENDIX I
SHAREHOLDER PROPOSALS
Proposals 1 to 5 were presented to the Management of the Bank by Yves Michaud,
residing at 4765 Meridian Avenue, Montreal, Quebec, H3W 2C3.
Proposals 6 and 7 were presented to the Management of the Bank by Marie
Rousseau, residing at 417
St-Joseph Boulevard, #11, Outremont, Quebec, H2V 2P3.
PROPOSAL NO. 1
FORM OF PROXY ALLOWING A SEPARATE VOTE FOR EACH PERSON PROPOSED AS A DIRECTOR
SHAREHOLDER'S PROPOSAL AND STATEMENT:
"IT IS PROPOSED THAT THE BY-LAWS OF THE BANK INCORPORATE GUIDELINE NO. 12 ISSUED
BY THE CAISSE DE DEPOT ET PLACEMENT DU QUEBEC IN MARCH 1997, WHICH STATES THAT
THE FORM OF PROXY SENT TO SHAREHOLDERS SHOULD ALLOW A SEPARATE VOTE FOR EACH
PERSON NOMINATED AS A DIRECTOR."
"Current practice, with the exception of the Laurentian Bank, is that
shareholders, whether or not they have appointed proxies to act on their behalf
at the meeting, may vote directly for the election of directors on the proxy
form. However, their choice is either to vote FOR the slate of candidates
presented by the bank or to "WITHHOLD" (sic) from voting. The aim of this
proposal is to modify this practice so that shareholders may VOTE SEPARATELY for
each candidate on the proxy form."
BANK'S POSITION:
If the only nominee directors are those presented by the Management of the Bank,
separate voting, as recommended by the CAISSE DE DEPOT ET PLACEMENT DU QUEBEC,
has no real impact on the results of the vote since the number of candidates
proposed is the same as the number of directors to be elected. The Bank plans to
continue using a proxy form which provides for voting for the slate of
candidates in order to make it easier for shareholders to express their choice
for the purpose of electing the nominated directors.
For these reasons, the Management of the Bank recommends voting AGAINST this
proposal.
PROPOSAL NO. 2
STATED NUMBER OF DIRECTORS FIXED AT 24
SHAREHOLDER'S PROPOSAL AND STATEMENT:
"NUMBER OF DIRECTORS OF THE BANK FIXED AT TWENTY-FOUR (24)."
"The adoption of this proposal is imperative in order to apply cumulative voting
since section 168 (1) a) of the Bank Act stipulates that "THERE SHALL BE A
STATED NUMBER OF DIRECTORS FIXED BY BY-LAW AND NOT A MINIMUM AND MAXIMUM NUMBER
OF DIRECTORS". The number 24 is taken from the Toronto Stock Exchange report on
corporate governance (1994), page 31, 5.41: "THE EFFECTIVENESS OF A BOARD OF
THIS SIZE HAS BEEN DEBATED WITHIN THE COMMITTEE. THERE IS A GENERAL VIEW WITHIN
THE COMMITTEE THAT AS THE NUMBER OF DIRECTORS ON A BOARD INCREASES BEYOND A
PARTICULAR THRESHOLD (APPROXIMATELY 20), THE EFFECTIVENESS OF THE BOARD
DECREASES. THE PUBLIC WONDERS HOW ANY GROUP OF 30 INDIVIDUALS FUNCTIONING WITHIN
TIME CONSTRAINTS CAN MAKE EFFECTIVE DECISIONS."
BANK'S POSITION:
Until December 1996, the Board of Directors of the Bank consisted of a minimum
of 24 and a maximum of 48 directors. At the last Annual Meeting, more than 90%
of the Shareholders of the Bank approved a resolution stating that the Board of
Directors would be comprised of no less than 20 and no more than 30 directors.
This amendment to the By-Laws of the Bank was presented by the Management of the
Bank as part of an initiative undertaken in October 1995 to reduce the size of
the Board and fully respects the spirit and the letter of the recommendations
made by the Toronto Stock Exchange (Dey Report) in this regard.
Where cumulative voting does not apply, if the Bank were to specify a set number
of directors, it would limit its ability to adapt to changes in the marketplace.
It is in the Bank's interest to retain some leeway to adapt the membership and
representativeness of its Board of Directors to reflect its needs. The
Management of the Bank therefore proposes that the decision made by the
shareholders in this regard at the 1997 Annual Meeting be respected and
recommends voting AGAINST this proposal.
18 - NATIONAL BANK OF CANADA
<PAGE>
PROPOSAL NO. 3
CUMULATIVE VOTING FOR THE PURPOSE OF ELECTING DIRECTORS
SHAREHOLDER'S PROPOSAL AND STATEMENT:
"IT IS PROPOSED THAT THE BY-LAWS, IN COMPLIANCE WITH SECTION 168 OF THE BANK
ACT, PROVIDE FOR CUMULATIVE VOTING FOR THE PURPOSE OF ELECTING DIRECTORS."
"Cumulative voting, as set out and explained in section 168 of the Bank Act,
enables minority shareholders to participate in the election of directors. This
provision of the Act allows a maximum of one or two nominees who are not among
those selected by the Bank to be elected to the board of directors. This
provision was included in the legislation to temper the practice, which goes
against the principles of corporate governance, of having the chief executive
officer or the board of directors propose a slate of candidates because such a
practice favours a "buddy-buddy" system through co-option and "mutual
back-scratching" which could turn boards of directors into rubber stamps for
senior management decisions."
BANK'S POSITION:
Cumulative voting applies only to the election of directors. Under this process,
each shareholder is assigned a number of votes equal to the number of common
shares he or she holds, multiplied by the number of directors to be elected. In
this case, the shareholder may apply all of his or her assigned votes in favour
of one or more candidates, without expressing an opinion on the others.
The concept of cumulative voting was introduced in certain corporate legislation
to enable minority shareholders of companies with majority shareholders to
express their point of view. If the entire capital stock is held by minority
shareholders, as is the case with the National Bank since no shareholder owns
more than 10% of a class of shares in compliance with the Bank Act, cumulative
voting is not necessary.
Moreover, in certain cases, cumulative voting could result in one or more
directors being elected by a group of shareholders with special interests. The
directors elected in this manner would feel obliged to defend the positions of
this group, without necessarily taking into account the interests of all the
shareholders. At present, the Bank's Directors are on an equal footing and are
elected by every shareholder. They are not accountable to any specific group of
shareholders and work together in the interests of all shareholders.
The provisions of the Bank Act governing the election of directors allow for
candidates other than those nominated by the Management of the Bank to be
elected. Shareholders are therefore free to nominate one or more additional
candidates, provided they meet the requirements of the Bank Act. These
candidates would be voted on by all the shareholders, in the same way as the
candidates proposed by Management.
In order to protect the interests of all its shareholders, the Management of the
Bank recommends voting AGAINST this proposal.
PROPOSAL NO. 4
ADOPTION OF A CODE OF PROCEDURE FOR SHAREHOLDER MEETINGS
SHAREHOLDER'S PROPOSAL AND STATEMENT:
"ADOPTION OF A CODE OF PROCEDURE FOR SHAREHOLDER MEETINGS."
"In the judgment Michaud vs. National Bank of Canada and Royal Bank of Canada
J.E. 96-245 (C.S.) confirmed by the Court of Appeal, the court concluded that
the intent of the legislation was for the annual meeting to be that of the
shareholders and not of the officers or directors. It naturally follows on from
this judgment that shareholders should not be subject to arbitrary decisions by
the chair of the meeting and that they be given ample opportunity to intervene
and make proposals. A code of procedure must, in particular, allow shareholders
making proposals a reasonable amount of time to explain each proposal (seven to
10 minutes) and five minutes to respond to anyone opposed to such proposal.
Similarly, the general meeting should not end until ALL the questions from
shareholders have been heard and debated."
NATIONAL BANK OF CANADA - 19
<PAGE>
BANK'S POSITION:
Like other financial institutions and large companies in Canada, the Bank
follows the rules of common law when conducting its annual meetings. These rules
give the chair of the meeting the necessary flexibility to allow everyone to
express themselves freely, within a reasonable timeframe, while ensuring that
the interests of shareholders are respected and that, in general, all
participants are satisfied.
To enable the Bank to maintain the necessary flexibility for its meetings, the
Management of the Bank recommends voting AGAINST this proposal.
PROPOSAL NO. 5
APPOINTMENT OF AN OMBUDSMAN WHO IS NOT
A CURRENT OR RETIRED EMPLOYEE OF THE BANK
SHAREHOLDER'S PROPOSAL AND STATEMENT:
"IT IS PROPOSED THAT THE POSITION OF OMBUDSMAN BE HELD BY SOMEONE WHO IS NOT
CURRENTLY OR WAS NOT FORMERLY EMPLOYED BY THE BANK."
"When it comes to justice, it is important not only that justice be rendered but
that it be seen to be rendered. This elementary principle is intended to ensure
that there is no appearance of conflict of interest between the person making a
decision and the person affected by that decision. Appointing a current or
retired employee as ombudsman could create a climate of distrust as a result of
the close relationship that can or could exist between the ombudsman and his
current or former employer."
BANK'S POSITION:
In the past year or so, Canadian banks have appointed ombudsmen to handle
complaints from clients. To ensure efficiency, the National Bank recently
created two ombudsman positions, with one ombudsman being responsible for
independent businesses and the other for consumers. As is the case for the other
banks, the persons appointed to these functions were selected from among the
Bank's current or retired employees because of their experience and knowledge of
the Bank's structure and its operations. Consequently, they are able to target
their actions more precisely in response to client complaints and settle files
more quickly and more efficiently than if they had come from outside the Bank.
The clients of any bank can also appeal the decision of their bank's ombudsman
to the Canadian Banking Ombudsman, who is not from the banking industry. He is
accountable for his actions and decisions to a non-profit organization, Canadian
Banking Ombudsman Inc., whose board of directors is made up of six external
representatives and five bank representatives.
In light of the foregoing, the Management of the Bank recommends voting AGAINST
this proposal.
PROPOSAL NO. 6
INELIGIBILITY OF CANDIDATES AS DIRECTORS IF THEY SIT ON MORE THAN FIVE OTHER
BOARDS OF DIRECTORS
SHAREHOLDER'S PROPOSAL AND STATEMENT:
"IT IS RECOMMENDED THAT CANDIDATES WHO ALREADY SIT ON MORE THAN FIVE BOARDS OF
DIRECTORS OF PUBLIC COMPANIES NOT BE ELIGIBLE FOR ELECTION TO THE BOARD OF
DIRECTORS."
"Considering that approximately 10 board of directors' meetings are held per
year; considering that the participants must be informed of the topics to be
discussed and that they require a certain amount of time for preparation; and
considering that regular attendance should be a quality that is looked for, it
is therefore appropriate to favour candidates who can fully assume their role as
directors and ensure that objectives of sound administration are achieved. For
instance, a person sitting on six boards of directors would have to attend 60
meetings per year, representing about one third of the work year. By limiting
candidates for its board to persons who sit on fewer than six boards of
directors, the bank, investors and bank clients will obtain maximum efficiency
from the system in its existing form."
BANK'S POSITION:
Approximately 10 years ago, the Bank established eligibility criteria as part of
its selection process for new directors. These criteria, recently revised by the
Conduct Review and Corporate Governance Committee of the Board of Directors,
take into account the requirements of the Bank Act, the expectations and needs
of the Bank, the personal qualities of the candidate in question and his or her
availability.
20 - NATIONAL BANK OF CANADA
<PAGE>
Directors who are members of several boards of directors provide invaluable
support to the smooth running of the Board of Directors given the expertise they
acquire on other boards. By systematically limiting the number of boards on
which directors may sit, the Bank could be deprived of interesting candidates.
Consequently, the Management of the Bank recommends voting AGAINST this
proposal.
PROPOSAL NO. 7
INCREASE IN PROPORTION OF WOMEN
CANDIDATES FOR THE BOARD OF DIRECTORS,
UP TO ONE-THIRD BY THE YEAR 2000
SHAREHOLDER'S PROPOSAL AND STATEMENT:
"IT IS RECOMMENDED THAT POLICIES OF THE NATIONAL BANK BE DEVELOPED AND ADOPTED
WITH THE GOAL OF SYSTEMATICALLY INCREASING THE PROPORTION OF WOMEN CANDIDATES
FOR THE BOARD OF DIRECTORS TO ONE-THIRD OF ALL CANDIDATES BY THE YEAR 2000."
"This proposal applies solely to the nomination of women candidates. It is not
an initiative to establish quotas and should in no way be interpreted as a
mandate to implement anti-discriminatory measures of a restrictive nature. The
number of such candidates nominated may obviously exceed the number of places
available, in which case it will be for the shareholders to elect the candidates
who represent them best.
It is in the shareholders' interest that the bank's board of directors have as
wide a representation base as possible and looking for women candidates offers
many advantages in this regard. By showing greater sensitivity to women and
putting that into practice, the bank can improve its competitiveness in
attracting clients and employees and maintaining good relations with them."
BANK'S POSITION:
The Bank acknowledges the importance of the role women have on its Board of
Directors and intends to increase their representation in the future.
In accordance with the terms of its mandate, the Conduct Review and Corporate
Governance Committee of the Board of Directors of the Bank has already begun the
process of identifying potential women candidates who meet the eligibility
criteria in effect at the Bank. The Management of the Bank intends to benefit
from the services of these persons whenever circumstances and the context allow,
while remaining faithful to the orientation undertaken with respect to reducing
the size of its Board of Directors.
A proposal making it compulsory to increase the number of women candidates to
one-third of the representation of the Board of Directors by the year 2000 is
not realistic under the circumstances.
The Management of the Bank therefore recommends voting AGAINST this proposal.
N.B. THE PROPOSALS AND STATEMENTS SUBMITTED BY SHAREHOLDERS WERE TRANSLATED INTO
ENGLISH BY THE BANK. EVERY EFFORT WAS MADE TO FAITHFULLY REFLECT THE MEANING AND
INTENT OF THE ORIGINAL FRENCH TEXTS.
NATIONAL BANK OF CANADA - 21
<PAGE>
LEGAL DEPOSIT:
1ST QUARTER 1998
BIBLIOTHEQUE NATIONALE DU QUEBEC
ISBN 2-921835-07-X
[LOGO] NATIONAL
BANK
OF CANADA
HEAD OFFICE:
NATIONAL BANK TOWER
600 DE LA GAUCHETIERE WEST
MONTREAL, QUEBEC
CANADA H3B 4L2
<PAGE>
1 9 9 7 A n n u a l R e p o r t
[PHOTO]
A N N U A L R E P O R T 1997
[LOGO]
<PAGE>
PROFILE OF NATIONAL BANK OF CANADA
NATIONAL BANK OF CANADA IS AN INTEGRATED FINANCIAL GROUP WHOSE MISSION IS TO
PROVIDE COMPLETE FINANCIAL SERVICES TO CONSUMERS, SMALL AND MEDIUM-SIZED
BUSINESSES AND LARGE CORPORATIONS IN ITS CORE MARKET, WHILE OFFERING SPECIALIZED
SERVICES TO ITS CLIENTS ELSEWHERE IN THE WORLD.
THE NATIONAL BANK OFFERS A FULL ARRAY OF BANKING SERVICES, INCLUDING ALL THE
INVESTMENT BANKING SERVICES REQUIRED BY LARGE CORPORATIONS. IT IS AN ACTIVE
PLAYER ON INTERNATIONAL CAPITAL MARKETS AND, THROUGH ITS SUBSIDIARIES, IS
INVOLVED IN SECURITIES BROKERAGE, INSURANCE, WEALTH MANAGEMENT, MUTUAL FUNDS
AND RETIREMENT PLANS.
RANKING SIXTH AMONG CANADA'S CHARTERED BANKS, THE NATIONAL BANK IS THE
LEADING BANKING INSTITUTION IN QUEBEC AND THE BANK OF CHOICE FOR INDEPENDENT
BUSINESSES. IT HAS BRANCHES IN EVERY PROVINCE OF CANADA. THROUGH ITS
REPRESENTATIVE OFFICES, SUBSIDIARIES AND ALLIANCES, IT IS ALSO PRESENT IN THE
UNITED STATES, EUROPE, ASIA AND LATIN AMERICA. FOUNDED IN 1859, NATIONAL BANK
OF CANADA IS THE PRODUCT OF A SERIES OF MERGERS AND ACQUISITIONS. ITS ASSETS
NOW EXCEED $65 BILLION AND, TOGETHER WITH ITS SUBSIDIARIES, IT EMPLOYS OVER
16,000 PEOPLE. THE BANK'S HEAD OFFICE IS IN MONTREAL AND ITS SHARES ARE
LISTED ON THE TORONTO, MONTREAL AND VANCOUVER STOCK EXCHANGES.
TABLE OF CONTENTS
1 Highlights
2 The Bank of Small and
Medium-Sized Businesses
5 Commitments and Challenges
6 Major Accomplishments in 1997
8 Message to Shareholders
13 Annual Information Form
15 Description of the Business of the Bank
19 Management's Discussion and Analysis
50 Management's Report
50 Auditors' Report
51 Consolidated Financial Statements
73 Corporate Governance Practices
of the Bank
77 Directors
78 Committees of the Board of Directors
80 Officers
82 Business Development Committee Members
85 Major Subsidiaries and Offices Abroad
87 Information for Shareholders
and Investors
88 Glossary of Financial Terms
<PAGE>
[GRAPH]
PERCENTAGE
CHANGE
1997 1996 1997
----
1996
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
Net interest income $ 1,319 $ 1,136 16
Other income 1,056 970 9
Net income 342 318 7
- --------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on common shareholders' equity 14.0% 14.5%
Return on average assets 0.62% 0.64%
- --------------------------------------------------------------------------------
PER COMMON SHARE
Net income
- Basic $ 1.86 $ 1.76 6
- Fully diluted 1.84 1.74 6
Dividends 0.575 0.49 17
Book value 13.99 12.70 10
Stock trading range
- High 20.30 13.90
- Low 13.20 10.38
- Close 20.15 13.00
- --------------------------------------------------------------------------------
FINANCIAL POSITION
(MILLIONS OF DOLLARS)
Total assets $ 66,235 $ 53,134 25
Loans and bankers' acceptances 49,532 39,660 25
Deposits 43,270 40,125 8
Shareholders' equity and bank debentures 3,829 3,515 9
Capital ratios (BIS)
- Tier 1 8.1% 6.9%
- Total 11.3% 10.2%(1)
- --------------------------------------------------------------------------------
OTHER INFORMATION
Number of common shares
at end of year (IN THOUSANDS) 170,461 167,151 2
Number of common shareholders
of record 34,433 36,549 (6)
Number of employees 16,320 15,829 3
Number of branches in Canada 637 632 1
Number of banking machines 738 712 4
- --------------------------------------------------------------------------------
(1) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON NOVEMBER 1,
1996.
NATIONAL BANK OF CANADA 1
<PAGE>
[PHOTO]
THE BANK OF SMALL AND MEDIUM-SIZED BUSINESSES
National Bank of Canada is the bank of small and medium-sized businesses (SMBs)
and it has every intention of remaining so. These businesses form the very
foundation of the economy, partly by virtue of their irreplaceable role in a
market economy and partly because of their sheer numbers.
In Quebec, businesses with fewer than 100 employees account for some 40% of
total wages and employment, in addition to creating the vast majority of new
jobs. Companies with assets of under $13 million generate between 40% and 50% of
corporate income.
But the role of SMBs in the economy goes far beyond their numerical importance.
Every large corporation started out as an SMB, and the many small businesses
being created every day serve an essential function by keeping markets dynamic
and flexible. Moreover, SMBs are frequently the originators of new ideas and
innovations.
IMPORTANCE OF SMBS FOR THE BANK
In proportion to its size, the National Bank leads the way among Canadian banks
in providing financing to independent businesses. More specifically, its 14%
share of the market for bank loans of under $500,000 is about twice the Bank's
size in relation to the rest of the banking industry.
In its core market, Quebec, the National Bank accounts for approximately
one-third of the SMB credit market. In the rest of Canada and in the United
States, the Bank serves businesses in specialized market niches.
The proportion of business loans in the National Bank's portfolio is higher
than the banking industry average. In fact, more than nine out of 10 of the
Bank's business loans are made to SMBs, with four-fifths of these loans being
for amounts of under $750,000 and two-thirds for less than $100,000.
The Bank's SMB clients represent the full spectrum of the Canadian economy,
with the result that the Bank's SMB credit portfolio is highly diversified.
2 NATIONAL BANK OF CANADA
<PAGE>
[PHOTO]
MY READY-TO-WEAR CLOTHING BOUTIQUE WAS DOING SO WELL THAT I DECIDED TO EXPAND
AND PURCHASE THE BUILDING NEXT DOOR FOR A NEW LINE OF EXCLUSIVE DESIGNS. TO
FINANCE THIS EXPANSION, I HAD PLANNED ON GETTING A CONVENTIONAL LOAN UNTIL THE
NATIONAL BANK POINTED ME IN THE RIGHT DIRECTION BY SUGGESTING I APPLY FOR A
SMALL BUSINESS LOAN.
CREATIVELY
FULL SERVICE FOR SMBS
Credit is merely one aspect of the Bank's commitment to SMBs. These clients can
also count on the National Bank for the full range of banking and financial
services they need to ensure their development -- from electronic data
interchange to employee benefit programs, from cash management to payroll
services. Whether financing is needed for advanced technology projects or
audiovisual production, specialized teams are on hand to give businesses the
benefit of their expertise. In the area of risk capital, the Bank also plays an
active role in 24 regional funds as well as a number of specialized technology
funds.
In a market that is daily becoming more global, the National Bank gives valuable
support to SMBs which export their products and services. Not only does it offer
the entire gamut of export-related financial services (such as letters of
guarantee, bills of exchange, foreign currency bank accounts and accounts in
other countries), but it is also the only Canadian bank to provide a factoring
service for companies' smaller foreign receivables.
Of all the Canadian banks, the National Bank has the most extensive commercial
network in the United States, consisting of 21 agencies and representative
offices. This network, in conjunction with the Bank's eight cooperation
agreements with European banks and its positioning in Latin America, means that
the National Bank can effectively accompany its clients as they expand their
operations in international markets.
The numerous partnership agreements the Bank has concluded with government
export finance agencies and the information seminars and workshops regularly
organized by the International division are just some of the other initiatives
introduced especially for the Bank's exporting clients.
NATIONAL BANK OF CANADA 3
<PAGE>
[PHOTO]
RECOGNITION PROGRAM
Now in its third year, "The Small and Medium-Sized Enterprises of the
National Bank" is a program to recognize the Bank's outstanding independent
business clients. Every year, juries in each of the Bank's regions in Quebec
choose three winners from among the local SMBs which have distinguished
themselves. In the second phase of the program, three provincial winners are
selected from among the regional finalists and are subsequently honoured at a
gala event. A survey has shown that more than half of the Bank's commercial
clients are aware of this program and that more than one-fifth of non-clients
have heard of the program, mainly through the print media.
This year, the gold medal was awarded to MICRO THERMO, which designs
innovative electronic systems for monitoring refrigeration equipment in
supermarkets. LOGICIELS ET APPLICATIONS SCIENTIFIQUES (L.A.S.), a company
which sells its remote sensing software in more than 40 countries, received
the silver medal, while the bronze medal went to VERGERS D'EMILIE,
distributors of apple- and maple-based food products in Canada and abroad.
ORIENTATIONS
The National Bank intends to maintain its standing as the principal banker
and the best bank for SMBs, and it will do so by focusing more and more on
the personalized relationships that companies look for with their banker.
For instance, the information technology deployed for commercial credit must,
first and foremost, make it easier for clients to do business, reduce their
costs and enhance the company/banker relationship.
A project is under way to simplify the Bank's dealings with its SMB clients.
The more streamlined application formalities introduced for loans of under
$100,000 are part of this thrust, as is the upcoming launch of an SMB credit
card for financing needs of less than $50,000.
The Bank's independent business clients can be confident that they will
receive, both now and in the future, financial services that are on a par
with their ambitions and backed by the National Bank's vast experience in
this sector.
Through its unswerving support of SMBs, the National Bank plays a pivotal role
in the economic development of the communities where it is present. At the same
time, it is building a franchise which offers high growth potential and which,
through sound credit risk management, will enhance future profitability.
4 NATIONAL BANK OF CANADA
<PAGE>
[PHOTO]
AFTER I QUIT MY JOB, I DECIDED TO TAKE ADVANTAGE OF THE SITUATION BY OPENING MY
OWN GRAPHIC ARTS STUDIO. I OWE MY SUCCESS TO NATIONAL BANK OF CANADA, WHICH GAVE
ME THE ONE TOOL I NEEDED TO GET MY BUSINESS OFF ON THE RIGHT FOOT. I JUST
DOWNLOADED THE BANK'S "YOUR KEY TO SUCCESS" SOFTWARE AND HAD EVERYTHING I NEEDED
TO PREPARE MY BUSINESS PLAN!
INTELLIGENTLY
COMMITMENTS AND CHALLENGES
PROFITABILITY
Pursue regular growth in income and profitability.
FINANCIAL STABILITY
Manage risks prudently in the interest of shareholders and clients alike. Build
up the necessary provisions to maintain the Bank's financial soundness.
THE BANK OF SMALL AND
MEDIUM-SIZED BUSINESSES
Remain the uncontested bank of small and medium-sized businesses in Quebec. Move
into profitable, specialized niches elsewhere.
INVESTMENT BANK
Offer corporate clients the full spectrum of investment banking services.
Finance the Bank's growing assets under the best possible conditions, notably
via international capital markets.
RETAIL BANK
Finalize the deployment of financial planners and personal bankers in the
branches.
Forge even more personalized relationships with clients.
DIVERSIFICATION
Continue developing new distribution channels. Remain at the forefront of new
electronic networks.
Occupy all niches of the financial industry as banking regulations are eased.
Consolidate coordination among the various members of the National Bank
Financial Group.
TRAINING
Continue to promote training for personnel. Expand the Employee Recognition
Program. Improve ways of recruiting and retaining personnel.
NATIONAL BANK OF CANADA 5
<PAGE>
[PHOTO]
MAJOR ACCOMPLISHMENTS IN 1997
PROFITABILITY: CONSOLIDATION AND GROWTH
Growth in net income, which reached $342 million.
Increase of 9% in loan volumes and bankers' acceptances (excluding reverse
repurchase agreements), which exceeded $40 billion.
THE BANK'S PROFITABILITY
Earnings per share of $1.86, with dividends up 8.5 cents or 17%.
Higher share price brings total return to shareholders to 60%, in line with the
industry.
STRONGER CAPITALIZATION
Rise of 12% in common shareholders' equity, which reached $2,384 million.
Increase in internally generated capital, innovative financing operation on the
U.S. market and Tier 1 capital ratio raised to 8.1%, the highest among the major
Canadian banks.
MARKET DIVERSIFICATION AND ANTICIPATION
Over 25% growth in mutual funds and savings instruments other than deposits.
Levesque Beaubien Geoffrion income up 28%.
Multiplication and diversification of distribution channels: branches in
supermarkets, mortgage representatives in Vancouver, electronic data interchange
services through National Bank Information Corporation.
Initial group of over 100 financial planners deployed in branches.
Other income in regular operations up by 19%. Capital market fees: +29%; income
from loans and bankers' acceptances: +14%; income from trust services: +15%;
credit card service revenues: +16%; insurance income: +41%.
6 NATIONAL BANK OF CANADA
<PAGE>
[PHOTO]
ACCESS MY ACCOUNTS AND MANAGE MY BUDGET BY COMPUTER? I THOUGHT I WAS DREAMING.
THANKS TO THE NATIONAL BANK'S PERSONAL COMPUTELLER, IT'S A DREAM COME TRUE!
EFFICIENTLY
THE BANK OF SMALL AND MEDIUM-SIZED
BUSINESSES
Growth of 13% in commercial loans and bankers' acceptances.
Increase in the Bank's share of the independent
business market in Quebec.
PRODUCT INNOVATION
New products for independent businesses: Group Benefits Plus employee benefits
plan from National Bank Life Insurance, General Trust retirement plans with
assisted portfolio management, ClickFinance software, package of services for
the self-employed.
New products for consumers: Money-Saver Mortgage, four new mutual funds,
InvesNet trading site on the World Wide Web.
COST AND RISK CONTROL
Non-interest expenses under control: 5.4% increase or 4.0% if only regular
operating expenses taken into account.
New credit risk assessment and control system in the Commercial Banking sector.
INNOVATION AND SYNERGY
Forging of strategic alliances continued in insurance, electronic services and
other transaction-oriented networks.
Enhanced synergies with the subsidiaries: corporate financing integrated into
Levesque Beaubien Geoffrion, cooperation with General Trust of Canada in
providing wealth management services, and a more effective referral process
implemented throughout the Bank's branch network.
Restructuring of senior management to reflect the Bank's main markets and
strategic objectives.
Continued emphasis on personnel training, specifically through the National Bank
university program.
NATIONAL BANK OF CANADA 7
<PAGE>
[PHOTO]
THE BANK'S PROFITABILITY CONTINUED TO IMPROVE, WITH THE TOTAL RETURN TO
SHAREHOLDERS REACHING A LEVEL COMPARABLE TO THE INDUSTRY.
ANDRE BERARD
MESSAGE TO SHAREHOLDERS
The Bank performed strongly in 1997 as evidenced by its profitability which
continued to improve, with the total return to shareholders reaching a level
comparable to the industry. Stronger economic growth and buoyant financial
markets both contributed to this performance. At the same time, however, the
financial industry had to contend with profound changes, characterized by
fiercer competition, rapid technological developments, the emergence of new
products and the proliferation of distribution networks.
OVERVIEW OF RESULTS
For 1997, the Bank reported net income of $342 million. Earnings for the year,
after adjusting 1996 net income for the one-time gain on the sale of the Bank's
interest in a Latin American bank, were up by more than 15%.
The pronounced increase in revenues, particularly from full-service and discount
brokerage activities and mutual funds, was responsible for this growth.
Earnings per share rose to $1.86 and the dividend increased by 8.5 cents, or
17.3%. Return on common shareholders' equity climbed from 13.4% to 14.0%,
excluding the non-recurring items which in 1996 boosted return on equity by 110
basis points. The Bank's share price reached a record high in 1997, returning a
total of 59.5% to shareholders. This return, which reflects a remarkable
improvement over the previous year, matched the average for Canadian banks and
trust companies.
The Bank further strengthened its capital structure in 1997. Internally
generated capital for the year amounted to $220 million, while common
shareholders' equity at year end totalled $2,384 million, for an increase of
12%. With a Tier 1 capital ratio of 8.1%, the National Bank is the best
capitalized of the major banks in Canada.
FINANCIAL INDUSTRY
"A whole new way of thinking" is more than just an advertising slogan; in just a
few words, it sums up the Bank's attitude towards the upheavals on financial
markets and its determination to capitalize on the advantages conferred by its
unique status among financial institutions.
For the banking industry as a whole, the prevailing feature of 1997 was the
migration of personal deposits into mutual funds and stock market securities. A
combination of very low inflation and government deficits under control exerted
downward pressure on interest rates, prompting consumers to react by switching
investment instruments. However, this shift is also indicative of a more
fundamental trend. With the appearance of new invest-
8 NATIONAL BANK OF CANADA
<PAGE>
[PHOTO]
THE NATIONAL BANK OPERATES IN A MULTI-FACETED, GLOBAL FINANCIAL MARKET. IN SUCH
AN ENVIRONMENT, A MEDIUM-SIZED FINANCIAL INSTITUTION HAS TO ADOPT A WHOLE NEW
WAY OF THINKING IN ORDER TO GROW.
LEON COURVILLE
ment instruments on the market, retail investors are increasingly drawn towards
more sophisticated investment strategies. Such disintermediation constitutes a
major challenge, but at the same time it provides the banking industry with an
opportunity to diversify its activities.
Given this migration in savings, the Bank continued to position itself with
respect to the products replacing personal deposits. By diversifying its
business lines and focusing on other income, the Bank is able to offer its
clients an integrated approach for managing their savings, regardless of the
instruments they choose.
A premier financial institution in Quebec, the National Bank operates in a
multi-faceted, global financial market where competition comes from large
institutions, specialized lenders and new distribution networks. In such an
environment, a medium-sized financial institution has to adopt a whole new way
of thinking if it is to advance and grow.
A NEW WAY OF THINKING ABOUT RETAIL BANKING
Our first priority is to bring a new way of thinking to the relationships we
forge with our individual clients. The challenge is to meet their needs and
expectations while helping them to find the best solution for their specific
situation. Clients naturally make their own decisions as to which products suit
them best, but they do expect the Bank to give them sound advice and to be there
to provide them with the right product at the right time.
The Bank's expanding role in managing its clients' assets explains the strong
growth in its brokerage subsidiary Levesque Beaubien Geoffrion, its discount
broker InvesTel, InvesNat mutual funds, and assets administered by General Trust
of Canada on behalf of individual clients.
Among the products launched by the Bank in 1997 were four new mutual funds,
various RRSP-eligible investment products such as the TSE 35 NatOption RRSP
(linked to the TSE 35 Index of the Toronto Stock Exchange), and InvesNet, an
InvesTel trading site on the Internet.
In response to the growing demand for advisory services and in order to ensure
that clients are efficiently directed to the National Bank Financial Group
company that can best address their needs, more than 100 financial planners were
deployed in branches during the year. They will soon be joined by personal
bankers who will focus on serving clients requiring financial advice of a
general nature.
NATIONAL BANK OF CANADA 9
<PAGE>
As clients are increasingly looking for a more personalized relationship with
their banker, the Bank has been reassigning branch personnel in recent years and
implementing new technologies which lighten their workload so that they can
develop the kind of banking relationship that clients want.
Another fundamental trend in the financial industry is the proliferation of
transaction-oriented networks. Clients wishing to perform banking transactions
or looking for a savings vehicle, a loan, an insurance policy or financial
advice can choose from among several such transaction-oriented networks. Since
the Bank firmly believes in respecting clients' preferences, it is positioning
itself in all the networks.
Redeployment of the Bank's branches continued in 1997 with the goal of bringing
our branch network closer to our clients and making it more accessible to them
in their day-to-day activities. In 1997, the Bank scored a first in this regard
when it opened branches in five supermarkets in Quebec and the results of this
initiative have been extremely positive. Other similar innovations are in the
works, including the opening of Bank branches in post offices.
Computer networks are proving to be another increasingly popular method of
accessing financial products and services. TelNat, the automated telephone
banking service introduced a few years ago, currently handles more than 30,000
calls a day. Moreover, the number of subscribers to Personal CompuTeller, which
lets clients do their banking at home via their personal computer, doubled in
1997. During the year, InvesTel also began offering its clientele the
possibility of executing trades on the Internet (www.invesnet.com).
The fierce competition that exists for personal and mortgage loans prompted the
Bank to increase its presence and develop non-traditional networks in these
sectors. In 1997, the Toronto Mortgage Centre doubled its lending volumes, while
in the dynamic Vancouver market the Bank created its own mortgage development
team which works on a commission basis. In Quebec, the new Money-Saver Mortgage,
an innovative formula that lets consumers realize substantial savings on their
loan, met with great success, attracting a large number of new clients to the
Bank.
A NEW WAY OF THINKING ABOUT COMMERCIAL BANKING
The National Bank is -- and will remain -- the undisputed business bank in
Quebec, especially for independent businesses. In fiscal 1997, loans and
bankers' acceptances in the Commercial Banking sector rose by 13%.
In Quebec, its core market, the Bank offers comprehensive banking services to
businesses and individuals alike. Elsewhere in Canada and North America, it
focuses on specialized niches, which serve to diversify its portfolio and reduce
risks.
In markets outside Quebec, the Bank continued to provide niche financing to
businesses. In the United States, asset-based loans in the Bank's portfolio
rose by 23.7% to $3,400 million. Our group in Toronto, which specializes in this
type of lending, increased its loan volumes to $33 million as at October 31,
1997, and a similar group began operating in Vancouver during the year.
Moreover, our energy sector loans in Western Canada almost doubled. Although
specialized operations of this type represent only a fraction of the Bank's
total loans, they are nonetheless instrumental in diversifying and strengthening
its lending portfolio.
The Bank increased its market share of independent business financing in Quebec
and also recorded sizeable growth in its business with large corporations.
10 NATIONAL BANK OF CANADA
<PAGE>
Some of the new products and services rolled out specifically for small and
medium-sized businesses during the year were the Group Benefits Plus employee
benefits plan offered by the subsidiary National Bank Life Insurance Company,
General Trust retirement plans with assisted portfolio management, a package of
services for the self-employed, and one-stop banking for franchises. A team of
professionals with expertise in providing financing to the audiovisual industry
was also set up to support and expand our existing operations in this sector.
Various other activities for independent business clients were pursued and
expanded, the most notable examples being the Technology Group which specializes
in financing new technologies, and the risk capital funds in which the Bank is
involved.
A NEW WAY OF THINKING ABOUT INVESTMENT BANKING
In addition to serving consumers and independent businesses, the Bank, through
its active participation in capital markets, is also able to provide large
corporations with the many specialized services they need. The complete line of
financing services offered to institutional and commercial clients combined with
treasury operations on capital markets make the National Bank a real investment
bank.
Concurrently with its traditional banking services, the Corporate Banking sector
offers risk management instruments developed in conjunction with the Treasury
division, as well as advisory services for non-traditional financing. In 1997,
other income from Corporate Banking operations rose by 11%.
The institutional and corporate financing services of Levesque Beaubien
Geoffrion constitute a cornerstone of the investment bank. In 1997, revenues
from these services soared by 30%. Nearly 80% of the institutional revenues
earned by Levesque Beaubien Geoffrion came from outside Quebec.
During the year, the Bank pursued its goal of integrating its investment banking
business by consolidating its money market operations with those of Levesque
Beaubien Geoffrion, in addition to jointly completing a number of corporate
financing transactions. Under the Bank's new organizational structure
implemented at fiscal year end, all corporate financing services now come under
the responsibility of the President of Levesque Beaubien Geoffrion, who reports
directly to the Bank's Senior Executive Vice-President - Treasury, Brokerage and
Corporate Banking.
A NEW WAY OF THINKING ABOUT BANK MANAGEMENT
The Bank has to adopt a new way of thinking about its management approach. Its
new organizational structure is designed to reflect our strategic priorities
more clearly and to foster responsibility-based management throughout the
organization.
Further progress was made in 1997 in developing synergies and alliances. For
instance, the Bank worked closely with General Trust of Canada to provide wealth
management services to its clients, as well as with National Bank Securities to
provide mutual fund and discount brokerage services and with Metropolitan Life
to distribute new life insurance products.
National Bank Information Corporation is now responsible for overseeing all
corporate electronic services in addition to the Bank's in-house systems. The
ongoing development of its electronic data interchange (EDI) services continued
to be a priority for this subsidiary. One of the highlights of the year was the
agreement it signed with the German-based firm SAP to facilitate the use of R/3
management software, specifically by the government and parapublic sector in
Quebec. Moreover, the Bank again drew on technology to diversify its revenue
streams when it sold an operating licence for its account management software to
another major Canadian bank.
NATIONAL BANK OF CANADA 11
<PAGE>
A NEW WAY OF THINKING ABOUT PERSONNEL
The Bank's personnel are in the frontline when it comes to customer service and
operational efficiency. They too have to acquire a whole new way of thinking,
and the Bank in turn has to rethink its relationship with them.
Our training efforts were consolidated during the year to focus on skills,
motivation and customer service. Moreover, in 1997, the National Bank university
program produced its very first graduates. Over 2,000 students have enrolled in
this program since it was launched, making it the fifth largest Faculty of
Business Administration in Quebec.
The Bank's policy towards its employees aims to provide them with work
conditions that are on a par with what is asked of them. An example of the
Bank's commitment in this respect is its Work and Family Responsibilities
Program, which was expanded during the year to accommodate employees who want to
further their education.
The Recognition Program, for its part, is intended to acknowledge the
performance of exceptional employees and their successes. Incentive compensation
is just one of the ways in which outstanding employees are acknowledged and
rewarded for their achievements.
The Bank plans to step up its efforts in this regard, notably by encouraging
managers at all levels to develop a "recognition reflex". Another challenge will
be to improve ways of attracting and retaining personnel.
Despite rationalization and the many changes experienced in recent years, the
Bank continued to create jobs in 1997. As at October 31, the number of regular
full- and part-time employees totalled 16,320, compared to 15,829 a year
earlier.
Finally, we would like to thank all the members of the Board of Directors who
consistently gave the Bank the benefit of their knowledge and experience. In
particular, we wish to single out the contribution of Maurice J. Closs, who will
not be standing for re-election in 1998, and of Guy St-Germain, who has left the
Board for personal reasons after 23 years of dedicated service.
In view of the progress made by the National Bank in recent years and its
achievements in 1997, it is well placed to tackle the challenges of the future.
With its new way of thinking, the Bank can be relied on to successfully take its
place in a rapidly changing industry, put its clients first at all times,
provide its personnel with motivating employment conditions and earn its
shareholders a higher return.
ANDRE BERARD LEON COURVILLE
CHAIRMAN OF THE BOARD AND PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF OPERATING OFFICER
12 NATIONAL BANK OF CANADA
<PAGE>
ANNUAL INFORMATION FORM
- --------------------------------------------------------------------------------
INCORPORATION
National Bank of Canada (the "Bank") was formed through a series of
amalgamations, notably with The Provincial Bank of Canada in 1979, with The
Mercantile Bank of Canada effective November 1, 1985, and with National Bank
Leasing Inc., its whollyowned subsidiary, on November 1, 1992. The Bank's roots
in fact date back to 1859 with the founding of the BANQUE NATIONALE in Quebec
City.
The Bank is a Schedule I bank under the Bank Act (the "Act"). Its head office
and principal place of business is located at the National Bank Tower, 600 de La
Gauchetiere West, Montreal, Quebec, Canada H3B 4L2.
COMPETITION
The barriers to competition in the financial industry are steadily disappearing
as the various markets merge and new types of investments and transactions are
developed. The Bank's competitors in traditional banking services are the major
Canadian banks together with the credit unions in its primary market of Quebec,
where it has an aggregate market share of 20%. The same competitive environment
exists in the brokerage industry, where the role of the major banks is growing
in importance. At the Bank, brokerage operations are carried out by Levesque
Beaubien Geoffrion Inc. and National Bank Securities Inc. through its InvesTel
service. For mutual funds, trust services and investment management, there is a
greater range of competitors, including a number of specialized financial
companies. In the United States, a large number of financial corporations
compete for asset-based lending business. The size of the Bank's portfolio
enables it to precisely target markets in order to limit risk exposure. In
addition, the Bank understands the importance of being at the leading edge when
it comes to the new electronic payment and marketing methods which are
experiencing strong growth as computer networks become more widely accessible.
The ongoing development of a number of electronic services by the Bank reflects
its determination to maintain its position in this new, very competitive market.
ENVIRONMENTAL ISSUES
In order to minimize risks related to the environment, a few years ago the Bank
introduced a procedure setting out its environmental responsibilities when
granting credit and taking possession of contaminated assets. To date, the risks
involved have not had a material impact on the Bank's operations.
BANK SUPERVISION
The Superintendent of Financial Institutions Canada (the "Superintendent"), who
reports to the Minister of Finance, is responsible for applying the Act. He
must, at least once a year, examine the affairs and business of the Bank for the
purpose of determining whether the provisions of the Act are being duly observed
and that the Bank is in sound financial condition, and report thereon to the
Minister. Outside Canada, the Bank's subsidiaries, branches and representative
offices are required to comply with the Act and with legislation in the various
jurisdictions in which they operate.
RESTRICTIONS ON OWNERSHIP OF BANK SHARES
The Act prohibits any person from owning, either directly or by way of entities
controlled by the person, more than 10% of all the outstanding shares of any
class of shares of the Bank. Governments, their agents or agencies, whether
Canadian or foreign, may not own shares of the Bank.
- --------------------------------------------------------------------------------
FINANCIAL DATA
All amounts in this Annual Information Form are expressed in Canadian dollars
unless otherwise indicated.
REFERENCES TO LEGISLATION
The information contained in this Annual Information Form is submitted in
compliance with the applicable regulations governing securities.
- --------------------------------------------------------------------------------
NATIONAL BANK OF CANADA 13
<PAGE>
EXECUTIVE OFFICERS
The officers mentioned on page 80 have held management, executive or senior
executive positions with the Bank during the past five years, with the
exception of Pierre Desbiens who, from 1990 to 1994, was employed by Empire
Financial Group as Regional Vice-President and General Manager; Gisele
Desrochers who, from 1989 to 1994, was employed by the Quebec Government as
Deputy Minister - Department of Recreation, Fish and Game; Associate Secretary
General - Administrative Reform and Higher Employment; and Deputy Minister -
Department of Revenue; and Michel Labonte who, from 1988 to 1993, was
employed by Hydro-Quebec as Vice-President - Industrial Markets;
Vice-President - Financing and Treasurer; and Executive Vice-President -
Finance and Administration.
The directors and executive officers of the Bank, as a group, beneficially own
less than 1% of the outstanding common shares of the Bank.
ADDITIONAL INFORMATION
The Bank undertakes to provide to any person, upon request, a copy of the Annual
Information Form of the Bank, together with a copy of any document incorporated
therein by reference, a copy of the annual consolidated financial statements for
the year ended October 31, 1997 with the accompanying auditors' report, a copy
of any subsequent quarterly financial statements, a copy of the Management Proxy
Circular of the Bank in respect of its most recent annual meeting of
shareholders that involved the election of directors and a copy of any other
document that is incorporated by reference into a preliminary short form
prospectus or a short form prospectus whenever the securities of the Bank are
part of a distribution.
The Bank's Management Proxy Circular dated December 23, 1997, which is enclosed
with the Notice of Annual Meeting of Shareholders scheduled for March 11, 1998,
contains additional information such as the remuneration and indebtedness of
directors and executive officers, the number of Bank shares held and share
options awarded.
Copies of these documents may be obtained upon request from the Corporate
Secretary's Office of the Bank, 600 de La Gauchetiere West, Montreal, Quebec,
Canada H3B 4L2.
DOCUMENTS INCORPORATED BY REFERENCE
Additional items comprising the Bank's Annual Information Form are disclosed in
portions of this Annual Report and are incorporated by reference
as set out below.
- --------------------------------------------------------------------------------
ITEM REFERENCE
- --------------------------------------------------------------------------------
1. Major Subsidiaries PAGE 85
2. Description of the Business PAGES 15 TO 17
3. General Development PAGES 8 TO 12
of the Business
4. Loans by Borrower PAGE 31, TABLE 7
Category
5. Impaired Loans PAGE 40, TABLE 14,
AND PAGE 58, NOTE 4
6. Interest on Impaired Loans PAGE 41, TABLE 15
7. Provision for Credit Losses PAGE 26, TABLE 3
8. Designated Countries PAGE 39, TABLE 13
9. Personal, Business PAGE 24, TABLE 2,
and Mortgage Loans AND PAGE 52
10. Earning Assets Abroad PAGE 30, TABLE 6
11. Assets Under PAGE 35, TABLE 11
Administration/Management
12. Personnel PAGES 1, 17 AND 72
13. Cash Dividends PAGE 48 AND PAGE 61,
and Dividend Policy NOTE 11
14. Main Consolidated PAGES 48 AND 72
Financial Data
15. Quarterly Results PAGE 48
16. Management's PAGES 19 TO 47
Discussion and Analysis
17. Market for Trading Bank's PAGE 87
Securities
18. Directors and Senior
Management PAGES 77 TO 80
- --------------------------------------------------------------------------------
14 NATIONAL BANK OF CANADA
<PAGE>
DESCRIPTION OF THE BUSINESS OF THE BANK
- --------------------------------------------------------------------------------
The National 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, International and Commercial Electronic
Networks; Wealth Management, which includes Trust Services and Insurance;
Treasury, Brokerage and Corporate Banking; and Human Resources and
Administration.
BANKING
RETAIL BANKING
Through its network of 637 branches, 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 wide choice of
transaction accounts and investment vehicles, such as term deposits and
guaranteed 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 travellers cheque services. In response to clients' growing
demand for financial advisory services, the Bank increased to more than 100 the
number of accredited financial planners integrated 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 be at the forefront in customer service by offering its
clients non-traditional services such as TelNat for banking by phone and
Personal CompuTeller for banking by computer. Personal CompuTeller gives clients
direct access to their transaction accounts via their personal computer.
The Bank also confirmed its leadership in Quebec by becoming the only
institution to set up branches in supermarkets, thereby offering personalized
service to its clients seven days a week.
Finally, the Bank developed a client segmentation model which enables it to
better anticipate the needs of individual clients, to "make the right offer to
the right client at the right time", using the delivery method which best suits
their expectations.
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, nine in Ontario
and nine 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.
In the United States, the Bank also serves mid-market companies through offices
in 20 cities, including its own representative offices and the offices of its
subsidiary National Canada Finance Corp.
NATIONAL BANK OF CANADA 15
<PAGE>
INTERNATIONAL
The International division is responsible for all the services offered to
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 and foreign payments. 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 efficiently 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.
COMMERCIAL ELECTRONIC NETWORKS
The Commercial Electronic Networks division ensures both the Bank's presence in
this market and the development of its own information technology systems.
WEALTH MANAGEMENT
TRUST SERVICES
Further to its acquisition by the Bank in July 1993, General Trust has been
restructured to focus on its primary vocation, namely, providing trust and
financial advisory services.
With its private investment management 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.
National Bank Securities Inc., another Bank subsidiary, administers the InvesNat
family of mutual funds on behalf of its clients. National Bank Securities Inc.
also offers discount brokerage services and a wide selection of third-party
mutual funds.
INSURANCE
The Insurance division is responsible for managing the Bank's insured risks and
credit insurance and for marketing its various insurance products to clients.
As part of its management of insured risks, this division ensures that the
various policies underwritten by the Bank provide good coverage for possible
claims related to the Bank's assets and premises as well as its officers'
liability. 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.
TREASURY, BROKERAGE AND CORPORATE BANKING
With offices in Montreal, Toronto, Vancouver, London, New York and Singapore,
the Treasury division of the Treasury, Brokerage and Corporate Banking sector
manages the Bank's liquidity; it is responsible for matching assets and
liabilities, and is in constant communication with financial markets in Canada
and abroad. It develops financial instruments adapted to the needs of both
institutional and commercial clients and is responsible for raising and managing
the Bank's Tier 1 and Tier 2 capital. This division, which oversees the
securitization of NHA mortgage loans, is also very active in the negotiation and
sale of off-balance sheet instruments such as options, swaps and other futures
contracts. It handles foreign exchange transactions on behalf of the Bank and
its clients on both the spot and futures markets.
16 NATIONAL BANK OF CANADA
<PAGE>
The Corporate Banking division, with the support of specialized teams based in
Montreal and Toronto, provides a wide array of services customized to clients'
needs. In addition to providing traditional operating credit and term financing,
these teams structure financing for acquisitions or recapitalization and arrange
high-yield bond issues, often through 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.
To reflect the new reality of the financial market industry and enhance our
presence among corporations, the Corporate Banking division and the Corporate
Finance Department of Levesque Beaubien Geoffrion Inc. have been grouped
together in a new division under the responsibility of Levesque Beaubien
Geoffrion Inc. The newly formed Corporate Financing division reports to the
Senior Executive Vice-President - Corporate Financing of Levesque Beaubien
Geoffrion Inc.
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 close to $9 billion in assets.
HUMAN RESOURCES AND ADMINISTRATION
The Human Resources and Administration sector is responsible for policies
concerning personnel and certain areas of administration.
In its human resources function, the sector is responsible for employee
relations, staffing, succession planning, training, employee benefits,
compensation and employment equity. In terms of administration, it is
responsible for audit, public relations, legal affairs and the corporate
secretary's office.
As at October 31, 1997, the Bank had 16,320 employees compared to 15,829 a year
earlier. This increase was most notably due to the integration of Municipal
Savings & Loan employees, and growth in activities at our subsidiaries Levesque
Beaubien Geoffrion Inc., National Bank Securities Inc. and National Bank
Information Corporation, as well as in our call and telemarketing centres and in
the U.S. commercial loans sector.
PROPERTIES
With respect to real estate holdings, as at October 31, 1997, the Bank owned its
head office in Montreal and, for its operations, also owned 130 other properties
across Canada and leased 593 premises, including 34 abroad.
The Bank's consolidated fixed assets at cost, less accumulated amortization, and
excluding furniture, equipment and leasehold improvements, amounted to $175
million as at October 31, 1997. However, no independent assessment of the market
value of the Bank's fixed assets was available. Information concerning the
Bank's fixed assets is provided in Note 6 to the Consolidated Financial
Statements on page 59 of the Annual Report.
NATIONAL BANK OF CANADA 17
<PAGE>
[PHOTO]
NEW WAY
OF THINKING
WORKING
CREATIVELY
INTELLIGENTLY
EFFICIENTLY
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ECONOMIC ENVIRONMENT
The sharp contrast between countries enjoying vigorous growth and those
recording modest or even negative growth was the chief characteristic of global
economic conditions in 1997.
The U.S. economy surpassed its 1996 performance and GDP growth in 1997 should
reach 3.7%, still without any inflationary pressures. Even though the
unemployment rate was very low, the increase in wages was modest and largely
offset by gains in productivity. As a result, the Federal Reserve did not raise
interest rates significantly and borrowing costs remained relatively low.
Strong economic growth in the United Kingdom again set it apart from the other
European countries, notably France and Germany. The sluggish recovery in
continental Europe produced the same kind of fairly accommodating monetary
policy that characterized most of the industrialized world.
At the other end of the spectrum, economic activity in Japan fell sharply in
1997, after showing some signs of recovery.
Canada made up for its particularly disappointing economic performance of 1996
by growing robustly in 1997. Over 300,000 jobs were created, or more than in the
previous two years combined. The unemployment rate in Canada dipped slightly,
even though the labour force expanded substantially as the job market became
more attractive.
The series of interest rate cuts in 1996 and the healthier employment picture in
1997 touched off a strong recovery in consumer spending. In fact, consumers
usurped the role of exports which had been the engine of growth for Canada's GDP
since the beginning of the decade.
Residential construction continued to expand, with housing starts up by more
than 20%. Greater demand caused new housing prices to rally, ending a three-year
slide.
Business spending on machinery and equipment also stimulated economic growth by
climbing 20%, a figure rarely seen in the past 50 years.
After peaking in 1996, commercial bankruptcies in Canada were down
significantly. The number of personal bankruptcies, however, continued to rise
although at a much slower rate.
The war on government deficits carried on into 1997, and the expectations are
that the federal budget should be balanced as of this year. Canadians have
already begun to reap the benefits since the efforts made to clean up public
finances have been taken seriously by financial markets. Canadian interest rates
(both short and long) were at historically low levels, boosting consumer and
investment spending as well as spurring economic growth.
Despite a slight rise in short-term rates at year end, the entire Canadian
interest rate curve was below its U.S. counterpart. In all likelihood, the wide
gap between Canadian and U.S. short-term rates, combined with the return to a
current account deficit in the balance of payments, worked against the Canadian
dollar. The Bank of Canada twice intervened to shore it up by raising the bank
rate by 0.25 of a point.
Reflecting the growth in the rest of Canada and the United States, Quebec's
economic situation was much improved in 1997. Employment growth in the province
was close to the Canadian average, residential construction posted a healthy
rise after stagnating in 1996, commercial bankruptcies fell and personal
bankruptcies increased at a slower pace than in the previous year.
The banking industry benefited from the more favourable economic climate that
prevailed in 1997. Gains in employment and lower interest rates sparked renewed
growth in consumer and mortgage loans, while the marked decline in commercial
bankruptcies lowered commercial credit risks.
NATIONAL BANK OF CANADA 19
<PAGE>
However, the combination of low interest rates, buoyant stock markets and the
development of new investment products prompted consumers to shift their savings
away from bank deposits to other instruments, with the result that the banks had
to turn to capital markets to fund a larger proportion of their loans. Consumer
preference for savings instruments offering higher potential returns, such as
stocks and mutual funds, is causing a groundswell that is shaking up the entire
banking industry.
National Bank of Canada was quick to take advantage of these changes. The
decline in commercial bankruptcies, more pronounced in Quebec than in the rest
of Canada, was particularly significant for the Bank as its portfolio is more
concentrated in Quebec and in loans to independent businesses than the
portfolios of the other major banks. The diversification of the Bank's financial
activities, and especially its strong presence in securities brokerage and
mutual funds, also helped to offset the erosion in deposits.
In 1998, economic conditions should continue to improve in Canada as a whole and
in Quebec, despite a slight upswing in short-term interest rates. Inflationary
pressures could emerge in the United States after what are probably temporary
factors, such as the appreciation of the U.S. dollar and the drop in the price
of oil and of certain other commodities, have run their course.
Demand for consumer credit and mortgage credit should continue to expand in
response to the improved job market and higher personal income. The outlook for
bankruptcies should also continue to improve.
The fundamental trend away from traditional bank deposits towards
non-traditional investment instruments will persist, and Canadian banks will
become more dependent on their capital market income. Competition among
financial institutions will remain fierce.
OVERVIEW OF RESULTS
The National Bank's 1997 results demonstrate its ability to adapt to new market
realities as well as to customer demand.
[GRAPH]
Net income continued to grow, reaching $341.6 million, or 7.3% more than in
1996. Total income (net interest income plus other income) posted a 12.7%
increase, loans and bankers' acceptances were up 24.9% and deposits grew by
7.8%.
The steady progress made in terms of profitability translated into a stronger
capital position. As shown in Table 9 on page 33, total capital amounted to
$4,295 million as at October 31, 1997, for an increase of 20.7%. The year's
highlights, which are presented at the beginning of this report, also
demonstrate the continued improvement in shareholders' equity and debentures, as
well as capital ratios in 1997.
STEADY PROGRESSION IN RESULTS
Table 1 summarizes the Bank's overall results on a taxable equivalent basis. The
growth in net income was essentially generated by a favourable trend in all
income components. Net interest income was up by 15.9% and other income by 8.8%.
The increase in non-interest expenses was confined to 5.4%.
20 NATIONAL BANK OF CANADA
<PAGE>
As at October 31, 1997, the Bank's total assets amounted to $66,235 million, or
24.7% higher than at the same date in 1996. Average assets for the year were
$55,524 million, for an increase of 12.8% over the previous year.
[GRAPH]
BETWEEN 1993 AND 1997, THE BANK'S TOTAL ASSETS GREW BY $23,501 MILLION, FOR AN
INCREASE OF 55.0%.
During the year, the Bank declared dividends of 57.5 CENTS per common share,
which was 17.3% higher than for the previous 12 months.
Return on common shareholders' equity was 14.0% in 1997, compared with the
previous year's figure of 13.4% (or 14.5% when the special gains are included).
Share price appreciation combined with a higher dividend yield brought the total
return on common shares for the year to 59.5%. Earnings per share rose to $1.86.
[GRAPH]
BREAKDOWN BY SECTOR
The first four sections of Table 1A (page 22) present a breakdown of the Bank's
main financial results by sector.
Retail Banking encompasses the branch network, credit cards, mutual funds,
Levesque Beaubien Geoffrion's retail activities, the InvesTel discount brokerage
service and the operations of General Trust of Canada.
The Retail Banking sector earned net income of $215 million, or 26.5% more than
in 1996. The sector's total income rose by 9.9%, largely as a result of the
18.9% growth in other income. Capital market fees chiefly accounted for this
rise in other income, while higher net interest income was generated primarily
by Municipal Savings & Loan and increased business with individuals.
The provision for credit losses declined by 13.0%. Non-interest expenses showed
an increase of 9.6%, the main reasons for which were the variable remuneration
of our brokerage subsidiary and the acquisition of Municipal Savings & Loan.
The Commercial Banking sector includes all the financial services provided to
local independent businesses as well as to U.S. commercial clients. Although it
mobilizes less than 20% of the Bank's assets, this sector alone generates
one-third of its net income.
The sector's net income of $108 million was up slightly compared to the previous
year because of the growth in income. In Canada, this growth occurred chiefly in
other income as interest income came under pressure from narrower margins. In
the United States, interest income rose because of strong growth in business
volumes. The increase in income more than offset the rise in costs, which was
particularly evident in Canada.
TABLE 1
OVERVIEW OF RESULTS
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS AND AS A PERCENTAGE OF AVERAGE ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income 1,323.9 2.38 1,142.2 2.32 1,180.6 2.48 1,094.9 2.54 1,016.2 2.56
Other income 1,055.6 1.90 970.1 1.97 711.6 1.50 719.3 1.67 635.3 1.60
Provision for credit losses 290.0 0.52 235.0 0.48 255.0 0.54 275.0 0.64 325.0 0.82
Non-interest expenses 1,488.8 2.68 1,413.1 2.87 1,229.3 2.58 1,168.7 2.71 1,042.0 2.63
Income taxes 243.1 0.43 135.8 0.28 156.3 0.33 144.6 0.34 101.3 0.25
Non-controlling interest 16.0 0.03 10.1 0.02 6.6 0.02 8.7 0.02 8.6 0.02
----------------------------------------------------------------------------------------------------
Net income 341.6 0.62 318.3 0.64 245.0 0.51 217.2 0.50 174.6 0.44
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets 55,524 49,239 47,582 43,160 39,657
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AS OF 1996, REALIZED AND UNREALIZED GAINS OR LOSSES ON SECURITIES ARE RECORDED
UNDER OTHER INCOME.
NATIONAL BANK OF CANADA 21
<PAGE>
The U.S. commercial portfolio, comprised of asset-based loans, contained US
$2,410 million in loan volumes (or CDN $3,400 million) as at October 31, 1997,
for an increase of 23.7% over 1996. The Bank's commercial operations in the
United States, which are among its most profitable, accounted for most of the
growth in the commercial sector's net interest income in 1997. More than
one-third of this sector's net income and over 10% of the Bank's consolidated
net income were derived from U.S. commercial operations, which recorded net
income of $41 million.
Asset-based lending is an example of one of the niche markets occupied by the
Bank outside its core commercial market. The asset-based lending group in
Toronto increased its volumes to $33 million as at October 31, and the Bank also
set up a similar group in Vancouver during the year. Another highly profitable
niche for the Bank is the Western Canada energy sector, where loan volumes
soared by 88.0%. Even though such specialized operations represent only a small
proportion of the Bank's loans, they do serve to diversify and strengthen its
total lending portfolio.
The third section of Table 1A details investment banking activities, consisting
of the financing services offered by the Bank and its brokerage subsidiary
Levesque Beaubien Geoffrion to institutional and corporate clients as well as
the Treasury sector's investment and trading operations.
The vigorous growth in these operations contributed substantially to the Bank's
bottom line in 1997. Net income earned on investment banking business grew 49.4%
to reach $124 million, or more than one-third of the Bank's consolidated net
income. The robust growth enjoyed by this sector in 1997 stemmed from a 36.1%
increase in income. Levesque Beaubien Geoffrion's institutional operations
accounted for about half of the growth in other income, with Treasury generating
most of the remainder in addition to being the source of three-quarters of the
increase in net interest income.
TABLE 1A
OVERVIEW OF RESULTS BY SECTOR OF ACTIVITY
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate and
Retail Commercial Capital Markets Other Total
--------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income 791 763 249 237 123 82 161 60 1,324 1,142
Other income 636 535 109 101 307 234 4 100 1,056 970
--------------------------------------------------------------------------------------------------
Total income 1,427 1,298 358 338 430 316 165 160 2,380 2,112
Provision for credit losses 100 115 62 50 17 4 111 66 290 235
Non-interest expenses 986 900 118 112 195 167 190 234 1,489 1,413
--------------------------------------------------------------------------------------------------
Net income before income taxes 341 283 178 176 218 145 (136) (140) 601 464
Income taxes 122 109 70 70 85 56 (34) (99) 243 136
Non-controlling interest 4 4 - - 9 6 3 - 16 10
--------------------------------------------------------------------------------------------------
Net income 215 170 108 106 124 83 (105) (41) 342 318
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets 22,005 21,016 10,470 9,267 22,719 17,493 330 1,463 55,524 49,239
--------------------------------------------------------------------------------------------------
Loans and bankers' acceptances 21,752 20,756 10,369 9,164 4,876 3,977 339 138 37,336 34,035
--------------------------------------------------------------------------------------------------
Deposits 23,450 23,984 2,056 1,906 14,301 11,964 557 750 40,364 38,604
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RETAIL SECTOR: This sector consists of the branch network,
intermediary services, LBG retail brokerage, discount
brokerage, mutual funds, trust services, credit cards
and insurance.
COMMERCIAL SECTOR: This sector consists of commercial banking services in
Canada and the United States.
CORPORATE AND
CAPITAL MARKETS: This sector consists of corporate lending, treasury
operations which include managing the Bank's assets and
liabilities, corporate brokerage and portfolio
management.
OTHER: This heading includes the real estate sector, the
international division and the unallocated portion of
centralized service units.
22 NATIONAL BANK OF CANADA
<PAGE>
Institutional financing services at Levesque Beaubien Geoffrion constitute one
of the pillars of its investment banking activities. In 1997, income from these
services climbed 30%, representing approximately 50% of other income from all
investment banking business. Close to 80% of institutional income at Levesque
Beaubien Geoffrion came from sources outside Quebec.
In keeping with its policy of promoting synergy, the Bank combined its money
market operations with those of Lvesque Beaubien Geoffrion, and also led a
number of joint corporate financing operations. In conjunction with Levesque
Beaubien Geoffrion, the Bank formed CanCap, a wholly-owned subsidiary that
manages a portfolio of Canadian common shares weighted according to the Toronto
Stock Exchange 35 Index. CanCap's portfolio was financed by a $152 million issue
of preferred shares and a private capital stock issue. The expertise acquired in
managing index-linked products has been and will continue to be useful in
developing new products.
The Bank's new organizational structure, implemented at year end, assigns
responsibility for the entire corporate financing sector to the President of
Levesque Beaubien Geoffrion, who reports to the Bank's Senior Executive
Vice-President - Treasury, Brokerage and Corporate Banking.
The "Other" category comprises real estate, international operations other than
U.S. and the unallocated portion of centralized service units. This last
component naturally accounts for the predominance of costs and the negative net
income for this category.
The decline in other income can be traced to the inclusion in 1996 of a special
$80 million gain realized on the sale of the Bank's stake in a Latin American
bank. Changes in the provision for credit losses were due to the inclusion of
real estate loans and the general allowance, net of the reversal of a portion of
the country risk allowance (Table 3, page 26).
In response to the Bank's desire to broaden its revenue streams and to follow
its clients wherever in the world their business takes them (including emerging
markets), our international operations outside the United States continued to
post steady growth. The main initiatives undertaken in 1997 revolved around
alliances and equity investments aimed at achieving these goals.
The Bank consolidated its network of alliances by signing a cooperation
agreement with BACOB Bank of Belgium, its eighth such agreement in Europe. In
Latin America, the Bank joined CorpBanca, a strategic partnership made up of
major financial institutions from Chile and the United States. CorpBanca, which
aims to invest in the Latin American financial industry, has already acquired
two South American banks. This partnership will not only provide the Bank with
profitable investment opportunities, but will give it the means to further
expand the international network it has built for its clients.
Again with the goal of helping its clients who do business abroad, the Bank
opened 11 new foreign exchange offices in Canada, bringing the total to 42.
NATIONAL BANK OF CANADA 23
<PAGE>
ANALYSIS OF RESULTS
NET INTEREST INCOME
Table 2 presents changes in net interest income by major asset and liability
category on a taxable equivalent basis. Assets generated interest income of
$3,075.6 million, for an average interest rate of 5.54%, compared to 6.33% in
1996. Liabilities and shareholders' equity cost the Bank $1,751.7 million in
interest, equivalent to a rate of 3.16%, versus 4.01% the previous year. Net
interest income ($1,323.9 million) is the difference between interest earned and
interest paid on asset and liability volumes, while the interest spread (2.38%)
is the difference between average interest rates.
The average rate paid by the Bank on its liabilities fell more than the rate
earned on its assets (a decline of 0.85 and 0.79 points respectively), widening
the interest spread slightly from 2.32% in 1996 to 2.38% in 1997.
Net interest income rose by $181.7 million or 15.9%. The relative contribution
of rate and volume variations can be analyzed using the last two columns of
Table 2, where the net impact is broken down into its volume component and its
rate component, calculated on 1997 rates and on 1996 volumes respectively.
TABLE 2
CHANGES IN NET INTEREST INCOME
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
$ Variation
1997 1996 1997/1996 due to:
-------------------------------------------------------------------------------------------------
AVERAGE Average Average Average
VOLUME RATE INTEREST volume Rate Interest volume Rate Interest volume Rate
-------------------------------------------------------------------------------------------------
$ % $ $ % $ $ % $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Deposits with other banks 3,348 4.85 162.4 3,692 5.47 202.0 (344) (0.62) (39.6) (16.7) (22.9)
Securities 8,694 3.89 338.4 8,256 3.14 259.4 438 0.75 79.0 17.0 62.0
Mortgage loans 13,183 7.20 948.7 11,315 8.19 926.2 1,868 (0.99) 22.5 134.5 (112.0)
Personal loans 6,094 8.59 523.2 5,822 10.08 587.1 272 (1.49) (63.9) 23.4 (87.3)
Business and other loans 20,241 5.35 1,082.7 16,447 6.99 1,150.1 3,794 (1.64) (67.4) 203.0 (270.4)
Impaired loans, net 511 3.95 20.2 678 (1.25) (8.5) (167) 5.20 28.7 (6.6) 35.3
------------------------------------------------------------------------------------------------
Earning assets 52,071 5.91 3,075.6 46,210 6.74 3,116.3 5,861 (0.83) (40.7) 354.6 (395.3)
Other assets 3,453 - - 3,029 - - 424 - - - -
------------------------------------------------------------------------------------------------
Total assets 55,524 5.54 3,075.6 49,239 6.33 3,116.3 6,285 (0.79) (40.7) 354.6 (395.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Personal deposits 21,112 4.14 874.2 21,279 5.22 1,111.1 (167) (1.08) (236.9) (6.9) (230.0)
Deposits by banks 4,937 5.11 252.4 6,177 5.82 359.5 (1,240) (0.71) (107.1) (63.4) (43.7)
Other deposits 14,303 4.05 579.9 11,138 4.66 519.2 3,165 (0.61) 60.7 128.2 (67.5)
------------------------------------------------------------------------------------------------
40,352 4.23 1,706.5 38,594 5.16 1,989.8 1,758 (0.93) (283.3) 57.9 (341.2)
Debentures 1,141 7.33 83.6 1,175 7.23 85.0 (34) 0.10 (1.4) (2.5) 1.1
Liabilities other than deposits 3,927 0.39 15.5 2,408 0.61 14.8 1,519 (0.22) 0.7 5.9 (5.2)
Other (1) - - (53.9) - - (115.5) - - 61.6 - 61.6
------------------------------------------------------------------------------------------------
Interest-bearing liabilities 45,420 3.86 1,751.7 42,177 4.68 1,974.1 3,243 (0.82) (222.4) 61.3 (283.7)
Other liabilities 7,463 - - 4 666 - - 2,797 - - - -
Shareholders' equity 2,641 - - 2 396 - - 245 - - - -
Impact of non-interest bearing
assets and liabilities - - - - - - - - - 137.4 (137.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity 55,524 3.16 1,751.7 49,239 4.01 1 974.1 6,285 (0.85) (222.4) 198.7 (421.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 2.38 1,323.9 2.32 1 142.2 0.06 181.7 155.9 25.8
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) OTHER INTEREST INCOME AND INTEREST EXPENSE INCLUDING HEDGING OPERATIONS.
24 NATIONAL BANK OF CANADA
<PAGE>
On the assets side, the $40.7 million reduction in interest income was the
result of falling rates, which were only partially offset by higher volumes.
Securities and mortgage loans were chiefly responsible for the increase in
interest income. The higher volumes of securities held by the Bank and, more
specifically, the higher returns they earned made a positive contribution of
$79.0 million to interest income. Average mortgage volumes also recorded strong
growth of 16.5% but this success was tempered by the drop in interest rates.
Interest income was further boosted by interest received on impaired loans,
which included past-due interest bonds from designated countries.
The downward trend in market interest rates affected personal and business loans
primarily as the growth in volumes (at 23.1% and 4.7% respectively) was not
sufficiently robust to offset the rate decline. Most of the 1997 growth in
business loan volumes came from the commercial portfolio in both Canada and the
United States.
On the liabilities side, the $222.4 million reduction in interest expense was
largely attributable to lower rates on deposits, which more than compensated for
the increase in volumes.
The last three figures on the last line of Table 2 summarize the impact of
variations in volumes and rates on net interest income. Volume growth was
essentially responsible for the rise in net interest income, although changes in
the interest spread also played a role.
LOAN LOSSES
In 1997, the Bank raised its annual provision for credit losses from $235
million to $290 million (Table 3, page 26). This provision included an
additional $100 million in the general allowance, specific provisions of $275
million and an $85 million reversal in the country risk allowance.
As a precautionary measure, the Bank decided to increase its general allowance
by $100 million, thus enabling it to benefit from a new rule issued by the
Superintendent of Financial Institutions Canada under which banks can include
their general allowance in calculating Tier 2 capital. In issuing this rule, the
Canadian regulatory authorities have adopted a practice that is stipulated in
the Basel accords and which is already being applied by the regulatory
authorities of several other countries, including the United States.
Total specific provisions for private risks were $275 million, a $40 million
increase over 1996. New provisions were taken in order to dispose of problem
loans under favourable conditions, especially in the domestic real estate
sector. As a result, the Bank can consider lowering its provision for credit
losses in 1998.
On the domestic scene, the provision for private risks was up $141 million. The
special provision of $100 million included in the general allowance accounts for
most of this increase. The remainder is the result of increases in specific
provisions for the real estate sector.
In the United States, our success in paring down the real estate portfolio led
to a 46.2% reduction in the provision for this sector. As for the U.S.
commercial sector, the higher provision for credit losses reflected the growth
in these operations, as well as the particularly low level of loan losses in
1996. However, the $10 million under this heading represented only a fraction of
a total portfolio of some $3,400 million. For the U.S. market as a whole, the
provision for credit losses was down 29.5%.
In the International sector, not including the United States, the provision was
increased to enable the Bank to eliminate some of the riskier components in its
portfolio.
The negative provision for losses on sovereign risks is the result of a decision
to adjust the book value of sovereign loans to their market value by reversing a
portion of the allowance assigned to this loan category. After the Bank sold off
a substantial part of this portfolio, bringing gross volumes down from $206
million as at October 31, 1996 to $109 million a year later, the provisioning
for sovereign risks became disproportionate during the year. Further to the $85
million reversal, the $53 million in net volumes was equal to the market value
of the sovereign loans.
NATIONAL BANK OF CANADA 25
<PAGE>
TABLE 3
PROVISION FOR CREDIT LOSSES
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Provision for credit losses
Domestic
Individuals and small businesses 100 115 69 64 66
Commercial 52 45 41 72 66
Corporate 17 4 34 31 28
Real estate 60 26 33 41 26
General allowance 100 - 44 25 25
Other 2 - - 3 6
-------------------------------------------------------
Domestic - Private risks 331 190 221 236 217
-------------------------------------------------------
International
Commercial - United States 10 5 4 19 41
Real estate - United States 21 39 26 15 41
Real estate - Other - (8) - 2 10
Other 13 9 4 3 16
-------------------------------------------------------
International - Private risks 44 45 34 39 108
-------------------------------------------------------
Designated countries (85) - - - -
-------------------------------------------------------
Provision for credit losses
posted to income 290 235 255 275 325
- ---------------------------------------------------------------------------------------------------------------
Net average loans
and bankers' acceptances
Domestic 32,510 29,424 28,382 26,462 24,187
International - United States 4,249 3,967 3,179 3,993 4,225
- Other 577 644 1,481 787 808
-------------------------------------------------------
Total 37,336 34,035 33,042 31,242 29,220
- ---------------------------------------------------------------------------------------------------------------
Provision for credit losses as a percentage
of net average loans and bankers'
acceptances
Domestic 1.02% 0.65% 0.78% 0.89% 0.90%
International - United States 0.73% 1.11% 0.94% 0.85% 1.94%
- Other 2.25% 0.16% 0.27% 0.64% 3.22%
Total 0.78% 0.69% 0.77% 0.88% 1.11%
- ---------------------------------------------------------------------------------------------------------------
Allowances
Balance at beginning of year 751 792 819 868 1,027
Retroactive application of new accounting
standard as at November 1, 1995 - 77 - - -
Provision for credit losses
posted to income 290 235 255 275 325
Write-offs (1) (242) (364) (313) (345) (495)
Recoveries 40 11 31 21 11
-------------------------------------------------------
Balance at end of year 839 751 792 819 868
- ---------------------------------------------------------------------------------------------------------------
Components of allowances:
Designated countries
Portion related to loans 52 69 85 85 228
Portion related to securities 4 85 105 105 46
Specific 583 497 502 573 563
General 200 100 100 56 31
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDING EXCHANGE RATE FLUCTUATIONS.
26 NATIONAL BANK OF CANADA
<PAGE>
As a proportion of loans and bankers' acceptances, the provision for private
risks was equivalent to 0.73% in the United States versus 1.11% in 1996. If the
general allowance is excluded, then the ratio for Canada is 0.71% compared to
0.65% for the previous year, the increase being attributable to the specific
provisions taken to pare down the real estate portfolio.
The allowance for credit losses appearing on the balance sheet is analyzed in
the lower two sections of Table 3. In 1997, this allowance rose to $839 million
under the combined effect of the $290 million provision, $40 million in
recoveries and $242 million in write-offs. As Table 14 on page 40 indicates, the
increase in the allowance amply covers gross private risks.
OTHER INCOME
Other income, described in Table 4, includes all income other than interest and
dividend income. In 1997, other income amounted to $1,056 million, up $166
million or 18.6% over regular income in this category in 1996 (i.e., excluding
the sale of the Bank's interest in a Latin American bank).
Capital market fees, which rose 29.0%, were the main source of the growth in
other income.
Most of the capital market fees were generated by brokerage operations at
Levesque Beaubien Geoffrion. This Bank subsidiary is a full-service securities
broker providing both retail services to individuals and financing services to
commercial, institutional and government clients. Over the past five years,
assets under management have tripled at Levesque Beaubien Geoffrion and revenues
have more than doubled.
[GRAPH]
The quality of research done at Levesque Beaubien Geoffrion was recognized by
Brendan Wood in its 1997 survey which ranked the research team first both for
ideas and for client communications.
Another noteworthy performance in capital market fees was that of InvesTel, the
Bank's discount brokerage service, which tripled its number of accounts and
recorded an 86% increase in revenues.
Combined revenues from lending fees, bankers' acceptances and letters of credit
and guarantee rose 13.7%, from $117 million to $133 million, reflecting the
increase in our share of the business loan market.
TABLE 4
OTHER INCOME
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital market fees 374 290 193 212 211
Deposit and payment service charges 148 140 133 123 109
Realized and unrealized gains on
securities, net amount 93 134 - - -
Card service revenues 80 69 64 59 56
Lending fees 92 82 83 81 71
Bankers' acceptances,
letters of credit and guarantee 41 35 31 28 25
Foreign exchange revenues 39 50 51 39 45
Trust services 23 20 21 22 5
Other 166 150 136 155 113
------------------------------------------------
1,056 970 712 719 635
- ---------------------------------------------------------------------------------------
Domestic 1,024 852 680 688 608
International - United States 29 32 24 25 22
- Other 3 86 8 6 5
- ---------------------------------------------------------------------------------------
Other income as a percentage
of total income 44.4% 45.9% 37.6% 39.6% 38.4%
- ---------------------------------------------------------------------------------------
</TABLE>
AS OF 1996, REALIZED AND UNREALIZED GAINS OR LOSSES ON SECURITIES ARE RECORDED
UNDER OTHER INCOME.
NATIONAL BANK OF CANADA 27
<PAGE>
Similarly, the 15.9% growth in card service revenues illustrates the extent to
which business has expanded in this sector: advances on the Bank's credit cards
were up by 7.3% in 1997. With the LES AILES DE LA MODE credit card, the Bank
introduced an innovative product that can be used by BOUTIQUES SAN FRANCISCO
customers to obtain exclusive discounts. Over 10,000 accounts were opened in the
first three months following the launch.
The 5.7% advance in deposit and payment service charges was attributable to
transaction volumes.
Trust services posted strong growth of 15.0% for the year, with the value of
personal assets managed by General Trust of Canada jumping by 15.1%. An
important General Trust achievement during 1997 was the development of a new
type of money purchase plan, namely, the retirement savings plan with assisted
portfolio management.
One of the main factors responsible for growth in the "Other" category, which
covers miscellaneous services, was mutual fund revenues from funds marketed by
National Bank Securities. This subsidiary manages both its own line of InvesNat
mutual funds and that of General Trust of Canada funds. Four new funds were
launched in 1997. National Bank Securities also offers clients mutual funds
managed by other companies.
Mutual fund revenues increased by 46.4% in 1997, while total mutual fund volumes
rose by 31.6%.
National Bank Securities, which also manages the InvesTel discount brokerage
service, turned in its best performance to date with a pre-tax contribution of
$33 million to the Bank's income, for an increase of 50.0%.
The "Other" category was also boosted by additional revenues from debit cards
($18 million, up 26.4%), a sector in which the Bank plays a leading role.
Revenues from insurance product sales were up 41% in 1997 for two reasons:
better market penetration of our insurance products, and the benefits resulting
from the new operating structure at National Bank Life Insurance. During the
year, this subsidiary began marketing life annuities as well as Group Benefits
Plus, a complete benefits package for employees of small and medium-sized
businesses.
The Bank's Insurance division also manages registered retirement income funds
(RRIFs), volumes of which doubled in 1997.
A new type of registered retirement savings plan was offered by the Bank in 1997
through its branch network, namely, the NatOption RRSP, an index-linked
investment tied to the TSE 35 Index. CanCap's expertise in managing index-linked
products was put to good use in designing this new product for customers.
Various electronic transaction services also contributed to the Bank's other
income, and will continue to do so. They include automated banking machines,
TelNat, the Personal CompuTeller, SECURNAT and the EDI consortium formed by the
National Bank, Bell Canada and the MOUVEMENT DESJARDINS. This consortium, whose
first client was the Quebec COMMISSION DE LA SANTE ET DE LA SECURITE DU TRAVAIL,
will play an increasingly important role in electronic commerce in Quebec.
Other income accounted for 44.4% of the Bank's total income, compared to 43.8%
in 1996, not including the special gain on the sale of the Bank's interest in a
Latin American bank.
FROM 1993 TO 1997, TOTAL INCOME ROSE 44.1%, NET INTEREST INCOME 30.3% AND
OTHER INCOME 66.2%. OTHER INCOME AS A PERCENTAGE OF TOTAL INCOME ADVANCED
FROM 38.4% IN 1993 TO 44.4% IN 1997.
28 NATIONAL BANK OF CANADA
<PAGE>
NON-INTEREST EXPENSES
Table 5 details the non-interest expenses incurred by the Bank. If the expenses
of Levesque Beaubien Geoffrion and of Municipal Savings & Loan (acquired at the
end of 1996) are excluded along with the special expenses in 1996 related to the
disposal of certain assets, the Bank's regular operating expenses came in at
$1,151 million for the year, up 4.0% from their 1996 figure of $1,107 million.
However, if all these expenses are included, non-interest expenses totalled
$1,489 million in 1997, for an increase of 5.4% over the previous year.
Salaries and staff benefits rose by $76 million, or 10.8%, with the $44 million
increase in variable remuneration at Levesque Beaubien Geoffrion accounting for
close to 60% of this amount. The increase in remuneration was more than offset,
however, by the $84 million rise in the subsidiary's revenues.
Over the course of the year, the number of Bank employees, including employees
of Bank subsidiaries, increased by 3.1%, for a total of 16,320 employees at year
end. Salaries paid by the Bank (apart from variable remuneration and staff
benefits) rose by 4.2%.
Expenses under the heading "Premises, computers and equipment" were up $30
million or 9.5% as a result of information technology expenses, which attests to
the growing importance of technology at the Bank. Making optimum use of new
technologies is essential for ensuring quality customer service and
strengthening the Bank's competitive position.
Non-interest expenses as a percentage of total income, also known as the
productivity ratio, fell from 66.9% in 1996 to 62.6% in 1997, their lowest level
since 1991. Based solely on the Bank's regular expenses, the productivity ratio
would have been 59.1%, compared to 61.6% for the previous year.
[GRAPH]
INCOME TAXES
In 1997, income taxes amounted to $238.5 million. Detailed information in this
regard is presented in Note 14 to the Consolidated Financial Statements on
page 63. The Bank's effective income tax rate was 40.0%. Two factors were
responsible for the substantial increase over 1996, namely, the tax treatment
of the block sale of certain assets and the lower tax rate applied to the
special gain from an investment in Chile. Had it not been for these
non-recurring items, the effective rate would have been 38.2% in 1996.
TABLE 5
NON-INTEREST EXPENSES
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and staff benefits 781 705 637 642 596
Premises, computers and equipment,
including amortization 346 316 293 249 218
Other expenses
Messenger services and communications 58 55 50 45 50
Advertising and external relations 33 32 27 29 23
Stationery 19 16 14 14 14
Loan and deposit insurance 39 37 36 30 21
Professional fees 66 48 42 39 24
Travel expenses 11 11 11 12 9
Security and theft 11 12 10 13 14
Capital and payroll taxes 48 48 39 30 21
Reduction in value of assets - 56 - - -
Other 77 77 70 65 52
-----------------------------------------------
362 392 299 277 228
-----------------------------------------------
Total 1,489 1,413 1,229 1,168 1,042
- -------------------------------------------------------------------------------------------------
Domestic 1,414 1,336 1,162 1,105 978
International - United States 55 56 49 46 39
- Other 20 21 18 17 25
- -------------------------------------------------------------------------------------------------
Total expenses as a percentage of total income 62.6% 66.9% 65.0% 64.4% 63.1%
Excluding the reduction in value of assets 62.6% 64.3% 65.0% 64.4% 63.1%
Excluding Levesque Beaubien Geoffrion 59.1% 61.6% 62.3% 61.9% 60.2%
- -------------------------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 29
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
The balance sheet contained in the Consolidated Financial Statements (page 52)
shows that total assets stood at $66,235 million as at October 31, 1997, for an
increase of $13,101 million or 24.7% over the previous year. Loans and bankers'
acceptances were up $9,872 million (24.9%).
[GRAPH]
The main liability categories - deposits and capital - are discussed later in
the Management's Discussion and Analysis under "Funding" on pages 32 to 35.
ASSETS
Table 6 presents a geographic breakdown of earning assets (including
interest-bearing liquid assets) by ultimate risk as at September 30 of each
year. As at that date in 1997, the Bank's earning assets amounted to $56,190
million, representing a $7,829 million increase over the year-earlier figure of
$48,361 million.
The geographic distribution of earning assets remained virtually unchanged. The
increase for the United States was essentially due to growth in the commercial
lending portfolio and higher levels of cash resources and securities. The
increase for Latin America and the Caribbean resulted from a shift of capital
following the settlement in 1997 of the sale of our stake in a Latin American
bank.
TABLE 6
GEOGRAPHIC DISTRIBUTION OF EARNING ASSETS BY ULTIMATE RISK (1)
AS AT SEPTEMBER 30
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ % $ % $ % $ % $ %
North America
Canada 44,894 79.9 39,738 82.2 38,293 79.4 34,428 80.5 33,037 82.3
United States 6,308 11.2 4,188 8.7 4,326 9.0 5,088 11.9 4,206 10.5
--------------------------------------------------------------------------------------------------
51,202 91.1 43,926 90.9 42,619 88.4 39,516 92.4 37,243 92.8
- -----------------------------------------------------------------------------------------------------------------------------------
Europe
United Kingdom 1,340 2.4 1,410 2.9 1,579 3.3 1,290 3.0 652 1.6
France 554 1.0 464 1.0 966 2.0 251 0.6 206 0.5
Germany 302 0.5 266 0.5 454 0.9 93 0.2 122 0.3
Switzerland 16 - 14 - 14 - 50 0.1 26 0.1
Other 845 1.5 612 1.3 808 1.7 447 1.1 470 1.2
--------------------------------------------------------------------------------------------------
3,057 5.4 2,766 5.7 3,821 7.9 2,131 5.0 1,476 3.7
- -----------------------------------------------------------------------------------------------------------------------------------
Latin America and Caribbean 596 1.1 357 0.7 361 0.7 258 0.6 355 0.9
- -----------------------------------------------------------------------------------------------------------------------------------
Asia and Pacific
Japan 76 0.1 258 0.5 393 0.8 90 0.2 217 0.5
Other 1,213 2.2 1,012 2.1 1,014 2.1 743 1.7 790 2.0
--------------------------------------------------------------------------------------------------
1,289 2.3 1,270 2.6 1,407 2.9 833 1.9 1,007 2.5
- -----------------------------------------------------------------------------------------------------------------------------------
Middle East and Africa 46 0.1 42 0.1 36 0.1 34 0.1 34 0.1
- -----------------------------------------------------------------------------------------------------------------------------------
Earning assets as
at September 30 56,190 100.0 48,361 100.0 48,244 100.0 42,772 100.0 40,115 100.0
- -----------------------------------------------------------------------------------------------------------------------------------
Other assets as
at September 30 4,263 3,511 3,058 2,929 2,863
Net change in assets
in October 5,782 1,262 (2,389) (927) (244)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets as at October 31 66,235 53,134 48,913 44,774 42,734
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) EARNING ASSETS ARE THOSE WHICH BEAR INTEREST. CONSEQUENTLY, THEY DO NOT
INCLUDE CASH RESOURCES, DEPOSITS WITH THE BANK OF CANADA, CHEQUES AND OTHER
ITEMS IN TRANSIT (NET VALUE), FIXED ASSETS, OTHER ASSETS AND CUSTOMERS'
LIABILITY UNDER ACCEPTANCES. THE BANK'S EARNING ASSETS AS AT SEPTEMBER 30
WERE DISTRIBUTED ACCORDING TO THE LOCATION OF ULTIMATE RISK, NAMELY, THE
GEOGRAPHIC LOCATION OF THE BORROWER OR, IF APPLICABLE, THE GUARANTOR.
EARNING ASSETS ARE CALCULATED NET OF ANY GENERAL OR SPECIFIC ALLOWANCES AND
ARE PRESENTED SEPARATELY FOR EACH COUNTRY WHERE THE BANK'S EXPOSURE EXCEEDS
AN AMOUNT EQUAL TO 3/4% OF TOTAL EARNING ASSETS.
30 NATIONAL BANK OF CANADA
<PAGE>
Table 7, which provides a breakdown of loans by borrower category as at
September 30, 1997, shows a 10.9% increase in loan volumes for a total of
$42,025 million. Excluding securities purchased under resale agreements, the
lending portfolio grew by 8.8%.
Personal loans (mainly consumer loans and credit cards) rose 10.1% to $5,869
million. More favourable economic conditions and a rebound in consumer
confidence enabled the Bank to adopt a more active strategy in this market - for
instance, by returning to the indirect loan market - without compromising its
credit criteria. Personal loans remained stable as a percentage of the total
portfolio.
[GRAPH]
Residential mortgages climbed by 12.5% to almost $13 billion as at September 30,
1997. This performance is consistent with the Bank's deliberate strategy to
focus on a relatively low-risk loan category that has the added advantage of
fostering customer loyalty. Mortgage loans accounted for 30.9% of the portfolio.
Among the various measures taken by the Bank to increase its mortgage clientele
was the introduction in Quebec of the Money-Saver Mortgage in the second quarter
of 1997. This innovative mortgage product, which lets borrowers realize
substantial savings on their loan, was extremely well received by consumers,
racking up sales of some $500 million by October 31, 1997. An estimated 50% of
the volumes for this product came from new clients.
TABLE 7
DISTRIBUTION OF LOANS BY BORROWER CATEGORY
AS AT SEPTEMBER 30
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Personal (1) 5,869 14.0 5,329 14.1 5,305 15.0 5,234 15.7 5,061 16.2
Residential mortgage 12,999 30.9 11,552 30.5 10,902 30.9 10,196 30.6 9,037 28.9
Non-residential mortgage 697 1.7 608 1.6 781 2.2 835 2.5 870 2.8
Agricultural 827 2.0 698 1.8 675 1.9 622 1.9 584 1.9
Financial institutions 2,437 5.8 1,774 4.7 766 2.2 1,307 3.9 1,082 3.5
Manufacturing and industrial 2,039 4.9 1,985 5.2 2,192 6.2 1,732 5.2 1,930 6.2
Construction and real estate 2,070 4.9 2,425 6.4 2,718 7.7 2,653 8.0 2,806 9.0
Transportation and
communications 3,717 8.8 3,055 8.1 2,914 8.3 2,431 7.3 3,001 9.6
Mines, quarries and energy 347 0.8 300 0.8 275 0.8 215 0.6 249 0.8
Forestry sector 250 0.6 242 0.6 264 0.7 346 1.0 456 1.5
Governments and other
public agencies 554 1.3 520 1.4 488 1.4 635 1.9 478 1.5
Wholesale trade 583 1.4 591 1.5 655 1.9 691 2.1 595 1.9
Retail trade 997 2.4 977 2.6 1,201 3.4 1,193 3.6 1,118 3.6
Services 1,941 4.6 1,969 5.2 1,784 5.1 1,920 5.8 2,151 6.9
Securities purchased under
resale agreements 4,133 9.8 3,062 8.1 2,313 6.6 1,467 4.4 869 2.8
Other 2,565 6.1 2,818 7.4 2,048 5.7 1,879 5.5 1,006 2.9
-------------------------------------------------------------------------------------------------
42,025 100.0 37,905 100.0 35 281 100.0 33,356 100.0 31,293 100.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES CONSUMER LOANS, CREDIT CARDS AND OTHER PERSONAL LOANS.
NATIONAL BANK OF CANADA 31
<PAGE>
In addition to its operations in the markets served by its branch network, the
Bank is increasingly focusing its efforts on developing non-traditional
distribution networks in Canada as a way of reaching less accessible client
segments. The Toronto Mortgage Centre, essentially an electronic operation,
doubled its mortgage volumes in 1997. The independent sales force in Quebec
spearheaded several mortgage renewal campaigns. The Bank also set up a group of
mortgage representatives working on commission in the dynamic Vancouver market.
Business loans (i.e., the total of all the other headings, excluding governments
and other public agencies and securities purchased under resale agreements)
advanced by 5.9% to reach $18,470 million as at September 30. This growth
occurred in both the Canadian and U.S. markets but was tempered by the decline
in real estate loans. If bankers' acceptances are included with business loans,
then total business credits increased by 8.2% in 1997.
Despite fierce competition in the lending market, the National Bank continued to
enlarge its market share of loans to Quebec-based businesses. There was no
material change in the breakdown of loans by economic sector, with the exception
of a decrease in loans to the construction and real estate sector.
FUNDING
The Bank finances its lending and investment activities through funds obtained
from its depositors, investors and shareholders. Acting as intermediary between
lenders and borrowers, savers and investors, constitutes the core business of a
bank. To do so successfully, it must be financially sound. For instance, a bank
must manage its liquidity in such a way as to meet its day-to-day financial
obligations. Activities must be funded at the lowest possible cost and with
maximum efficiency. A bank must also maintain a solid capital base that will
safeguard it against any economic or financial eventuality.
LIQUIDITY MANAGEMENT
As at October 31, 1997, the Bank's balance sheet contained $14,486 million of
liquid assets, compared to $11,942 million a year earlier. Securities
represented 69.1% of these liquid assets with cash resources (especially
deposits with other banks) making up the remainder. Liquid assets amounted to
21.9% of total assets, down from 22.5% at the end of 1996. If securities
purchased under resale agreements are excluded from assets, the liquidity ratio
would be 25.4%, up slightly from 23.7%.
DEPOSITS
In 1997, the Bank funded roughly 65% of its assets through deposits. As at
October 31, personal deposits accounted for 47.2% of the deposit mix, commercial
deposits for 17.8% and purchased funds (primarily deposits by other financial
institutions) for 35.0%, as shown in Table 8.
Personal deposits as at October 31, 1997 were down $2,000 million from the
previous year, which was in line with the trend on financial markets where the
proliferation of savings instruments prompted clients to opt for investments
offering a higher potential yield.
TABLE 8
DEPOSITS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Personal 20,413 47.2 22,413 55.9 21,389 52.9 20,172 54.7 19,004 54.1
Commercial 7,709 17.8 7,056 17.6 6,411 15.9 5,599 15.2 5,136 14.6
Purchased funds 15,148 35.0 10,656 26.5 12,624 31.2 11,079 30.1 10,973 31.3
--------------------------------------------------------------------------------------------------
43,270 100.0 40,125 100.0 40,424 100.0 36,850 100.0 35,113 100.0
- -----------------------------------------------------------------------------------------------------------------------------------
Domestic 29,158 67.4 32,471 80.9 30,197 74.7 28,357 77.0 26,903 76.6
International - United States 5,474 12.6 3,597 9.0 3,359 8.3 3,359 9.1 3,653 10.4
- Other 8,638 20.0 4,057 10.1 6,868 17.0 5,134 13.9 4,557 13.0
- -----------------------------------------------------------------------------------------------------------------------------------
Personal deposits as a
percentage of total assets 30.8 42.2 43.7 45.0 44.5
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32 NATIONAL BANK OF CANADA
<PAGE>
Because of its diversification into other savings markets, the Bank was more
than able to offset the drop in bank deposits through increases in funds
under administration and management (Table 11, page 35). The Bank's strategy
in 1997 was to enhance synergy with its subsidiaries in order to provide
clients with options that take into account their preference for higher
returns, such as mutual funds from National Bank Securities and General
Trust, and stock market investments from Levesque Beaubien Geoffrion and
InvesTel.
Commercial deposits experienced a satisfactory increase of $653 million or 9.3%
over 1996.
In all, core deposits (personal plus commercial) were down by $1,347 million or
4.6%. To make up for this decline, the Bank raised its volume of purchased
funds, particularly as it was able to obtain them at a low cost. In short, its
financial stability and confidence in the future enabled the Bank to fund
in this way the rapid growth in its assets.
[GRAPH]
The Bank floated issues of $627 million of Euronotes in 1997. The Euro Medium
Term Notes Programme was created at the end of the year to give the Treasury
division easier and more systematic recourse to European capital markets in
order to obtain purchased funds under favourable conditions.
DURING THE PREVIOUS FOUR YEARS, DEPOSIT LIABILITY (THE SHARE OF TOTAL
DEPOSITS IN THE BANK'S BALANCE SHEET) CLIMBED FROM $35,113 MILLION TO
$43,270 MILLION, FOR A 23.2% INCREASE. PERSONAL DEPOSITS ROSE 7.4%,
COMMERCIAL DEPOSITS 50.1% AND PURCHASED FUNDS 38.0%. CORE DEPOSITS DECLINED
FROM 68.7% TO 65.0% OF TOTAL DEPOSITS OVER THE PERIOD.
CAPITAL MANAGEMENT
In addition to funding operations, the Bank's capital ensures the financial
stability of the institution by allowing it to deal with any eventuality.
As at October 31, 1997, total capital stood at $4,295 million. Table 9 presents
the sources of this capital.
[GRAPH]
TABLE 9
SOURCE OF CAPITAL
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-controlling interest 466 42 36 44 41
Bank debentures 1,069 1,016 1,177 1,241 1,037
Shareholders' equity
Preferred shares 376 376 376 532 426
Common shares 1,309 1,268 1,234 1,207 1,083
Retained earnings 1,075 855 701 578 462
-----------------------------------------------
2,760 2,499 2,311 2,317 1,971
-----------------------------------------------
Total capital 4,295 3,557 3,524 3,602 3,049
- -------------------------------------------------------------------------------
Internally generated capital
Net income 342 318 245 217 175
Other amounts affecting
retained earnings 2 (56) (18) 1 (4)
-----------------------------------------------
344 262 227 218 171
Less: dividends (124) (108) (104) (102) (89)
-----------------------------------------------
220 154 123 116 82
- -------------------------------------------------------------------------------
External financing
Non-controlling interest 424 6 (8) 3 7
Debentures 53 (161) (64) 204 68
Preferred shares - - (156) 106 (42)
Common shares 41 34 27 124 177
-----------------------------------------------
518 (121) (201) 437 210
-----------------------------------------------
Increase (Decrease) in capital 738 33 (78) 553 292
- -------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 33
<PAGE>
Capital is obtained through external financing - debenture and share issues -
and from internally generated capital, namely, earnings not paid out as
dividends. In 1997, internally generated capital totalled $220 million,
approximating net income of $342 million less the dividend payout of $124
million.
The 42.9% growth in internally generated capital over the previous year
established a new record for the Bank, topping its previous high in 1996.
In the area of external financing, the Bank also considerably strengthened its
capital base by setting up NB Capital Corporation in the United States, which
issued US $300 million (or CDN $423 million) of preferred shares included in
Tier 1 capital. This contribution is listed under the heading "Non-controlling
interest". This innovative operation widened the National Bank's lead over the
other major Canadian banks in terms of capitalization, with the result that it
is now the best capitalized of them all.
Common shareholders' equity as at October 31, 1997 amounted to $2,384 million,
for an increase of 12.3%. The dividend on common shares was raised from 49CENTS
to 57.5CENTS during the year.
Table 10 explains how the Bank's regulatory capital is calculated. Following the
issue of preferred shares on the U.S. market, the Bank's Tier 1 capital climbed
$692 million to reach $3,013 million. Tier 2 capital rose
TABLE 10
CAPITAL RATIOS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
(IN ACCORDANCE WITH BIS GUIDELINES)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1997 1996 (3) 1995 1994 1993 (1)
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 capital
Common shareholders' equity 2,384 2,123 1,935 1,785 1,643
Non-cumulative preferred shares,
permanent 317 317 317 442 317
Non-controlling interest 466 42 36 44 41
Less: goodwill (154) (161) (159) (169) (179)
---------------------------------------------------
3,013 2,321 2,129 2,102 1,822
- ---------------------------------------------------------------------------------------------------
Tier 2 capital
Cumulative preferred shares 59 59 59 90 110
Bank debentures 947 1,064 1,078 1,184 881
General allowance 200 - - - -
Less: investments in
affiliated corporations (3) (1) (1) (1) (1)
---------------------------------------------------
1,203 1,122 1,136 1,273 990
- ---------------------------------------------------------------------------------------------------
Total capital 4,216 3,443 3,265 3,375 2,812
- ---------------------------------------------------------------------------------------------------
Risk-weighted balance sheet items
Cash resources 981 761 1,019 805 698
Securities 2,282 2,861 2,334 2,230 1,435
Mortgage loans 4,200 4,156 4,118 4,029 4,008
Other loans 22,202 20,143 19,144 18,412 18,401
Other assets 4,022 3,098 2,500 2,542 2,431
---------------------------------------------------
33,687 31,019 29,115 28,018 26,973
- ---------------------------------------------------------------------------------------------------
Risk-weighted off-balance sheet items (2)
Commitments to extend credit
Guarantees, letters of credit and
transaction-related contingencies 1,193 1,174 1,121 978 1,134
Other commitments to extend credit 2,293 1,358 1,086 1,250 1,095
Interest rate contracts 77 66 38 21 40
Foreign exchange contracts 158 136 197 145 147
Equity contracts 18 21 - - -
---------------------------------------------------
3,739 2,755 2,442 2,394 2,416
- ---------------------------------------------------------------------------------------------------
Total risk-weighted assets 37,426 33,774 31,557 30,412 29,389
- ---------------------------------------------------------------------------------------------------
Ratios
Tier 1 8.1% 6.9% 6.8% 6.9% 6.2%
Tier 2 3.2 3.3% 3.6% 4.2% 3.4%
---------------------------------------------------
Total 11.3% 10.2% 10.4% 11.1% 9.6%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) TAKING INTO ACCOUNT THE REDEMPTION OF $100 MILLION IN DEBENTURES THROUGH
THE ISSUE OF COMMON SHARES ON NOVEMBER 1, 1993.
(2) AS AT SEPTEMBER 30.
(3) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON NOVEMBER 1,
1996.
34 NATIONAL BANK OF CANADA
<PAGE>
by $81 million as a result of the general allowance being included as of 1997.
Growth in Tier 2 capital also took into account the redemption of debentures
during the year. Total regulatory capital grew by 22.5% to $4,216 million as at
October 31, 1997.
The lower half of Table 10 presents the value of balance sheet and off-balance
sheet items, risk-weighted according to the rules of the Bank for International
Settlements (BIS). Calculated by dividing Tier 1 and total capital by total
risk-weighted assets, the Bank's Tier 1 capital ratio was 8.1% as at October 31,
1997 and its total capital ratio was 11.3%. Both ratios were up
significantly over their respective values of 6.9% and 10.2% at the end of the
previous year. The Bank's Tier 1 capital ratio made it the best capitalized of
the major Canadian banks.
ASSETS UNDER ADMINISTRATION/MANAGEMENT
Table 11 lists the principal asset administration and management services which
the Bank and its subsidiaries offer to clients. As at October 31, 1997, the
value of these assets amounted to $65,336 million, for an increase of $15,062
million.
With the exception of mortgages sold to third parties, which were down because
of principal repayments, all management and administration categories
contributed to this growth.
The Bank was more than able to make up for the $2 billion decline in personal
deposits in 1997 (shown in Table 8, page 32) through increases in other savings
instruments. If InvesNat and third-party mutual funds sold by National Bank
Securities, stock portfolios held by individual clients of Levesque Beaubien
Geoffrion and the InvesTel brokerage service, as well as savings bonds bought at
the Bank are isolated from the data in Table 11, the amounts flowing through the
National Bank group in 1997 were up some $6.2 billion over the previous year.
TABLE 11
ASSETS UNDER ADMINISTRATION/MANAGEMENT
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
National Natcan
General Levesque Bank Investment Bank Total
Trust Beaubien Securities Management excluding ---------------------
of Canada Geoffrion Inc. Inc. subsidiaries 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS UNDER ADMINISTRATION
Institutional 24,384 - - - - 24,384 17,510
Personal - 20,645 2,133 - - 22,778 17,754
Mutual funds 2,078 24 3,091 - - 5,193 3,886
Mortgage loans sold to third parties 32 - - - 1,389 1,421 1,945
-------------------------------------------------------------------------------------------
Total assets under administration 26,494 20,669 5,224 - 1,389 53,776 41,095
-------------------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT
Personal 2,389 - - - - 2,389 2,076
Managed portfolios - 370 - 5,692 - 6,062 4,803
Mutual funds - - - 3,109 - 3,109 2,300
-------------------------------------------------------------------------------------------
Total assets under management 2,389 370 - 8,801 - 11,560 9,179
-------------------------------------------------------------------------------------------
TOTAL ASSETS UNDER ADMINISTRATION/
MANAGEMENT 28,883 21,039 5,224 8,801 1,389 65,336 50,274
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 35
<PAGE>
RISK MANAGEMENT
Risk is an inherent feature of banking intermediation and financial products,
and managing that risk is one of a bank's main responsibilities. This section
contains a description of the various types of risks and control methods used
by the Bank, an analysis of the Bank's balance sheet as at October 31, 1997
in terms of credit and interest rate risks, and a review of the risks in
off-balance sheet activities (notably derivatives) at the end of the fiscal
year. This will complement the analyses already presented in this
Management's Discussion and Analysis.
RISK CATEGORIES AND CONTROL MEASURES
Market risk, credit risk and liquidity risk are the three main risk categories.
In addition, there are legal risks and risks associated with operations.
The risk related to a specific financial instrument is managed using a portfolio
approach, which means that the instrument is not considered individually but as
a component of a portfolio that may contain both balance sheet and off-balance
sheet items.
MARKET RISK
Market risk denotes the probability of variations in the value of a financial
instrument because of fluctuations in economic conditions and market prices.
For a bank, this risk is tied more closely to changes in interest and currency
rates. Accordingly, "interest rate risk" designates the risk that the value of a
financial instrument will be affected by market variations in interest rates
while "foreign currency risk" or "foreign exchange risk" refers to the impact of
exchange rate movements on the value of a financial instrument.
The Bank has established specific, detailed policies for managing market risk
which have been approved by the Board of Directors. These policies are aimed not
at neutralizing such risks, but at maximizing risk/return trade-offs within
carefully defined limits.
Market risk is managed by the Bank's Treasury sector, primarily using a "value
at risk" (VAR) methodology. With a simulation model, it is possible to estimate
the impact of potential market fluctuations on the financial instruments held by
the Bank. The model concentrates on worst-case loss scenarios and excludes only
those risks with a probability of less than 0.5%. In addition to daily VAR
simulations, at least once a week the Bank carries out a simulation aimed at
gauging the impact of catastrophic events that exceed the 99.5% confidence
level. This stress testing is used to measure - and if necessary mitigate - the
Bank's vulnerability to extreme shifts in market conditions. To complement these
methods, the Bank also uses other standard financial risk measurements and
various sensitivity analysis techniques.
The Executive Committee of the Board of Directors establishes maximum risk
limits and the procedures to follow depending on the level of risk involved.
Responsibility for managing market risk lies with the Chairman of the Board and
the Senior Executive Vice-President in charge of Treasury. Managers are required
to respect strict follow-up and reporting procedures, and stop-loss mechanisms
are automatically triggered should losses at any time exceed certain specified
levels. Moreover, an independent unit within the Bank is responsible for
monitoring and controlling transactions.
CREDIT RISK
Credit risk is the risk that a loss may occur if the counterparty to a financial
instrument fails to honour its commitments. It can apply to both balance sheet
and off-balance sheet assets, such as a loan or a derivative with a positive
market value.
Credit risks are controlled using specific policies which are designed to
maximize the risk/return trade-offs. These policies are approved by the Board of
Directors. An explanation of credit risk management as it applies to balance
sheet items and off-balance sheet items is provided below.
LIQUIDITY RISK
Liquidity risk refers to an institution's ability to raise the funds needed to
meet its financial commitments, whether for balance sheet items or off-balance
sheet activities. An integral part of asset and liability management, liquidity
risk is included in the strategies applied by Treasury. Since it is extremely
important for a bank to have liquid assets available at all times, special
emphasis is placed on managing them.
The Bank's liquidity management policy, which is approved by the Board of
Directors, sets out the objectives, measurement methods, minimum liquid asset
requirements and control procedures as well as strategies for obtaining market
funds and the steps to be taken to deal with any unforeseen events. The Senior
36 NATIONAL BANK OF CANADA
<PAGE>
Executive Vice-President in charge of Treasury is responsible for applying the
liquidity management policy, a report on which is submitted each year to
the Executive Committee. The situation is regularly monitored through weekly
follow-up reports on liquidity ratios and quarterly reports on the Bank's
overall liquidity position.
The liquidities needed for the Bank's operations are guaranteed by stable,
well-diversified funding through core deposits and purchased funds (Table 8,
page 32), capital adequacy (Tables 9 and 10, pages 33 and 34 respectively), and
the Bank's access to capital markets.
Other techniques, such as loan syndication and securitization, the marketing of
Bank products and the use of derivatives, are also instrumental in matching
assets and liabilities which in turn ensures sufficient liquidity.
ANALYSIS OF BALANCE SHEET RISKS
Credit and interest rate risks represent the main balance sheet risks.
CREDIT RISK MANAGEMENT
Credit risk has a direct bearing on the quality of a bank's portfolio. A
two-fold approach is taken to managing such risk, one for prospective loans and
the other for existing loans.
The first involves applying the measures and methods adopted by the Bank to
limit credit risks in the loans it makes. During the year ended October 31,
1997, not only did the Bank continue to apply very strict credit limits, but it
further refined the criteria applied in the credit-granting process. New limits
were assigned to regional credit centres and all applications that exceed these
limits are handled by the Credit Committee of the Bank. Credit files approved at
the regional level are also closely monitored on an ongoing basis. The Bank
continues to carry out syndication activities in order to spread the risk in
certain loans among several financial institutions.
The Bank also introduced a new credit assessment system for commercial clients
in order to better control portfolio risk while still granting clients terms and
conditions in line with their financial position. This system, which is largely
computerized, takes three factors into consideration. First, it assesses the
client's credit rating using a more precise scale of 1 to 10 (compared to the
former 5-point scale). It then considers the collateral provided by the client,
and finally, it looks at the borrower's overall business relations with the
Bank. Plans are also under way to include a capital allocation model in the near
future so as to ensure that credit terms and conditions more accurately
correspond to the risks inherent in the credits granted.
The second approach in improving portfolio quality is to lessen the risks that
inevitably arise in loans after they have been granted. Just like the other
banks, the National Bank in recent years has had to improve the quality of its
real estate portfolio by shedding the riskiest assets and taking provisions
against potential losses. This cleanup operation progressed as planned for real
estate loans in 1997.
The Bank's prominent role with respect to small and medium-sized businesses
means that it has to be extremely vigilant, but at the same time our involvement
in this sector gives us a loyal client base. Accordingly, when our clients
experience temporary setbacks, the Bank works with them to seek out amicable
solutions that protect both their interests and those of its shareholders.
These strategies have clearly been effective as, during the year, the Bank was
able to reduce its provision for credit losses in the individuals and small
businesses category (Table 3, page 26). Improvements in the Bank's impaired
loans are analyzed later on (Table 14, page 40).
NATIONAL BANK OF CANADA 37
<PAGE>
The Bank's credit risk management policy is adopted by the Board of Directors
in collaboration with the Executive Committee and the Credit Committee of the
Board. It sets out the objectives and the methods and procedures for
identifying and measuring risks (including concentration risk), evaluating
credit, approving applications, as well as checking, monitoring and
controlling such risk.
The Chief Executive Officer and the Chairman of the Credit Committee of the Bank
(a separate entity from the Credit Committee of the Board) are responsible
for implementing these policies. Line management with the authority to approve
credit applications varies in accordance with the size and risk of the loan
being contemplated. Beyond certain limits, the decisions are made by the Credit
Committee of the Board. Each credit application must meet the requirements
stipulated in the Bank's policy. The portfolio is monitored on an ongoing basis
and a specialized team analyzes the risks associated with the various credit
categories and sectors in which the Bank wants to be involved.
At least once a year, the Chairman of the Credit Committee of the Bank presents
a detailed risk management report to the Board of Directors. Periodic or special
reports are also submitted to the Board of Directors, the Executive Committee
and the Credit Committee of the Board. Accounts which are potentially
problematic are monitored very closely and independent examinations are carried
out.
The Bank continued its orderly withdrawal from the real estate market in 1997.
Gross real estate loans amounted to $1,191 million as at October 31, 1997, down
26.0% from a year earlier (Table 12). Less the $158 million in provisions set
aside to cover potential losses in this sector, net volumes outstanding were
$1,033 million, for a decrease of 30.9% from the previous year.
TABLE 12
REAL ESTATE LOANS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Geographic distribution
Canada
Ontario 327 28 437 27 491 24 570 26 612 25
Quebec 405 34 503 31 562 27 494 22 503 21
Other 40 3 34 2 57 3 101 4 112 5
-------------------------------------------------------------------------------------------------
772 65 974 60 1,110 54 1,165 52 1,227 51
-------------------------------------------------------------------------------------------------
United States
California 149 13 232 15 302 14 329 15 336 14
New York 63 5 96 6 118 6 131 6 173 7
Illinois 55 4 114 7 144 7 149 7 151 6
Other 152 13 194 12 262 13 327 15 377 15
-------------------------------------------------------------------------------------------------
419 35 636 40 826 40 936 43 1,037 42
Other - - - - 116 6 121 5 164 7
-------------------------------------------------------------------------------------------------
1,191 100 1,610 100 2,052 100 2,222 100 2,428 100
- -----------------------------------------------------------------------------------------------------------------------------------
By type of project
Retail 358 30 414 26 511 25 531 24 570 23
Office 410 34 572 36 815 40 974 44 1,080 44
Residential 158 13 188 11 214 10 243 11 281 12
Industrial 78 7 110 7 157 8 173 8 184 8
Land 35 3 47 3 64 3 43 2 47 2
Other 152 13 279 17 291 14 258 11 266 11
-------------------------------------------------------------------------------------------------
1,191 100 1,610 100 2,052 100 2,222 100 2,428 100
Allowance for credit losses 158 116 153 173 227
-------------------------------------------------------------------------------------------------
Real estate loans, net 1,033 1,494 1,899 2,049 2,201
- -----------------------------------------------------------------------------------------------------------------------------------
As a percentage of
shareholders' equity 37 60 82 88 112
As a percentage of total loans
and bankers' acceptances 2 4 5 6 7
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38 NATIONAL BANK OF CANADA
<PAGE>
Real estate loan volumes shrank in virtually every region this year including -
for the second consecutive year - Quebec. We took advantage of good
opportunities as they arose to sell or restructure domestic real estate loans,
with the result that gross volumes declined by
$202 million or 20.7%. At the same time, we continued to
liquidate the U.S. real estate portfolio, reducing gross loans outstanding by
$217 million or 34.1% by the end of the year.
[GRAPH]
As can be seen from the breakdown of loans by project type, this reduction in
real estate volumes occurred in all sectors.
In short, the Bank's strategy of sustained effort and prudence continued to
produce results in 1997. Net real estate exposure represented only 37% of
shareholders' equity at year end, compared to 60% in 1996 and 112% in 1993. It
also dropped to 2% of total loans and bankers' acceptances.
The situation with respect to loans to designated countries again improved
during the year (Table 13). Gross volumes outstanding declined to $109 million,
down 47.1% from 1996, as the Bank took advantage of the strong market ratings
for these loans to divest itself of a large part of its remaining portfolio.
As a result of this decrease and the favourable spread between the market and
book values of the portfolio, the provisions taken proved to be disproportionate
and the Bank was able to scale them back by $85 million, not including $13
million in write-offs.
The country risk allowance was therefore reduced by $98 million, bringing net
outstandings to $53 million or only 1.9% of shareholders' equity. Moreover, the
provisioning rate for the loans still on our books was 51.4%, a level deemed to
be amply sufficient.
TABLE 13
DESIGNATED COUNTRIES
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans and securities, gross
Poland - - 90 91 148
Brazil 35 51 91 91 103
Argentina - 51 51 51 62
Ivory Coast 18 18 18 18 17
Venezuela - 15 15 15 15
Sudan 16 17 19 17 14
Morocco - - 28 28 27
Peru 13 22 22 22 21
Other 27 32 40 41 38
------------------------------------------------
109 206 374 374 445
Country risk allowance 56 154 190 190 274
------------------------------------------------
Loans and securities, net of allowances 53 52 184 184 171
- --------------------------------------------------------------------------------------------
Allowances as a % of loans and securities 51.4% 74.8% 50.8% 50.8% 61.6%
Loans and securities, net, as a % of
shareholders' equity 1.9% 2.1% 8.0% 7.9% 8.7%
- --------------------------------------------------------------------------------------------
</TABLE>
DURING FISCAL 1997, THE BANK CONVERTED THE LOAN GRANTED TO PERU INTO DISCOUNT
BONDS FOR AN AMOUNT OF $12 MILLION UNDER THE BRADY PLAN. PARTICULARS, BY
COUNTRY, OF PRIVATE-RISK AND SOVEREIGN-RISK LOANS CLASSIFIED AS RESTRUCTURED FOR
PREVIOUS YEARS ARE AS FOLLOWS: 1996: PANAMA $6 MILLION, 1994: BRAZIL $81
MILLION, POLAND $82 MILLION AND ARGENTINA $45 MILLION.
NATIONAL BANK OF CANADA 39
<PAGE>
As at October 31, 1997, impaired loans net of provisions for credit losses stood
at $297 million, for a 26.8% reduction from the $406 million level a year
earlier (Table 14). The ratio of impaired loans to loans and bankers'
acceptances was only 0.6%, down sharply from 1.0% in 1996 and 3.0% in 1993. As a
percentage of common shareholders' equity, net impaired loans continued their
downward trend, declining from 19.1% in 1996 to 12.5% in 1997.
Domestic net impaired loans to individuals and the commercial sector were up
during the year, reflecting the rapid growth in this portfolio and the Bank's
active role with independent businesses and very small businesses. As the Bank
had indicated in its 1996 Annual Report, additional provisions were taken in
this regard (see Table 3 on page 26 for the relevant explanations).
Changes in the volume of net impaired loans to individuals and independent
businesses were more than offset by the additional general allowance taken
by the Bank and the reduction in net impaired loans in other sectors. Domestic
impaired loans in the real estate sector were down as the Bank continued to pare
down this portfolio whenever opportunities arose. All in all, domestic net
impaired loans shrank by 21.1%.
TABLE 14
IMPAIRED LOANS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Private impaired loans, net
Domestic
Individuals and small businesses (1) 241 192 138 119 104
Commercial 208 175 194 212 251
Corporate 7 18 31 56 54
Real estate 38 61 98 182 166
Other (2) (213) (90) (90) (42) (11)
-----------------------------------------------
281 356 371 527 564
-----------------------------------------------
International
Commercial - United States (1) 3 3 11 80
Real estate - United States 9 39 70 83 133
Real estate - Other - - 50 52 51
Other (2) 3 - 8 8 13
-----------------------------------------------
11 42 131 154 277
-----------------------------------------------
Total private impaired loans, net 292 398 502 681 841
- -------------------------------------------------------------------------------------------
Impaired loans to designated countries
Gross 57 77 94 92 337
Allowance 52 69 85 85 228
-----------------------------------------------
5 8 9 7 109
-----------------------------------------------
Total impaired loans, net (3) 297 406 511 688 950
- -------------------------------------------------------------------------------------------
Private impaired loans, gross 1,075 995 1,104 1,310 1,435
Allowance for credit losses 783 597 602 629 594
-----------------------------------------------
Private impaired loans, net 292 398 502 681 841
Provisioning rate 72.8% 60.0% 54.5% 48.0% 41.4%
- -------------------------------------------------------------------------------------------
As a percentage of net loans and
bankers' acceptances
Domestic - Private 0.7% 1.0% 1.2% 1.8% 2.1%
International - Private 0.2% 0.8% 2.8% 3.3% 5.7%
International - Designated countries 0.1% 0.2% 0.2% 0.2% 2.3%
Total 0.6% 1.0% 1.5% 2.1% 3.0%
As a percentage of common
shareholders' equity 12.5% 19.1% 26.4% 38.5% 61.5%
- -------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDING $42 MILLION IN NET CONSUMER LOANS IN 1997 (1996: $37 MILLION;
1995: $39 MILLION; 1994: $28 MILLION; 1993: $22 MILLION).
(2) INCLUDING $200 MILLION IN GENERAL ALLOWANCES IN 1997 (1996: $100 MILLION;
1995: $100 MILLION; 1994: $56 MILLION; 1993: $31 MILLION).
(3) THE BANK HAS NO LOANS CLASSIFIED AS OTHER PAST-DUE LOANS (90 DAYS AND OVER)
EXCEPT FOR THOSE ALREADY DESIGNATED AS IMPAIRED.
40 NATIONAL BANK OF CANADA
<PAGE>
In the United States, the Bank's impaired loans continued to decline, with
outstanding volumes falling from $42 million to $8 million. This continued
improvement ties in with the Bank's strategy in recent years to reorient itself
towards the mid-market sector and specialize in promising niches such as
asset-based lending. It also reflects the efforts made to gradually reduce the
real estate portfolio. Tight controls over new credits granted in the United
States further contributed to the strong performance recorded in 1997.
Impaired loans to designated countries continued their downward trend and these
volumes are no longer considered significant.
As a percentage of the $1,075 million in gross private impaired loans, the $783
million allowance for loan impairment as at October 31, 1997 represented a
provisioning rate of 72.8%, continuing its upward trend of the past few years.
[GRAPH]
Given the high proportion of loans to small and medium-sized businesses in its
portfolio and the fact that its operations are concentrated in Quebec, the
National Bank has yet to match the performance levels of Canada's other major
banks. Nevertheless, impaired loan volumes in relation to the Bank's total loans
continue to shrink steadily. As already stated in its two previous Annual
Reports, the Bank believes that its success in improving its lending portfolio
will sustain this positive trend.
Net interest earned on impaired loans went from a negative amount of $5 million
in 1996 to a positive amount of $15 million in 1997 (Table 15), owing to
past-due interest bonds received from designated countries. Aggregate net
interest earned on all impaired loans rose from -1.1% to 3.3% for the same
reason.
Average impaired loans outstanding increased in the domestic sector, declined in
the international sector, and remained stable overall.
INTEREST RATE RISK MANAGEMENT
Interest rate risk in the balance sheet results from the mismatching of the
maturities of assets and liabilities. The level of risk also varies according to
the steepness of the interest rate curve as well as the frequency and extent of
fluctuations in interest rates. To control this risk, the Bank manages its asset
and liability matching and adjusts the mix of its portfolios by using a vast
range of both balance sheet and off-balance sheet financial instruments,
including securitization transactions.
Analyzing interest rate sensitivity gaps is one of the methods used to control
interest rate risk. Table 16 on pages 42 to 45 presents a breakdown of assets
and liabilities by maturity and illustrates the sensitivity of the Bank's
balance sheet to interest rate fluctuations as at October 31, 1997. In this
table, a distinction is made between items in Canadian dollars and those in
foreign currencies, while the trading account and the investment account are
shown separately.
TABLE 15
INTEREST ON IMPAIRED LOANS
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest on impaired loans (1)
Domestic (19) (20) (18) (16) (7)
International 34 15 31 18 37
-----------------------------------------------
15 (5) 13 2 30
- -------------------------------------------------------------------------------------------------
Average impaired loans
Domestic 400 354 427 554 569
International 50 96 149 309 502
-----------------------------------------------
450 450 576 863 1,071
- -------------------------------------------------------------------------------------------------
Interest as a % of average impaired loans
Domestic (4.8)% (5.7)% (4.2)% (2.9)% (1.2)%
International 68.0 % 15.6 % 20.8 % 5.8 % 7.4 %
Total 3.3 % (1.1)% 2.3 % 0.2 % 2.8 %
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) INTEREST EARNED INCLUDES INTEREST RECEIPTS AND REVERSALS FOR LOANS NEWLY
CLASSIFIED AS IMPAIRED.
NATIONAL BANK OF CANADA 41
<PAGE>
The net sensitivity gap for maturities of one year and under in the investment
account was essentially unchanged, going from a liability-sensitive position of
$793 million (or 2.2% of assets) as at October 31, 1996 to $781 million (or 1.8%
of assets) as at October 31, 1997. The asset-sensitive position of net gaps for
maturities of over one year shrank from $2,717 million at year end 1996 to
$1,994 million at year end 1997.
The use of derivatives greatly contributed to extending the average maturity of
the Bank's net assets, thereby making the interest spread less sensitive to
interest rate fluctuations. In fact, by using derivatives, the Bank reduced the
asset-sensitive position of net gaps for maturities of under one year by $3,481
million.
Information on sensitivity gaps for the foreign currency investment account
shows that mismatches were limited and that the vast majority of assets and
liabilities had maturities of under one year.
TABLE 16A
INTEREST RATE SENSITIVITY ANALYSIS - CANADIAN DOLLAR ITEMS
AS AT OCTOBER 31
(MILLIONS OF CANADIAN DOLLARS)
- -----------------------------------------------------------------------------
3 MONTHS
TOTAL VARIABLE RATE AND UNDER YIELD
-------- --------------- ----------- -------
ASSETS
Trading account
Cash resources 38 38 - -
Securities 4,698 - 802 3.79
Loans 7,934 657 6,486 3.80
Other assets - - - -
-------- --------------- ----------- -------
12,670 695 7,288 3.80
--------------------------------------------------
Investment account
Cash resources 1,794 610 1,179 4.52
Securities 3,019 2 547 4.28
Loans 33,658 13,402 4,495 5.78
Other assets 4,252 - - -
-------- --------------- ----------- -------
42,723 14,014 6,221 5.41
--------------------------------------------------
Total 55,393 14,709 13,509 4.54
- ------------------------------------------------------------------------------
LIABILITIES
Trading account
Deposits 950 950 - -
Other liabilities 11,626 174 6,847 3.63
-------- --------------- ----------- -------
12,576 1,124 6,847 3.63
--------------------------------------------------
Investment account
Deposits 30,427 6,444 6,134 3.67
Subordinated debt 335 - - -
Other liabilities 5,629 2,207 - -
Shareholders' equity 2,760 59 - -
-------- --------------- ----------- -------
39,151 8,710 6,134 3.67
--------------------------------------------------
Total 51,727 9,834 12,981 3.65
- ------------------------------------------------------------------------------
Trading gap 94 (429) 441
Investment gap 3,572 5,304 87
On-balance sheet gap 3,666 4,875 528
- ------------------------------------------------------------------------------
DERIVATIVES
Trading derivatives 25 - 2,251
Investment derivatives (3,457) - (2,903)
Total (3,432) - (652)
- ------------------------------------------------------------------------------
Total trading gap 119 (429) 2,692
Total investment gap 115 5,304 (2,816)
Total gap, net 234 4,875 (124)
- ------------------------------------------------------------------------------
42 NATIONAL BANK OF CANADA
<PAGE>
Another risk assessment method used by the Bank is to measure the impact of
interest rate movements on net interest income and on the present value of
shareholders' equity. The Bank structured the investment sensitivity gaps for
maturities of one year and under in such a way as to minimize the impact of
interest rate fluctuations on the interest spread. Based on the Bank's matching
position as at October 31, 1997, simulations demonstrate that an immediate and
sustained 1% rise in interest rates would increase net interest income by
approximately $4 million (before taxes) over 12 months and reduce the present
value of common shareholders' equity by $33 million.
To complement the traditional tools used for measuring financial risk, the Bank
applies a VAR methodology to trading activities. According to simulations, if
potential losses with a probability of 0.5% or less are excluded, the VAR of
trading activities as at October 31, 1997 was limited to $1.3 million in foreign
exchange operations, $4.1 million in interest rate operations and $0.8 million
in equity trading. The VAR of these three types of operations combined amounted
to $4.2 million. These amounts are considerably lower than the notional amount
of the derivatives used for trading purposes.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
6 TO 12 TOTAL 1 YEAR NON-INTEREST
3 TO 6 MONTHS YIELD MONTHS YIELD AND UNDER 1 TO 5 YEARS YIELD OVER 5 YEARS YIELD SENSITIVE
------------- ----- ------- ----- ------------ ------------ ----- ------------ ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - - - 38 - - - - -
1,117 4.01 900 4.24 2,819 622 4.99 1,257 5.57 -
667 3.79 - - 7,810 124 7.96 - - -
- - - - - - - - - -
------------- ----- ------ ---- ------------ ------------ ----- ------------ ----- ------------
1,784 3.93 900 4.24 10,667 746 5.48 1,257 5.57 -
- -----------------------------------------------------------------------------------------------------------------------------------
5 3.91 - - 1,794 - - - - -
229 5.41 85 7.38 863 999 5.79 813 6.68 344
1,983 6.78 3,402 6.99 23,282 10,188 7.20 188 7.83 -
- - - - - - - - - 4,252
------------- ----- ------ ---- ------------ ------------ ----- ------------ ----- ------------
2,217 6.63 3,487 7.00 25,939 11,187 7.07 1,001 6.90 4,596
- -----------------------------------------------------------------------------------------------------------------------------------
4,001 5.43 4,387 6.43 36,606 11,933 6.97 2,258 6.16 4,596
- -----------------------------------------------------------------------------------------------------------------------------------
- - - - 950 - - - - -
1,051 3.82 110 4.23 8,182 678 5.25 1,253 5.48 1,513
------------- ----- ------ ---- ------------ ------------ ---- ------------ ----- ------------
1,051 3.82 110 4.23 9,132 678 5.25 1,253 5.48 1,513
- -----------------------------------------------------------------------------------------------------------------------------------
3,546 4.22 4,840 4.32 20,964 9,376 6.03 87 6.28 -
- - 9 10.88 9 51 11.30 275 7.50 -
- - - - 2,207 27 5.99 85 7.75 3,310
- - - - 59 192 9.58 125 9.16 2,384
------------- ----- ------ ---- ------------ ----------- ----- ------------ ----- ------------
3,546 4.22 4,849 4.33 23,239 9,646 6.13 572 7.71 5,694
- -----------------------------------------------------------------------------------------------------------------------------------
4,597 4.13 4,959 4.33 32,371 10,324 6.07 1,825 6.18 7,207
- -----------------------------------------------------------------------------------------------------------------------------------
733 790 1,535 68 4 (1,513)
(1,329) (1,362) 2,700 1,541 429 (1,098)
(596) (572) 4,235 1,609 433 (2,611)
- -----------------------------------------------------------------------------------------------------------------------------------
(125) (1,247) 879 (920) (1) 67
(2,302) 1,724 (3,481) (191) 215 -
(2,427) 477 (2,602) (1,111) 214 67
- -----------------------------------------------------------------------------------------------------------------------------------
608 (457) 2,414 (852) 3 (1,446)
(3,631) 362 (781) 1,350 644 (1,098)
(3 023) (95) 1,633 498 647 (2,544)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 43
<PAGE>
ANALYSIS OF OFF-BALANCE SHEET RISK EXPOSURE
Risks are also linked to off-balance sheet activities, which consist of
commitments to extend credit and derivatives. These financial instruments are
usually components of portfolios which include balance sheet items and, as such,
are subject to the full range of control measures described earlier. In
addition, commitments to extend credit must also comply with the same credit
policies as loan operations recorded on the balance sheet. Additional control
measures are also applied to derivatives.
This section provides more information on the nature of off-balance sheet
activities, the risks they involve, and the assessments and control measures
applicable to such risks.
CREDIT EQUIVALENT AMOUNT OF OFF-BALANCE SHEET ITEMS
Table 10 (page 34) provides a breakdown of the risk-weighted credit equivalent
amount of the various off-balance sheet items included in the calculation of
total risk-weighted assets. They represent a relatively low proportion in
comparison to the other credit risks recorded on the balance sheet. Off-balance
sheet items accounted for 11.1% of risk-weighted assets on the balance sheet,
compared to 8.9% in 1996.
TABLE 16B
INTEREST RATE SENSITIVITY ANALYSIS - FOREIGN CURRENCY ITEMS
AS AT OCTOBER 31
(MILLIONS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
3 MONTHS
TOTAL VARIABLE RATE AND UNDER YIELD
--------- ----------------- ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Trading account
Cash resources 9 9 - -
Securities 764 - 73 5.59
Loans 680 211 355 4.59
Other assets - - - -
--------- ----------------- ------------- ---------
1,453 220 428 4.76
------------------------------------------------------------------
Investment account
Cash resources 2,635 249 2,178 5.54
Securities 1,529 114 676 3.68
Loans 4,986 1,894 2,626 5.87
Other assets 239 - - -
--------- ----------------- ------------- ---------
9,389 2,257 5,480 5.47
------------------------------------------------------------------
Total 10,842 2,477 5,908 5.42
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Trading account
Deposits 210 183 22 -
Other liabilities 1,367 67 56 2.50
--------- ----------------- ------------- ---------
1,577 250 78 1.81
------------------------------------------------------------------
Investment account
Deposits 11,683 905 6,786 5.60
Subordinated debt 734 - 148 4.48
Other liabilities 514 - 34 5.30
Shareholders' equity - - - -
--------- ----------------- ------------- ---------
12,931 905 6,968 5.58
------------------------------------------------------------------
Total 14,508 1,155 7,046 5.53
- -----------------------------------------------------------------------------------------------------
Trading gap (124) (30) 350
Investment gap (3,542) 1,352 (1,488)
On-balance sheet gap (3,666) 1,322 (1,138)
- -----------------------------------------------------------------------------------------------------
DERIVATIVES
Trading derivatives 5 - (1,511)
Investment derivatives 3,593 - 364
Total 3,598 - (1,147)
- -----------------------------------------------------------------------------------------------------
Total trading gap (119) (30) (1,161)
Total investment gap 51 1,352 (1,124)
Total gap, net (68) 1,322 (2,285)
- -----------------------------------------------------------------------------------------------------
</TABLE>
44 NATIONAL BANK OF CANADA
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
The derivative financial instruments used by the Bank (forwards, futures, swaps
and options) are contracts whose value is derived mainly from interest rates and
foreign exchange rates and, to a lesser extent, commodity prices and equity
prices.
Derivatives are the strategic tool of choice for risk management. The Bank uses
them for two purposes: trading activities and asset/liability management.
The Bank uses its trading portfolio to carry out market-making or trading
operations and to position itself on markets. The Bank also makes its expertise
in risk management available to its commercial and institutional clients by
offering management solutions for risk exposure.
Derivatives are one of the balance sheet tools available for managing interest
rate and foreign exchange risk exposure as well as asset and liability matching.
It is essential that these risks, which are a normal part of banking, be managed
in order to protect the interest spread and the present value of capital.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
6 TO 12 TOTAL 1 YEAR NON-INTEREST
3 TO 6 MONTHS YIELD MONTHS YIELD AND UNDER 1 TO 5 YEARS YIELD OVER 5 YEARS YIELD SENSITIVE
------------- ----- ------- ----- ------------ ------------ ----- ------------ ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - - - 9 - - - - -
2 5.30 - - 75 298 5.56 264 6.53 127
35 5.39 - - 601 - - - - 79
- - - - - - - - - -
------------- ----- ------- ----- ------------ ------------ ----- ------------ ----- -------------
37 5.38 - - 685 298 5.56 264 6.53 206
----------------------------------------------------------------------------------------------------------------------------------
164 5.48 7 5.88 2,598 - - - - 37
92 6.01 85 4.24 967 141 6.12 223 6.06 198
247 6.02 54 5.57 4,821 129 7.17 - - 36
- - - - - - - - - 239
------------- ----- ------- ----- ------------ ------------ ----- ------------ ----- -------------
503 5.84 146 4.81 8,386 270 6.62 223 6.06 510
---------------------------------------------------------------------------------------------------------------------------------
540 5.81 146 4.81 9,071 568 6.07 487 6.31 716
----------------------------------------------------------------------------------------------------------------------------------
- - - - 205 - - - - 5
- - - - 123 29 5.67 68 5.85 1,147
------------- ----- ------- ----- ------------ ------------ ----- ------------ ----- -------------
- - - - 328 29 5.67 68 5.85 1,152
----------------------------------------------------------------------------------------------------------------------------------
1,978 5.85 1,894 6.02 11,563 79 6.27 - - 41
- - - - 148 234 6.05 352 8.13 -
- - - - 34 9 5.63 458 7.70 13
- - - - - - - - - -
------------- ----- ------- ----- ------------ ------------ ----- ------------ ----- -------------
1,978 5.85 1,894 6.02 11,745 322 6.09 810 7.89 54
----------------------------------------------------------------------------------------------------------------------------------
1,978 5.85 1,894 6.02 12,073 351 6.06 878 7.73 1,206
----------------------------------------------------------------------------------------------------------------------------------
37 - 357 269 196 (946)
(1,475) (1,748) (3,359) (52) (587) 456
(1,438) (1,748) (3,002) 217 (391) (490)
----------------------------------------------------------------------------------------------------------------------------------
2,057 160 706 (534) (28) (139)
1,857 1,519 3,740 (210) 247 (184)
3,914 1,679 4,446 (744) 219 (323)
----------------------------------------------------------------------------------------------------------------------------------
2,094 160 1,063 (265) 168 (1,085)
382 (229) 381 (262) (340) 272
2,476 (69) 1,444 (527) (172) (813)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 45
<PAGE>
For trading activities, transactions are accounted for on a mark-to-market
basis. For asset/liability management operations, the derivatives are accounted
for on an accrual basis in order to match the accounting treatment of the assets
and liabilities being hedged. Note 19 to the financial statements (page 65)
presents the maturity profile of the derivatives held by the Bank as at
September 30, 1997. It should be noted that most of these instruments have
short maturities: 65% of interest rate contracts and 69% of foreign exchange
contracts mature within six months.
Note 19 further presents the notional (or nominal) amounts of derivatives used
by the Bank for trading and asset/liability management (other activities). Table
16 (pages 42 to 45) shows how, for asset/liability management purposes,
derivatives modify interest rate sensitivity gaps and how, by extending the
maturity of capital, they reduced balance sheet risk exposure
in 1997. The notional amount of derivatives in the trading account is not
necessarily representative of their risk level but rather reflects the high
number of transactions.
The risks inherent in derivatives are similar to the general risks for financial
instruments. These can be divided into four major categories: market risk,
especially interest and foreign exchange rate risk; credit risk; liquidity risk
and legal risk.
Market risk is defined as the potential for a deterioration in the value of a
derivative instrument because of fluctuations in the underlying primary
instrument (interest rates or foreign exchange rates). All derivative risks are
accurately measured, reevaluated on a daily basis and managed in accordance with
the policies approved by the Bank's Board of Directors.
Credit risk, also known as the credit equivalent amount, is the value of the
loss incurred in the event a counterparty fails to honour its commitments. It
includes the current replacement cost of the contract, if it is positive, and
future credit risk exposure, which is the estimated change in the value of the
contract to maturity.
Note 20 to the financial statements (page 66), which provides data on credit
risk exposure calculated in this way, confirms the analysis of Table 10 (page
34) with respect to the low proportion of derivatives compared to the balance
sheet items.
The Bank limits credit risk exposure related to derivatives in various ways. For
instance, in dealings with certain counterparties, it can reduce its exposure by
means of netting or mark-to-market agreements. In addition, credit risk exposure
is reduced substantially when the relevant instruments are listed on a stock
exchange. As shown in Note 19 to the financial statements (page 66), most of
the credit equivalent amount for derivatives is contracted with reliable
counterparties, particularly major banks and OECD governments.
Liquidity risk consists of two elements: market liquidity and cash flow. In the
first instance, risk exposure stems from a possible delay in settling a
position when, for example, the market lacks sufficient depth. The Bank controls
this risk by taking relatively short positions and by operating on markets where
its positions represent only a very small proportion of total volume. In the
second instance, cash flow risk derives from the timing of cash receipts and
outflows and is managed as part of the Bank's overall liquidity management
process.
46 NATIONAL BANK OF CANADA
<PAGE>
Legal risk exists where there is a possibility that a counterparty does not have
the necessary legal power to enter into a transaction or the legal documents
for such a transaction are deficient. The Bank manages this risk by applying the
necessary checks and controls and by working with the national and international
organizations that set the standards to be respected.
In derivative operations, another type of risk that is often discussed concerns
operations and systems, namely, the risk of losses that would be incurred should
information systems or operations control and management systems fail. The Bank
has a number of ways to limit this risk exposure. For example, it establishes
specific policies and procedures, including emergency plans (for recovery in the
event of equipment breakdown, for instance), continuous monitoring and follow-up
of procedures and systems, daily backup of transactions, regular presentation of
reports to senior line management, separation of transaction and control
functions, and personnel training.
In addition to being managed as part of the Bank's general risk management
policies, derivative risk exposure is also subject to special assessment and
control measures. An independent unit within the Bank is responsible for
monitoring financial transactions and administering risk control systems. The
duties of this unit include ensuring that transactions are settled and recorded,
measuring position risk, checking that the policies adopted by the Board of
Directors are applied and controlling the quality of analysis systems.
CONCLUSION
In 1997, the Bank took full advantage of the favourable economic conditions that
prevailed in order to boost its income and profits and to strengthen its
financial structure. It is currently the best capitalized of all the major
Canadian banks. Moreover, its shareholders received a total return comparable to
the industry average. This sustained performance was a natural extension of the
strategic orientations and the progress made in recent years.
Diversifying operations is one of the key factors in the Bank's ongoing efforts
to improve its financial structure and profitability. This diversification
entailed transforming the Bank into a fully integrated financial group and
expanding the range of products for its clients. In addition to positioning
itself in all the distribution networks for banking services, the Bank also
emphasized synergy with its subsidiaries to offer a variety of investment
products, a comprehensive range of financing instruments, advisory services
adapted to its many client groups, wealth management and trust services as well
as insurance products. As a result, the Bank was able to deal effectively with
the major trend that became particularly evident in 1997, namely, the migration
of personal deposits to other savings instruments.
The Bank is also diversified in geographic terms. While remaining the principal
bank for businesses in Quebec, the National Bank is carving a niche for itself
in growth markets throughout Canada, the United States and elsewhere in the
world. It is an active player on international capital markets and is
well-placed to accompany its clients to whatever country their business may take
them.
Nineteen ninety-seven was therefore another year of solid progress for the
National Bank as it continued to merit the confidence of its clients and
shareholders alike.
NATIONAL BANK OF CANADA 47
<PAGE>
QUARTERLY RESULTS
(MILLIONS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DIVIDENDS
NET INTEREST (IN THOUSANDS) RETURN ON
INCOME (TAXABLE PROVISION NON- NET INCOME --------------------- COMMON
EQUIVALENT FOR CREDIT OTHER INTEREST NET PER COMMON SHARE COMMON PREFERRED SHAREHOLDERS'
BASIS)(1) LOSSES INCOME(1) EXPENSES INCOME -------------------- SHARES SHARES EQUITY %
BASIC FULLY DILUTED
- ---------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Q 260 75 141 254 45 0.28 0.28 12,789 9,168 11.0
2nd Q 244 100 173 251 40 0.23 0.24 12,869 8,314 9.5
3rd Q 254 75 161 261 48 0.27 0.26 14,760 8,195 10.4
4th Q 258 75 160 276 42 0.23 0.22 14,844 8,116 8.8
- ---------------------------------------------------------------------------------------------------------------------------
1993 1,016 325 635 1,042 175 1.01 1.00 55,262 33,793 9.9
- ---------------------------------------------------------------------------------------------------------------------------
1st Q 265 63 185 296 51 0.27 0.26 15,869 8,063 10.4
2nd Q 267 63 177 294 52 0.27 0.27 15,931 8,933 10.4
3rd Q 281 87 194 292 57 0.29 0.29 16,010 10,679 10.8
4th Q 282 62 163 286 57 0.29 0.28 16,096 10,435 10.6
- ---------------------------------------------------------------------------------------------------------------------------
1994 1,095 275 719 1,168 217 1.12 1.10 63,906 38,110 10.5
- ---------------------------------------------------------------------------------------------------------------------------
1st Q 281 56 167 292 61 0.31 0.31 16,173 10,167 11.1
2nd Q 303 76 171 301 57 0.29 0.28 16,256 9,968 10.5
3rd Q 293 56 185 314 64 0.33 0.33 16,327 9,983 11.4
4th Q 304 67 189 322 63 0.33 0.32 16,393 9,370 11.0
- ---------------------------------------------------------------------------------------------------------------------------
1995 1,181 255 712 1,229 245 1.26 1.24 65,149 39,488 11.0
- ---------------------------------------------------------------------------------------------------------------------------
1st Q 281 44 214 328 75 0.41 0.41 18,926 6,855 14.0
2nd Q 280 44 230 401 71 0.39 0.38 20,667 6,787 13.2
3rd Q 292 104 299 340 98 0.55 0.54 20,769 6,724 17.7
4th Q 289 43 227 344 74 0.41 0.41 20,893 6,675 12.8
- ---------------------------------------------------------------------------------------------------------------------------
1996 1,142 235 970 1,413 318 1.76 1.74 81,255 27,041 14.5
- ---------------------------------------------------------------------------------------------------------------------------
1ST Q 325 56 231 355 84 0.46 0.45 20,980 6,563 14.2
2ND Q 310 56 246 361 80 0.44 0.44 25,398 6,537 13.6
3RD Q 322 57 261 375 88 0.47 0.47 25,551 6,538 14.0
4TH Q 367 121 318 398 90 0.49 0.48 25,587 6,538 14.1
- ---------------------------------------------------------------------------------------------------------------------------
1997 1,324 290 1,056 1,489 342 1.86 1.84 97,516 26,176 14.0
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF COMMON
IMPAIRED LOANS SHARES (IN THOUSANDS) PER COMMON SHARE
--------------------------------------------- -------------------- --------------------------
NET PRIVATE DESIGNATED COUNTRIES NET TOTAL AVERAGE END OF BOOK STOCK TRADING RANGE NUMBER OF NUMBER OF
-------------------- PERIOD VALUE ------------------- EMPLOYEES(2) BRANCHES
GROSS ALLOWANCE IN CANADA
OUTSTANDING HIGH LOW
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Q 938 393 280 1,051 127,689 127,954 10.26 8.63 7.38 11,935 646
2nd Q 915 331 276 970 133,411 146,968 10.11 9.88 7.25 11,654 645
3rd Q 917 327 274 970 147,544 147,599 10.27 10.75 10.13 11,683 632
4th Q 841 337 274 904 148,390 148,474 10.41 10.63 9.50 12,149 650
- -------------------------------------------------------------------------------------------------------------------------------
1993
- -------------------------------------------------------------------------------------------------------------------------------
1st Q 812 340 277 875 158,680 158,708 10.55 11.63 10.13 12,081 647
2nd Q 786 251 222 815 159,306 159,339 10.71 11.38 9.00 10,870 646
3rd Q 733 257 226 764 160,093 160,126 10.89 9.25 8.25 10,882 645
4th Q 681 92 85 688 160,947 160,976 11.09 10.00 8.63 10,746 641
- -------------------------------------------------------------------------------------------------------------------------------
1994
- -------------------------------------------------------------------------------------------------------------------------------
1st Q 620 96 88 628 161,714 161,740 11.30 10.00 8.63 10,774 643
2nd Q 556 96 86 566 162,545 162,573 11.51 10.25 9.00 10,576 644
3rd Q 530 96 87 539 163,259 163,279 11.74 11.50 10.13 10,796 641
4th Q 502 95 86 511 163,940 163,963 11.88 11.88 10.38 10,620 629
- -------------------------------------------------------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------------------------------------------------------
1st Q 399 94 86 407 164,575 164,594 11.86 11.38 10.38 11,514 648
2nd Q 395 93 84 404 165,330 165,348 12.13 12.00 11.00 11,295 649
3rd Q 392 81 72 401 166,161 166,182 12.53 12.00 11.05 11,568 632
4th Q 398 77 69 406 167,119 167,151 12.70 13.90 11.15 11,402 632
- -------------------------------------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------------------------------------
1ST Q 387 75 68 394 168,046 168,315 13.04 14.40 13.20 11,668 665
2ND Q 394 55 50 399 169,163 169,369 13.36 16.80 13.75 11,584 659
3RD Q 392 54 49 397 170,121 170,250 13.68 18.25 15.65 11,736 643
4TH Q 292 57 52 297 170,391 170,461 13.99 20.30 17.00 11,651 637
- -------------------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) AS OF 1996, REALIZED AND UNREALIZED GAINS OR LOSSES ARE RECORDED UNDER
OTHER INCOME.
(2) ON A FULL-TIME EQUIVALENT BASIS AND EXCLUDING THE SUBSIDIARY LEVESQUE
BEAUBIEN GEOFFRION INC.
48 NATIONAL BANK OF CANADA
<PAGE>
[PHOTO]
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1997
<PAGE>
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
The consolidated financial statements and all information contained in this
document were prepared by the management of the Bank, which is responsible for
their accuracy, objectivity and completeness. These consolidated financial
statements were prepared in accordance with generally accepted accounting
principles, including the accounting requirements of the Superintendent of
Financial Institutions Canada.
Management maintains the necessary accounting and internal control systems
designed to ensure that reliable financial information is produced and that
assets are safeguarded, to a reasonable extent, against any loss or unauthorized
use. The procedures used include following up relevant criteria for hiring and
training personnel, establishing an organizational structure to ensure
appropriate distribution of tasks, regularly updating policies, procedures and
permanent instructions and appropriate budget control by centre of
responsibility. These systems are regularly evaluated by a group of inspectors
and internal auditors, whose findings are presented from time to time to the
Audit Committee. The Board of Directors, through its Audit Committee composed
entirely of directors who are neither officers nor employees of the Bank, is
responsible for examining and overseeing the Bank's practices with respect to
accounting and to the disclosure of financial information.
The Superintendent of Financial Institutions Canada each year makes such
examination of the Bank's affairs as he deems necessary to satisfy himself that
the provisions of the Bank Act having reference to the protection of the
depositors and shareholders of the Bank are duly observed, and that the Bank is
in a sound financial condition. He meets with the Audit Committee, with or
without management being present.
The independent auditors, whose report follows, have audited the consolidated
financial statements of the Bank. They meet with the Audit Committee from time
to time, with or without management being present, to discuss their audit and
questions related thereto.
Leon Courville
President and Chief Operating Officer
Montreal, November 24, 1997
AUDITORS' REPORT
- -------------------------------------------------------------------------------
TO THE SHAREHOLDERS OF NATIONAL BANK OF CANADA
We have audited the Consolidated Balance Sheet of National Bank of Canada as at
October 31, 1997 and the Consolidated Statements of Income, Changes in
Shareholders' Equity and Changes in Financial Position for the year then ended.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance that 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Bank as at October 31, 1997 and
the results of its operations and the changes in its financial position for the
year then ended in accordance with generally accepted accounting principles,
including the accounting requirements of the Superintendent of Financial
Institutions Canada.
The consolidated financial statements for the year ended October 31, 1996 were
audited by Raymond, Chabot, Martin, Pare and Price Waterhouse who expressed an
opinion thereon without reservation in their report dated November 28, 1996.
Price Waterhouse
Chartered Accountants
Samson Belair/Deloitte & Touche
General Partnership
Chartered Accountants
Montreal, November 24, 1997
50 NATIONAL BANK OF CANADA
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS EXCEPT FOR PER SHARE AMOUNTS) 1997 1996
- --------------------------------------------------------------------------------
INTEREST INCOME AND DIVIDENDS
Loans $2,622 $2,672
Securities 320 351
Deposits with other banks 163 206
------------------------------
3,105 3,229
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 1,608 1,970
Bank debentures 84 85
Other 94 38
------------------------------
1,786 2,093
------------------------------
NET INTEREST INCOME 1,319 1,136
- --------------------------------------------------------------------------------
OTHER INCOME
Capital market fees 374 290
Deposit and payment service charges 148 140
Realized and unrealized gains on
securities, net amount 93 134
Lending fees 133 117
Foreign exchange revenues 39 50
Card service revenues 80 69
Trust services 23 20
Other 166 150
------------------------------
1,056 970
- --------------------------------------------------------------------------------
GROSS REVENUES 2,375 2,106
Provision for credit losses 290 235
------------------------------
2,085 1,871
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Salaries and staff benefits 781 705
Premises 140 137
Computers and equipment 206 179
Communications 58 55
Reduction in value of certain assets (Note 13) - 56
Other 304 281
------------------------------
1,489 1,413
- --------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 596 458
Income taxes (Note 14) 238 130
- --------------------------------------------------------------------------------
NET INCOME BEFORE NON-CONTROLLING INTEREST 358 328
Non-controlling interest 16 10
------------------------------
NET INCOME $342 $318
- --------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (Note 15)
- Basic $1.86 $1.76
- Fully diluted $1.84 $1.74
- --------------------------------------------------------------------------------
NATIONAL BANK OF CANADA 51
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
AS AT OCTOBER 31
(MILLIONS OF DOLLARS) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
CASH RESOURCES
Cash and deposits with Bank of Canada $ 304 $ 212
Deposits with other banks 4,172 3,316
------------------------------
4,476 3,528
- --------------------------------------------------------------------------------
SECURITIES (Note 3)
Investment account securities 3,997 3,999
Trading account securities 6,013 4,415
------------------------------
10,010 8,414
- --------------------------------------------------------------------------------
LOANS (Note 4)
Residential mortgages 13,012 12,229
Personal and credit card loans 5,948 5,382
Business and government loans 19,144 17,627
Securities purchased under resale agreements 9,155 2,697
------------------------------
47,259 37,935
------------------------------
OTHER
Customers' liability under acceptances 2,273 1,725
Premises and equipment (Note 6) 347 343
Other assets (Note 7) 1,870 1,189
------------------------------
4,490 3,257
------------------------------
$66,235 $53,134
- --------------------------------------------------------------------------------
LIABILITIES
DEPOSITS (Note 8)
Individuals $20,724 $22,750
Businesses and governments 14,082 11,616
Banks 8,464 5,759
------------------------------
43,270 40,125
- --------------------------------------------------------------------------------
OTHER
Acceptances 2,273 1,725
Obligations related to securities sold short 4,225 4,058
Securities sold under repurchase agreements 9,038 2,373
Other liabilities (Note 9) 3,600 1,338
------------------------------
19,136 9,494
- --------------------------------------------------------------------------------
SUBORDINATED DEBT
Bank debentures (Note 10) 1,069 1,016
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 11)
Preferred 376 376
Common 1,309 1,268
Retained earnings 1,075 855
------------------------------
2,760 2,499
------------------------------
$66,235 $53,134
- --------------------------------------------------------------------------------
ANDRE BERARD
Chairman of the Board and Chief Executive Officer
LEON COURVILLE
President and Chief Operating Officer
52 NATIONAL BANK OF CANADA
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS) 1997 1996
- --------------------------------------------------------------------------------
CAPITAL STOCK, AT BEGINNING OF YEAR $1,644 $1,610
Issue of common shares 41 34
------------------------------
CAPITAL STOCK, AT END OF YEAR $1,685 $1,644
- --------------------------------------------------------------------------------
RETAINED EARNINGS, AT BEGINNING OF YEAR
As previously reported $855 $ 715
Prior period adjustments (Note 16) - (66)
------------------------------
As restated 855 649
Net income 342 318
Dividends
Preferred shares (26) (27)
Common shares (98) (81)
Income taxes related to dividends
on Preferred Shares, Series 10, 11 and 12 (1) (1)
Expenses related to share issues,
net of income taxes (8) (1)
Unrealized foreign currency translation gains
(losses), net of income taxes
of $10 (1996: ($1)) 11 (2)
------------------------------
RETAINED EARNINGS, AT END OF YEAR $1,075 $ 855
- --------------------------------------------------------------------------------
NATIONAL BANK OF CANADA 53
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS) 1997 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $342 $ 318
Items not affecting cash resources:
Provision for credit losses 290 235
Amortization 60 57
Deferred income taxes 2 (25)
Pension expense 2 2
------------------------------
696 587
Current income taxes 106 32
Accrued interest (71) (142)
Other 842 (407)
------------------------------
1,573 70
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deposits 3,145 (1,400)
Obligations related to securities sold short 167 2,527
Securities sold under repurchase agreements 6,665 2,031
Reduction in variable-capital notes - (106)
Bank debentures:
Issue 150 -
Redemption (121) (131)
Adjustment for foreign currency translation 24 (30)
Common shares:
Issue 41 34
Dividends (124) (108)
Other 691 34
------------------------------
10,638 2,851
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of subsidiaries - (45)
Securities (1,596) (1,090)
Loans (9,614) (3,619)
Premises and equipment (53) (57)
------------------------------
(11,263) (4,811)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH RESOURCES 948 (1,890)
CASH RESOURCES, AT BEGINNING OF YEAR 3,528 5,174
Cash resources of subsidiaries at date
of acquisition - 244
------------------------------
CASH RESOURCES, AT END OF YEAR $4,476 $3,528
- --------------------------------------------------------------------------------
54 NATIONAL BANK OF CANADA
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(FIGURES IN TABLES ARE IN MILLIONS OF DOLLARS, UNLESS OTHERWISE SPECIFIED)
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements were prepared in accordance with section 308(4) of the
Bank Act, which states that Canadian generally accepted accounting principles
are to be applied unless otherwise specified by the Superintendent of Financial
Institutions Canada (the "Superintendent"). These principles differ in some
regards from United States generally accepted accounting principles as explained
in Note 27. The significant accounting policies used in preparing these
financial statements, including the accounting requirements of the
Superintendent, are summarized below.
CONSOLIDATION
The consolidated financial statements of the Bank include the assets,
liabilities and operating results of the Bank and all its subsidiaries. The
purchase method is used to account for the acquisition of subsidiaries. Goodwill
is amortized using the straight-line method over a period corresponding to its
estimated useful life, namely 20 years. Goodwill is written down to fair value
when the decline in value is considered to be permanent based on projected
investment yield which takes into account the related risks.
TRANSLATION OF FOREIGN CURRENCIES
Items in foreign currencies included in the Consolidated Balance Sheet are
translated into Canadian dollars at the exchange rates prevailing at year end.
Income and expenses are translated at the average exchange rates prevailing
during the year.
Spot and forward foreign exchange positions are kept in balance insofar as
practicable. Any gain or loss on these positions is recognized in the
Consolidated Statement of Income, with the exception of positions related to net
foreign-currency investments in offices abroad.
Gains and losses on net foreign-currency investments in branches and
subsidiaries abroad are recorded under retained earnings, less the after-tax
gains and losses applicable to instruments used for hedging purposes. These
gains and losses are not charged to income until they are realized.
SECURITIES
Securities are divided into two major categories: investment account securities
and trading account securities.
Investment account securities are purchased with the intention of holding them
to maturity. Equity securities are stated at their acquisition cost if the Bank
does not have a significant influence while debt securities are stated at their
unamortized acquisition cost. Premiums and discounts on debt securities are
amortized using the yield method over the period to maturity of the related
securities or, on occasion, until disposal of the security. Gains and losses
realized on the disposal of securities and the amortization of premiums and
discounts are recorded under income for the year. Any permanent impairment in
the value of securities held for investment is charged to the year's income.
Trading account securities are purchased for resale in the short term. They are
presented at their fair value based on publicly disclosed market prices. In the
event market prices are not available, the fair value is estimated on the basis
of the market prices of similar securities. Realized and unrealized gains or
losses on these securities are recorded in income.
The Bank records all income relating to securities on an accrual basis.
LOANS
Investments recorded as loans are recorded at their principal amounts less
allowances for credit losses.
A loan is considered impaired when, in the opinion of management, there is
reasonable doubt as to the ultimate collectibility of a portion of principal or
interest or where payment of interest is contractually past due 90 days, unless
there is no doubt as to the collectibility of principal and interest. A loan may
revert to performing status only when principal and interest payments have
become fully current.
When loans are deemed impaired, interest income ceases to be recorded and the
book value of the loans is adjusted to its estimated realizable amount by
writing off all or part of the recorded investment in the loan and/or by taking
a provision for credit losses.
Foreclosed assets held for sale in settlement of an impaired loan are recorded
at the time of foreclosure at the lower of the recorded investment in the
foreclosed loan and the estimated net proceeds from the sale of the assets. Any
difference between the carrying amount of the loan and the estimated realizable
amount of the assets is posted to the provision for credit losses. The recorded
investment in the foreclosed loan is then adjusted to take into account the
revenues received or the costs incurred after foreclosure.
The provision for credit losses, posted directly to income for the year,
consists of the net change in the allowance for credit losses and write-offs of
the carrying amounts resulting from foreclosed assets, less recoveries.
Fees and commissions related to the granting of loans and commitments to extend
credit are amortized over the term thereof and recorded in the Consolidated
Statement of Income.
Loans also include securities sold under repurchase agreements which the Bank
has purchased and simultaneously committed to resell to the initial buyer at a
specified price on a specified date. Since ownership of the securities does not
change, the operation is treated as a loan by the Bank. The securities are
recorded at cost and the related interest income is recorded on an accrual
basis.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses related to the total recorded investment in
individual loans considered impaired was established for all impaired loans for
which the impairment could be estimated individually, reducing them to their
estimated realizable amounts. For groups of loans consisting of large numbers of
homogeneous balances of relatively small dollar amounts, the extent of
impairment is estimated for each group of loans by applying formulas that take
into account past loss experience, economic conditions and other relevant
circumstances. The estimated realizable amounts are measured by discounting
expected future cash flows.
The general allowance for credit losses related to the total recorded investment
in loans reflects the risk represented by loans for which it is currently not
possible to establish a provision on a loan-by-loan basis or for a group of
loans. An aggregate impairment is estimated by the Bank for such loans
collectively.
The allowance for credit losses in relation to loans to countries designated by
the Superintendent is constantly reevaluated on the basis of exposure in the
various countries and the underlying economic conditions.
NATIONAL BANK OF CANADA 55
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
MORTGAGE-BACKED SECURITIES
The Bank finances a portion of its mortgage loan portfolio through the mortgage-
backed securities program provided for in the National Housing Act. Under this
program, the Bank pools eligible mortgage loans and sells ownership rights in
these pools to investors. Investors are paid a coupon rate set in advance and
the principal from the underlying mortgages. The Canada Mortgage and Housing
Corporation (CMHC) unconditionally guarantees the payments to the investors. The
Bank continues to service the mortgage loans thus securitized.
The Bank is committed to the CMHC to make sufficient funds regularly available
to the central payor and transfer agent to pay the amounts due to investors,
whether or not the mortgagors have made their payments. Moreover, the Bank must
place all funds due to investors at maturity of the securities at the disposal
of the central payor and transfer agent. Should the Bank default, CMHC can
assign the servicing of the securitized loans to another servicer.
Issuance costs for mortgage-backed securities include the direct costs incurred
in assembling and selling the securities and the discount at sale. These costs
are charged in their entirety to the Consolidated Statement of Income at the
time of sale by way of a deduction from the proceeds of the sale of securities.
The normal servicing fees which the Bank collects for servicing the securitized
mortgage loans are set at 25 basis points. They are charged to other income when
collected.
The Bank also collects a net interest spread over the life of the mortgage-
backed securities. This spread is the interest collected from mortgagors less
the sum of the interest paid to investors and the normal servicing fees.
The estimated present value of the net interest spread, based on the assumption
that the annual mortgage prepayment rate varies between 12% and 24%, is added to
the proceeds from the sale of securities as a receivable and is included in
establishing the gains or losses at the date of sale. This receivable is drawn
down as mortgage payments are received and the resulting yield is charged to
interest income.
CUSTOMERS' LIABILITY UNDER ACCEPTANCES
The potential liability of the Bank under acceptances is reported as a liability
in the Consolidated Balance Sheet. The Bank's potential recourse is recorded as
an equivalent offsetting asset.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost and amortized over their estimated
useful lives according to the following methods and rates:
Methods Rates
- --------------------------------------------------------------------------------
Buildings (a) or (b) 2% to 10%
Equipment and furniture (a) or (b) 20% to 33 1/3%
Leasehold improvements (a) (c)
(A) STRAIGHT-LINE
(B) DIMINISHING-BALANCE
(C) OVER THE LEASE TERM PLUS THE FIRST RENEWAL OPTION
- --------------------------------------------------------------------------------
OBLIGATIONS RELATED TO SECURITIES SOLD SHORT
These liabilities represent the Bank's obligation to deliver securities it has
sold but which were not owned at the time of sale. Gains and losses on the sale
and adjustments to market value are charged to income for the year.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
These liabilities represent securities which the Bank has sold and
simultaneously committed to repurchase from the initial buyer at a specified
price on a specified date. Since ownership of the securities does not change,
the operation is treated as a loan to the Bank. The securities are recorded at
cost and the interest expense is recorded on an accrual basis.
INCOME TAXES
The Bank provides for income taxes under the income tax allocation method.
Deferred income taxes result from timing differences in the recognition of
various items for financial reporting and income tax purposes, the main such
item being the allowance for credit losses. Deferred income taxes represent tax
benefits with respect to deductions the Bank may claim to reduce its taxable
income in future years.
No provision for deferred income taxes was taken for the portion of retained
earnings of foreign subsidiaries which is permanently reinvested.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank uses various types of derivatives to enable clients to manage their
market risk exposures as well as for its own asset/liability management and
trading purposes.
The main derivative instruments used by the Bank are foreign exchange forward
contracts, futures, forward rate agreements, currency and/or interest rate swaps
and interest rate or foreign currency options.
Derivatives used to enable clients to manage their market risk exposures and to
generate income from the Bank's trading activities are marked to market and the
resulting gains or losses are recorded in income.
When asset/liability management derivatives are used to manage interest rate and
foreign currency exposures, the resulting gains or losses are deferred and
amortized to income over the life of the hedged assets or liabilities.
PENSION PLANS
Pension costs related to current services are charged to the Consolidated
Statement of Income in the period during which the services are rendered.
Past service costs, experience gains or losses and the funding excess
existing on the date the accounting principle came into effect, which have
not yet been charged to the Consolidated Statement of Income, are amortized
over the expected average remaining service life of the employee group
covered by the plans. The difference between the pension expense and the
funding payments is recorded in the Consolidated Balance Sheet under "Other
Assets" or "Other Liabilities", as applicable.
56 NATIONAL BANK OF CANADA
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. MORTGAGE-BACKED SECURITIES
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Principal amount of securitized mortgage pools $1,063 $1,476
Average rate of mortgage pools 7.60% 9.17%
Average coupon rate paid to investors 5.64% 7.59%
Maturity dates of securities DECEMBER 1997 December 1996
TO JULY 2002 to September 2001
Present value of net interest spread $ 35 $ 17
- --------------------------------------------------------------------------------
3. SECURITIES
Securities held and effective yields on the investment account were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
NO
WITHIN 3 TO 6 6 TO 12 1 TO 5 OVER SPECIFIC BOOK MARKET BOOK MARKET
3 MONTHS MONTHS MONTHS YEARS 5 YEARS MATURITY VALUE VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ % $ % $ % $ % $ % $ % $ % $ $ $
INVESTMENT ACCOUNT
Securities issued or
guaranteed by
Canada 3 6.0 29 7.0 49 7.6 739 6.0 643 6.7 3 3.1 1,466 6.4 1,526 1,903 1,960
Provinces 12 5.5 50 5.9 - - 165 6.6 31 9.8 - - 258 6.8 272 362 367
Municipalities
or school corporations 45 3.7 - - - - - - 18 10.2 - - 63 5.6 67 43 46
Debt securities 293 4.2 167 5.0 128 6.8 778 5.6 311 6.2 33 - 1,710 5.4 1,713 1,135 1,179
Equity securities
Floating-rate preferred
shares 18 4.0 - - - - 6 4.5 - - 2 4.1 26 4.1 26 58 50
Fixed-rate preferred
shares 28 7.1 - - - - 19 1.4 10 - 6 3.0 63 3.9 66 65 63
Other securities - - - - - - - - - - 411 0.4 411 0.4 436 433 485
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OF INVESTMENT
ACCOUNT 399 4.4 246 5.4 177 7.0 1,707 5.8 1,013 6.6 455 0.4 3,997 5.3 4,106 3,999 4,150
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TRADING ACCOUNT
Securities issued or
guaranteed by
Canada 190 541 745 301 755 - 2,532 2,532 2,025 2,025
Provinces 200 52 79 203 375 - 909 909 966 966
Municipalities
or school corporations 137 30 49 148 100 - 464 464 213 213
Debt securities 382 496 49 494 383 - 1,804 1,804 1,129 1,129
Equity securities
Fixed-rate preferred
shares - - - - - 4 4 4 2 2
Other securities - - - - 69 231 300 300 80 80
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OF TRADING ACCOUNT 909 1,119 922 1,146 1,682 235 6,013 6,013 4,415 4,415
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OF SECURITIES
ACCOUNT 1,308 1,365 1,099 2,853 2,695 690 10,010 10,119 8,414 8,565
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a) WHERE NO ORGANIZED MARKET EXISTS FOR WHICH PRICES ARE PUBLICLY DISCLOSED,
THE FAIR VALUE IS ESTIMATED USING THE MARKET PRICES OF SIMILAR SECURITIES.
b) THE CALCULATION OF THE YIELD RATE IS BASED ON ANNUAL AVERAGE BALANCES. THE
YIELD RATE OF TAX-EXEMPT SECURITIES, INCLUDING IN PARTICULAR MOST OF THE
DIVIDENDS RECEIVED, HAS NOT BEEN ADJUSTED ON A TAXABLE EQUIVALENT BASIS.
c) LDC BONDS INCLUDE LOANS GRANTED TO LESSER DEVELOPED COUNTRIES AND
SUBSEQUENTLY RESTRUCTURED AS BONDS UNDER THE BRADY PLAN, NET OF THE COUNTRY RISK
ALLOWANCE. SUCH BONDS ARE GUARANTEED BY THE UNITED STATES GOVERNMENT AND HAVE
LONGER MATURITIES AND MORE FAVOURABLE CONDITIONS FOR THE BORROWING COUNTRY.
d) AS AT OCTOBER 31, 1996, TRADING ACCOUNT DEBT SECURITIES INCLUDED $98 MILLION
IN IMMOBILIERE NATGEN INC. DEBENTURES. IN MAY 1994, $238 MILLION IN DEBENTURES
WAS RECEIVED IN CONSIDERATION FOR NON-PERFORMING LOANS AND REPOSSESSED
PROPERTIES AS WELL AS $10 MILLION IN DEBENTURES AS WORKING CAPITAL. DURING
FISCAL 1995, IMMOBILIERE NATGEN INC. REPAID $70 MILLION IN DEBENTURES. IN 1996,
THE BANK RECORDED A PERMANENT $80 MILLION REDUCTION IN THE VALUE OF IMMOBILIERE
NATGEN INC. DEBENTURES. IN 1997, THE BANK RECEIVED $56 MILLION AS FINAL
PAYMENT. THE REMAINING $22 MILLION, LESS AN ALLOWANCE OF $20 MILLION, WAS
CHARGED TO INCOME.
e) THE SECURITIES IN THE INVESTMENT ACCOUNT INCLUDE THE FOLLOWING LOAN
SUBSTITUTES:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
NO
WITHIN 3 TO 6 6 TO 12 1 TO 5 OVER SPECIFIC BOOK MARKET BOOK MARKET
3 MONTHS MONTHS MONTHS YEARS 5 YEARS MATURITY VALUE VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ % $ % $ % $ % $ % $ % $ % $ $ $
Loan substitutes - - - - 2 14.9 21 2.1 44 3.3 3 - 70 2.7 70 89 81
</TABLE>
NATIONAL BANK OF CANADA 57
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
<TABLE>
<CAPTION>
3. SECURITIES (CONT.)
- ----------------------------------------------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------------------------------------------
BOOK GROSS GROSS MARKET
VALUE UNREALIZED GAINS UNREALIZED LOSSES VALUE
<S> <C> <C> <C> <C>
INVESTMENT ACCOUNT: Unrealized gains or losses
Securities issued or guaranteed by
Canada $ 1,466 $ 61 $ (1) $ 1,526
Provinces 258 14 - 272
Municipalities or school corporations 63 4 - 67
Debt securities 1,710 12 (9) 1,713
Equity securities
Floating-rate preferred shares 26 1 (1) 26
Fixed-rate preferred shares 63 4 (1) 66
Other securities 411 47 (22) 436
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OF INVESTMENT ACCOUNT $ 3,997 $ 143 $ (34) $ 4,106
- ----------------------------------------------------------------------------------------------------------------------------------
4. IMPAIRED LOANS
The table below sets out impaired loans. The recorded investment in loans was reduced, as applicable, by the related allowance for
credit losses.
As at October 31, they amounted to:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
RECORDED ALLOWANCE FOR CARRYING CARRYING
INVESTMENT CREDIT LOSSES AMOUNT AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIVATE LOANS
DOMESTIC
Residential mortgages $ 88 $ 14 $ 74 $ 61
Personal loans 70 28 42 37
Small business loans 176 51 125 94
Corporate loans 62 55 7 18
Commercial loans 387 179 208 175
Real estate loans 167 129 38 61
Other loans 7 25 (18) 5
General allowance (1) - 195 (195) (95)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 957 $ 676 $ 281 $ 356
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
Commercial loans - United States $ 14 $ 15 $ (1) $ 3
Real estate loans - United States 38 29 9 39
Other loans 66 58 8 5
General allowance (1) - 5 (5) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 118 $ 107 $ 11 $ 42
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL PRIVATE LOANS $ 1,075 $ 783 $ 292 $ 398
- ------------------------------------------------------------------------------------------------------------------------------------
Loans to designated countries 57 52 5 8
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL IMPAIRED LOANS $ 1,132 $ 835 $ 297 $ 406
- ------------------------------------------------------------------------------------------------------------------------------------
The total recorded investment in foreclosed assets to be resold included in total impaired loans and the related allowance for
credit losses amounted to $122 million and $12 million respectively as at October 31, 1997 compared to $168 million and $16
million as at October 31, 1996.
</TABLE>
(1) THE GENERAL ALLOWANCE WAS TAKEN FOR THE BANK'S LOANS IN THEIR ENTIRETY.
58 NATIONAL BANK OF CANADA
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
5. ALLOWANCE FOR IMPAIRED LOANS
The changes made to the allowance during the year were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
DESIGNATED
SPECIFIC GENERAL COUNTRIES (LOANS
ALLOWANCES ALLOWANCE AND SECURITIES) TOTAL TOTAL
<S> <C> <C> <C> <C> <C>
ALLOWANCE AT BEGINNING OF YEAR $ 497 $ 100 $ 154 $ 751 $ 792
Retroactive application of new standard
as at November 1, 1995 - - - - 77
- ------------------------------------------------------------------------------------------------------------------------------------
Restated allowance 497 100 154 751 869
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses charged to income 275 100 (85) 290 235
Write-offs (229) - (13) (242) (364)
Recoveries 40 - - 40 11
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE AT END OF YEAR $ 583 $ 200 $ 56 $ 839 $ 751
- ------------------------------------------------------------------------------------------------------------------------------------
Portion related to loans $ 583 $ 200 $ 52 $ 835 $ 666
Portion related to securities $ - $ - $ 4 $ 4 $ 85
- ------------------------------------------------------------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Land $ 21 $ - $ 21 $ 23
Buildings 221 67 154 155
Equipment and furniture 342 255 87 84
- ------------------------------------------------------------------------------------------------------------------------------------
$ 584 $ 322 $ 262 $ 262
- ------------------------------------------------------------------------------------------------------------------------------------
Leasehold improvements 85 81
- ------------------------------------------------------------------------------------------------------------------------------------
$ 347 $ 343
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization for the year charged to the Consolidated
Statement of Income $ 49 $ 46
- ------------------------------------------------------------------------------------------------------------------------------------
7. OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued interest $ 314 $ 298
Deferred income taxes 172 170
Prepaid expenses and other receivables 533 363
Goodwill less accumulated
amortization of $67 (1996: $56) 154 161
Sundry 697 197
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,870 $ 1,189
Amortization of goodwill for the year charged
to the Consolidated Statement of Income $ 11 $ 11
- ------------------------------------------------------------------------------------------------------------------------------------
8. DEPOSITS
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
PAYABLE PAYABLE PAYABLE ON
ON DEMAND AFTER NOTICE A FIXED DATE TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Individuals $ 888 $ 5,119 $ 14,717 $ 20,724 $ 22,750
Businesses and governments 2,589 4,313 7,180 14,082 11,616
Banks 65 7 8,392 8,464 5,759
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3,542 $ 9,439 $ 30,289 $ 43,270 $ 40,125
- ------------------------------------------------------------------------------------------------------------------------------------
9. OTHER LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued interest $ 662 $ 717
Current income taxes 194 88
Liabilities of subsidiary 317 50
Non-controlling interest 466 42
Trade and other payables 1,447 215
Sundry 514 226
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3,600 $ 1,338
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 59
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
10. BANK DEBENTURES
The debentures, subordinated in right of payment to the claims of depositors
and certain other creditors, consist of:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITY INTEREST
DATE RATE CHARACTERISTICS 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 1998 10.875% Convertible into 10 7/8% deposit notes at the Bank's option;
interest payable semi-annually on June 1 and December 1
$ 9 $ 9
February 1999 5.60% Yen 5 billion; interest payable annually on February 23 59 59
April 1999 7.325% Yen 5 billion / AUD 45.7 millionequivalent; interest payable
annually in AUD at the rate indicated for
the AUD equivalent on April 21 59 59
April 2001 10.50% Interest payable semi-annually on April 5 and October 5;
not redeemable prior to maturity 30 100
June 2001 12.50% Convertible into 2,391,600 common shares, redeemable at
the Bank's option on certain conditions; interest payable
semi-annually on June 5 and December 5 20 20
December 2001 9.00% Redeemable at the Bank's option after December 30, 1996;
interest payable semi-annually on June 30 and December 30
up until December 30, 1996;interest at the Bankers' Acceptance
Rate plus 1% subject to a minimum annual rate of 9%, payable
monthly on the 30th day of each month, as of January 30, 1997 - 51
December 2003 7.50% Not redeemable by the Bank priorto maturity; interest payable
semi-annually on June 30 and December 30 125 125
August 2004 8.125% US $250 million; not redeemable by the Bank prior to maturity
unless the debentures become subject to foreign taxes; interest
payable semi-annually on February 15 and August 15 351 334
October 2004 6.92% Yen 5 billion / L22 million equivalent; interest for the first
10 years payable in L at the rate indicated for the L equivalent,
thereafter payable annually in yen at the Japanese long-term
prime rate plus 1% on October 25; redeemable at the Bank's
option on October 25, 1999 59 59
October 2004 7.00% Yen 5 billion / L22.1 million equivalent; interest payable annually
in L at the rate indicated for the L equivalent on October 31;
redeemable at the Bank's option on October 31, 1999 59 59
October 2011 floating Not redeemable prior to October 17, 2001; interest payable
semi-annually on April 17 and October 17 at a rate of 7.50% until
October 17, 2006. Thereafter, interest payable at an annual rate
equal to the 90-day Bankers' Acceptance Rate plus 1% 150 -
February 2087 floating US $105 million bearing interest at an annual rate of 1/8% above
the LIBOR rate; interest payable semi-annually on February 28 and
August 31; redeemable at the Bank's option as of February 28, 1993 148 141
- ------------------------------------------------------------------------------------------------------------------------------------
$1,069 $1,016
- ------------------------------------------------------------------------------------------------------------------------------------
The debenture maturities are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1998 $ 9
1999 $ 117
2000 $ -
2001 $ 51
2002 $ -
2003 and thereafter $ 892
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
60 NATIONAL BANK OF CANADA
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
11. CAPITAL STOCK
AUTHORIZED
<TABLE>
<CAPTION>
FIRST PREFERRED SHARES SECOND PREFERRED SHARES COMMON SHARES
- ----------------------------------------- ------------------------------------- --------------------------------------
<S> <C> <C>
AN UNLIMITED NUMBER OF SHARES, WITHOUT PAR 15,000,000 SHARES, WITHOUT PAR VALUE, AN UNLIMITED NUMBER OF SHARES, WITHOUT
VALUE, ISSUABLE FOR A MAXIMUM AGGREGATE ISSUABLE FOR A MAXIMUM AGGREGATE PAR VALUE, ISSUABLE FOR A MAXIMUM
CONSIDERATION OF $1 BILLION CONSIDERATION OF $300 MILLION AGGREGATE CONSIDERATION OF $3 BILLION
ISSUED AND FULLY PAID
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996
FIRST PREFERRED SHARES
286,610 shares, Series 5 (1996: 286,610) $ 29 $ 29
422,633 shares, Series 7 (1996: 422,633) 10 10
789,638 shares, Series 8 (1996: 789,638) 20 20
3,680,000 shares, Series 10 (1996: 3,680,000) 92 92
4,000,000 shares, Series 11 (1996: 4,000,000) 100 100
5,000,000 shares, Series 12 (1996: 5,000,000) 125 125
- -----------------------------------------------------------------------------------------------------------------------------
$ 376 $ 376
- -----------------------------------------------------------------------------------------------------------------------------
170,461,483 Common Shares (1996: 167,151,381) 1,309 1,268
- -----------------------------------------------------------------------------------------------------------------------------
$1,685 $1,644
- -----------------------------------------------------------------------------------------------------------------------------
The Bank paid the following dividends:
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
(DIVIDENDS PER SHARE IN DOLLARS)
<S> <C> <C> <C> <C> <C>
Common Shares $0.575 $0.49 $0.40 $0.40 $ 0.40
First Preferred Shares
Series 1 $- $- $- $- $40.974
Series 5 3.3670 4.8235 5.9462 4.4495 4.6618
Series 6 - - - - 0.3461 US
Series 7 0.8777 1.2576 1.5503 1.1601 1.2154
Series 8 0.8417 1.2059 1.4865 1.1125 1.1655
Series 9 - - 2.275771 2.3750 2.3750
Series 10 2.1875 2.1875 2.1875 2.1875 2.1875
Series 11 2.00 2.00 2.00 2.00 2.00
Series 12 1.625 1.625 1.625 1.05625 -
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ISSUE OF COMMON SHARES (AMOUNTS IN DOLLARS)
During the year ended October 31, 1997, 3,310,102 Common Shares were issued
under the Dividend Reinvestment and Share Purchase Plan and the Stock Option
Plan for an aggregate consideration of $41,494,617.
During the year ended October 31, 1996, 3,188,088 Common Shares were issued
under the Dividend Reinvestment and Share Purchase Plan for an aggregate
consideration of $33,880,663.
RESERVED COMMON SHARES (AMOUNTS IN DOLLARS)
As at October 31, 1997, 2,391,600 Common Shares (1996: 2,391,600) were reserved
for future conversion, 6,196,398 Common Shares (1996: 8,207,218) were reserved
under the Dividend Reinvestment and Share Purchase Plan and 6,700,718 Common
Shares (1996: 8,000,000) were reserved under the Stock Option Plan.
As at October 31, 1997, 3,447,718 options were outstanding with a strike price
ranging between $9.50 and $13.50 and maturities between December 1998 and
December 2006. During the fiscal year, 1,299,282 options were exercised at
strike prices ranging from $9.50 to $11.25. As at October 31, 1997, 451,618
options could be exercised.
CHARACTERISTICS OF FIRST PREFERRED SHARES
(AMOUNTS IN DOLLARS)
Series 5
Redeemable at the Bank's option at $100 per share plus accrued and unpaid
dividends; cumulative preferential dividends at a quarterly rate equal to one
quarter of 70% of the average of the Bank's Prime Lending Rate in effect on each
day during the three months ending on the first day of the month preceding
the month in which the dividend payment is to be made.
Series 7
Redeemable at the Bank's option at $25 per share plus accrued and unpaid
dividends; cumulative preferential dividends at a quarterly rate equal to one
quarter of 73% of the average of the Bank's Prime Lending Rate in effect on each
day during the three months ending on the first day of the month preceding the
month during which the dividend payment is to be made.
NATIONAL BANK OF CANADA 61
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
CHARACTERISTICS OF FIRST PREFERRED SHARES (CONT.)
Series 8
Redeemable at the Bank's option at $25 per share plus accrued and unpaid
dividends; cumulative preferential dividends at a quarterly rate equal to one
quarter of 70% of the average of the Bank's Prime Lending Rate in effect on each
day during the three months ending on the first day of the month preceding the
month in which the dividend payment is to be made.
Series 10
Redeemable at the Bank's option on or after November 16, 2001 at $25 per share
in cash plus accrued and unpaid dividends, or by conversion into Common Shares
in accordance with the privileges and conditions related to such Preferred
Shares; non-cumulative preferential dividends, payable quarterly in an amount of
$0.546875 per share.
Convertible at the holder's option on or after February 18, 2002 into Common
Shares or into another series of Preferred Shares if the Bank's Board of
Directors should decide, by resolution at least 30 days prior to February 18,
2002, to constitute a further series of First Preferred Shares, subject to the
prior approval of the Superintendent. The Bank may, upon notice of no less than
two business days prior to the conversion date, redeem the Preferred Shares to
be converted.
Series 11
Redeemable at the Bank's option on or after February 15, 2002 at $25 per share
in cash plus accrued and unpaid dividends, or by conversion into Common Shares
in accordance with the privileges and conditions related to such Preferred
Shares; non-cumulative preferential dividends, payable quarterly in an amount of
$0.50 per share.
Convertible at the holder's option on or after May 15, 2002 into Common Shares
or into another series of Preferred Shares if the Bank's Board of Directors
should decide, by resolution at least 30 days prior to February 15, 2002, to
constitute a further series of First Preferred Shares, subject to the prior
approval of the Superintendent. The Bank may, upon notice of no less than two
business days prior to the conversion date, redeem the Preferred Shares to be
converted.
Series 12
Redeemable at the Bank's option on or after May 15, 2001 at $25 per share in
cash plus a premium, if redeemed before May 15, 2003, together with accrued and
unpaid dividends, in accordance with the privileges and conditions related to
such Preferred Shares and subject to the prior approval of the Superintendent;
non-cumulative preferential dividends payable quarterly in an amount of $0.40625
per share.
Convertible at the Bank's option on or after May 15, 2001 into Common Shares,
subject to the approval of the stock exchanges on which any shares of the Bank
are listed.
Convertible at the holder's option on or after May 15, 2004 into Common Shares
in accordance with the privileges and conditions related to such Preferred
Shares, or into another series of Preferred Shares if the Bank's Board of
Directors should decide, by resolution at least 30 days prior to May 15, 2004,
to constitute a further series of First Preferred Shares, subject to the prior
approval of the Superintendent. The Bank may, upon notice of no less than two
business days prior to the conversion date, redeem the Preferred Shares to be
converted.
12. PENSION PLANS
The Employee Pension Plan of National Bank of Canada provides for the payment of
benefits based on the length of service and final average earnings of the
employees covered. According to the latest actuarial valuation of the plan
conducted as at December 31, 1995 and updated as at December 31, 1996, accrued
pension benefits, projected as at October 31, 1997, were $704 million and the
adjusted market value of the assets of the plan as at October 31, 1997 amounted
to $816 million. The pension expense included in the Statement of Income
amounted to $1.6 million (1996: $2.1 million), taking into account the
amortization on a straight-line basis of the experience gains and losses over a
13-year period and the funding excess existing on the date the accounting
principle came into effect.
13. REDUCTION IN VALUE OF CERTAIN ASSETS
In July 1993, the Bank acquired General Trust of Canada for a consideration of
$95 million in variable-capital notes. At that time, the Bank exchanged
subordinated notes and debt securities issued by General Trust of Canada or its
subsidiary for $25 million in variable-capital notes.
The variable-capital notes, bearing interest at a rate of 6.76% per annum, would
have been convertible into Common Shares of the Bank on or after June 21, 1997.
At maturity on July 21, 1997, the notes were to be redeemed, at the Bank's
option, either in cash or by issue of Common Shares of the Bank.
Potential losses on most of the loans acquired and on the IMMOBILIERE NATGEN
INC. debentures received in exchange for non-performing loans and repossessed
properties reduced the value of the variable-capital notes issued by the Bank.
These losses were to be subsequently offset by financial assistance from the
REGIE DE L'ASSURANCE-DEPOTS DU QUEBEC (Quebec deposit insurance board).
During 1996, the Bank sold a loan portfolio of $215 million and recorded a
permanent reduction in the value of the IMMOBILIERE NATGEN INC. debentures. In
addition, the REGIE DE L'ASSURANCE- DEPOTS DU QUEBEC agreed to pay an amount of
$80.7 million, representing the discounted value of the assistance agreed upon.
This amount was added to the provisions taken by the Bank on the acquisition
date, bringing total provisions to $133.2 million before the impact of the bulk
sale of loans and of the reduction in the value of the IMMOBILIERE NATGEN INC.
debentures.
The difference between the proceeds of the disposal of the loans and their book
value together with the permanent decrease in the value of the debentures was
applied to reduce the value of the variable-capital notes to zero and lower the
provisions taken by the Bank when General Trust was acquired. The remainder was
recorded in the Statement of Income. The impact on results,
taking the tax effect into account, was nil.
The table below summarizes the impact of these operations:
- --------------------------------------------------------------------------------
Difference between the proceeds of the disposal
of loans and their book value $ 138.0
Permanent reduction in the value of the debentures 80.0
Less: Write-off of variable-capital notes (95.4)
Bank provisions (66.6)
---------
Net impact on earnings before income taxes 56.0
---------
Related income taxes (56.0)
---------
Net impact $ 0.0
- --------------------------------------------------------------------------------
62 NATIONAL BANK OF CANADA
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
14. INCOME TAXES
Total income taxes reported in the consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
Income taxes $238 $130
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Income taxes related to:
Prior period adjustments - (18)
Dividends on Preferred Shares, Series 10, 11 and 12 1 1
Unrealized foreign currency translation gains (losses) 10 (1)
- --------------------------------------------------------------------------------------------------------------------------
11 (18)
- --------------------------------------------------------------------------------------------------------------------------
$249 $112
- --------------------------------------------------------------------------------------------------------------------------
Current and deferred income taxes are as follows:
Current $247 $171
Deferred 2 (59)
- --------------------------------------------------------------------------------------------------------------------------
$249 $112
- --------------------------------------------------------------------------------------------------------------------------
The Bank's effective income tax rate on net income before income taxes was calculated as follows:
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Net income before income taxes $596 100.0% $458 100.0%
- --------------------------------------------------------------------------------------------------------------------------
Income taxes at Canadian statutory income tax rate $232 39.0% $179 39.0%
- --------------------------------------------------------------------------------------------------------------------------
Reduction (Increase) in income tax rate due to:
Tax-exempt income from securities, mainly dividends
from Canadian corporations 9 1.5 3 0.6
Rate applicable to subsidiaries and branches abroad (7) (1.3) 19 4.1
Reduction in value of certain assets (Note 13) - - 34 7.4
Previous years' rate applicable to deferred taxes - - 3 0.7
Federal large corporations tax (4) (0.7) (4) (0.9)
Other items (4) (0.5) (6) (1.3)
- --------------------------------------------------------------------------------------------------------------------------
(6) (1.0) 49 10.6
- --------------------------------------------------------------------------------------------------------------------------
Income taxes and effective income tax rate $238 40.0% $130 28.4%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
15. NET INCOME PER COMMON SHARE
Basic net income per share was calculated on the basis of the net income
available for holders of Common Shares, less dividends on Preferred Shares, and
the average number of Common Shares outstanding of 169,432,000 in 1997 (1996:
165,799,000).
Fully diluted net income per share was calculated on the basis of the net
income available for holders of Common Shares less the dividends on
non-convertible Preferred Shares and the average number of Common Shares of
171,824,000 in 1997 (1996: 168,191,000), assuming that all securities
convertible at the holder's option (except for Preferred Shares, Series 10,
11 and 12) were converted at the beginning of each fiscal year.
16. PRIOR PERIOD ADJUSTMENTS
IMPAIRED LOANS
On November 1, 1995, in accordance with the recommendations of the Canadian
Institute of Chartered Accountants and guidelines from the Superintendent, the
Bank began to apply the new accounting standard governing impaired loans. The
estimated realizable amount of impaired loans is now measured by discounting
expected future cash flows. This new accounting standard has been applied
retroactively with no restatement for prior years. A cumulative adjustment of
$52 million, net of income taxes of $32 million, was made to the opening balance
of retained earnings as at November 1, 1995.
TAX LIABILITY Further to reviews and discussions with taxation authorities,
the Bank considers it likely that certain transactions executed in years
prior to November 1, 1994 will be reassessed. In order to account for this
contingent liability, the Bank reduced the balance of retained earnings as at
November 1, 1995 by $14 million.
NATIONAL BANK OF CANADA 63
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
17. COMMITMENTS
As at October 31, 1997, minimum commitments under leases for premises, a service
contract for outsourced information technology services, and equipment and
furniture leasing agreements were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SERVICE EQUIPMENT
PREMISES CONTRACT & FURNITURE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 80 $135 $6 $221
1999 71 131 4 206
2000 58 84 3 145
2001 50 84 1 135
2002 42 - - 42
2003 and thereafter 262 - - 262
- -------------------------------------------------------------------------------------------------------------------------------
$563 $434 $14 $1,011
- -------------------------------------------------------------------------------------------------------------------------------
18. COMMITMENTS TO EXTEND CREDIT
In the normal course of its business, the Bank enters into commitments to extend
credit in order to meet the financial needs of its clients.
- -------------------------------------------------------------------------------------------------------------------------------
AS AT SEPTEMBER 30 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Guarantees, letters of credit and trade-related contingencies $ 1,614 $ 1,589
Sale and repurchase agreements 946 1,500
Commitments to extend credit 14,158 12,228
Note issuance and revolving underwriting facilities 516 500
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Guarantees, letters of guarantee and trade-related contingencies are firm
commitments by the Bank to make the related payments or guarantee the execution
of non-financial commitments on behalf of a client who is unable to meet its
contractual obligations to a third party. The credit risk they represent is
considered equivalent to loans.
Documentary letters of credit, which are used in international trade and usually
issued on behalf of an importer, enable a third party such as an exporter to
draw drafts on the Bank up to a pre-set amount under specific terms and
conditions. The amounts are collateralized by the delivery of the underlying
goods.
Sale and repurchase agreements represent the mortgage loans sold under the
mortgage-backed securities program, provided for in the National Housing Act,
which the Bank will repurchase when the securities mature.
Commitments to extend credit represent the unused portions of credit
authorizations granted in the form of loans, bankers' acceptances or other
credit instruments. The Bank is required at all times to make the unused portion
of the authorization available, subject to certain conditions.
Note issuance and revolving underwriting facilities represent arrangements to
acquire short-term notes for a pre-set price in the event that the client is
unable to sell or issue the notes.
64 NATIONAL BANK OF CANADA
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
19. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank utilizes derivative instruments for asset/liability management and for
trading purposes. The derivatives used to manage the balance sheet serve to
protect the interest spread against the risk of fluctuations in interest and
exchange rates. Trading activities enable clients to manage their risks and
also include proprietary trading undertaken by the Bank.
As at September 30, the type and maturity by type of contract were as follows:
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY
- ----------------------------------------------------------------------------------------------------------------------------------
CONTRACTS HELD FOR TOTAL 3 MONTHS 3 TO 6 6 TO 12 1 TO 3 3 TO 5 OVER 5
TRADING PURPOSES CONTRACTS AND UNDER MONTHS MONTHS YEARS YEARS YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREIGN EXCHANGE CONTRACTS
OTC CONTRACTS
Forwards $ 25,508 $ 26,800 $ 17,363 $ 3,111 $ 4,025 $ 1,726 $ 575 $ -
Swaps 1 488 - - - 308 180 -
Purchased options 9,348 9,348 4,373 1,135 2,537 1,303 - -
Written options 8,342 8,342 3,387 1,608 2,901 446 - -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 43,199 44,978 25,123 5,854 9,463 3,783 755 -
- ----------------------------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED CONTRACTS
Futures
Long positions 1 1 1 - - - - -
Short positions 467 467 363 90 14 - - -
Purchased options 51 51 51 - - - - -
Written options 217 217 217 - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 736 736 632 90 14 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CONTRACTS
OTC CONTRACTS
Forwards 12,031 12,088 10,564 1,494 30 - - -
Swaps 9,195 26,632 5,352 3,548 4,568 6,216 6,119 829
Purchased options 752 1,559 600 104 686 100 69 -
Written options 1,886 2,143 136 1,704 134 100 69 -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 23,864 42,422 16,652 6,850 5,418 6,416 6,257 829
- ----------------------------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED CONTRACTS
Futures
Long positions 3,914 3,914 2,580 213 533 588 - -
Short positions 5,886 9,086 5,913 736 1,360 1,077 - -
Purchased options 6,365 6,365 5,750 615 - - - -
Written options 2,576 2,576 2,562 14 - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 18,741 21,941 16,805 1,578 1,893 1,665 - -
- ----------------------------------------------------------------------------------------------------------------------------------
EQUITY CONTRACTS
OTC CONTRACTS
Swaps - 33 - 3 - 30 - -
Purchased options - 79 - - - 34 - 45
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL - 112 - 3 - 64 - 45
- ----------------------------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED CONTRACTS
Futures
Long positions 9 9 9 - - - - -
Short positions 168 223 223 - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 177 232 232 - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL: 1997 $86,717 $110,421 $59,444 $14,375 $16,788 $11,928 $ 7,012 $ 874
TOTAL: 1996 $52,199 $ 68,904 $36,763 $11,348 $10,176 $ 6,231 $ 3,558 $ 828
- ----------------------------------------------------------------------------------------------------------------------------------
The above table shows the notional amounts of derivative instruments. These amounts are used to calculate payments and measure
business volumes. They do not indicate credit or market risk.
The credit equivalent amount for financial derivatives is based on the current replacement cost of all outstanding contracts in a
gain position, taking into account master netting agreements and an amount representing the future credit risk calculated in
accordance with the capital adequacy requirements set by the Superintendent.
As at September 30, credit risk exposure on the derivatives portfolio was as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
1997
NOTIONAL PRINCIPAL FUTURE CREDIT RISK- NOTIONAL PRINCIPAL
PRINCIPAL REPLACEMENT CREDIT EQUIVALENT WEIGHTED PRINCIPAL REPLACEMENT
AMOUNT COST RISK EQUIVALENT AMOUNT COST
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Foreign exchange contracts $45,714 $245 $428 $580 $158 $29,848 $165
Interest rate contracts 64,363 237 100 304 77 38,564 256
Equity contracts 344 47 10 57 18 492 45
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $110,421 $529 $538 $941 $253 $68,904 $466
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1996
FUTURE CREDIT RISK
CREDIT EQUIVALENT WEIGHTED
RISK EQUIVALENT
- ---------------------------------------------------------------------------
Foreign exchange contracts $342 $472 $136
Interest rate contracts 43 278 66
Equity contracts 23 68 21
- ---------------------------------------------------------------------------
TOTAL $408 $818 $223
- ---------------------------------------------------------------------------
NATIONAL BANK OF CANADA 65
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
19. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)
<TABLE>
As at September 30, the distribution of risk exposure by counterparty was as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
REPLACEMENT FUTURE CREDIT CREDIT CREDIT
COST RISK EQUIVALENT EQUIVALENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OECD governments $ 6 $ 3 $ 6 $ 10
OECD banks 640 391 712 606
Other 117 144 223 202
- ----------------------------------------------------------------------------------------------------------------------------------
$763 $538 $941 $818
- ----------------------------------------------------------------------------------------------------------------------------------
20. CREDIT RISK EXPOSURE
(In accordance with the guidelines of the Bank for International Settlements)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE RISK RISK-WEIGHTED BALANCE
ON-BALANCE SHEET ITEMS SHEET AMOUNT WEIGHT (%) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and deposits with Bank of Canada $ 304 0 $ - $ -
Deposits with other banks 4,172 20-100 981 761
Securities issued or guaranteed by Canada,
provinces, municipalities or school corporations 5,692 0-20 105 51
Other securities 4,318 0-100 2,177 2,810
Mortgage loans 13,695 0-100 4,200 4,156
Other loans and acceptances 35,837 0-100 24,475 21,868
Other assets 2,217 0-100 1,749 1,373
- ----------------------------------------------------------------------------------------------------------------------------------
$66,235 $33,687 $31,019
- ----------------------------------------------------------------------------------------------------------------------------------
NOTIONAL CREDIT RISK RISK-WEIGHTED EQUIVALENT
AMOUNT CONVERSION WEIGHT(%)
CREDIT INSTRUMENTS (1) FACTOR (%) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Guarantees, letters of credit and trade-related
contingencies $1,614 50-100 20-100 $1,193 $1,174
Sale and repurchase agreements 946 100 0 - -
Note issuance and revolving underwriting facilities 516 50 0-100 - -
Commitments to extend credit 14,158 0-50 0-100 2,293 $1,358
- ----------------------------------------------------------------------------------------------------------------------------------
$17,234 $3,486 $2,532
- ----------------------------------------------------------------------------------------------------------------------------------
NOTIONAL REPLACEMENT FUTURE CREDIT RISK RISK-WEIGHTED EQUIVALENT
DERIVATIVE FINANCIAL INSTRUMENTS (1) AMOUNT COST RISK WEIGHT (%) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign exchange contracts
Swaps $ 488 0-50
Purchased options 9,399 0-50
Written options 8,559 0-50
Futures 468 0-50
Forwards 26,800 0-50
- ----------------------------------------------------------------------------------------------------------------------------------
$45,714 $245 $428 $158 $136
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate contracts
Swaps $26,632 0-50
Purchased options 7,924 0-50
Written options 4,719 0-50
Futures 13,000 0-50
Forwards 12,088 0-50
- ----------------------------------------------------------------------------------------------------------------------------------
$64,363 $237 $100 $77 $66
- ----------------------------------------------------------------------------------------------------------------------------------
Equity contracts
Swaps $33 0-50
Purchased options 79 0-50
Futures 232 0-50
- ----------------------------------------------------------------------------------------------------------------------------------
$344 $47 $10 $18 $21
- ----------------------------------------------------------------------------------------------------------------------------------
Total financial instruments $110,421 $529 $538 $253 $223
- ----------------------------------------------------------------------------------------------------------------------------------
Total risk-weighted assets $37,426 $33,774
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital 8.1% 6.9%
Tier 2 capital 3.2% (2)3.3%
Total capital 11.3% (2)10.2%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) AS AT SEPTEMBER 30
(2) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON NOVEMBER 1, 1996
</TABLE>
66 NATIONAL BANK OF CANADA
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
21. INTEREST RATE SENSITIVITY POSITION
Analyzing interest rate sensitivity gaps is one of the methods used by the Bank
to control interest rate risk.
The following breakdown of assets and liabilities by maturity illustrates the
sensitivity of the Bank's balance sheet to interest rate fluctuations as at
October 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
VARIABLE 3 MONTHS 3 TO 6 6 TO 12 1 TO 5 OVER 5 NON-INTEREST
RATE AND UNDER MONTHS MONTHS YEARS YEARS SENSITIVE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS $ $ $ $ $ $ $ $
Cash resources 906 3,357 169 7 - - 37 4,476
Securities 116 2,098 1,440 1,070 2,060 2,557 669 10,010
Loans 16,164 13,962 2,932 3,456 10,441 188 115 47,258
Other assets - - - - - - 4,491 4,491
- ----------------------------------------------------------------------------------------------------------------------------------
17,186 19,417 4,541 4,533 12,501 2,745 5,312 66,235
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits 8,482 12,942 5,524 6,734 9,455 87 46 43,270
Subordinated debt - 148 - 9 285 627 - 1,069
Other liabilities 2,448 6,937 1,051 110 743 1,864 5,983 19,136
Shareholders' equity 59 - - - 192 125 2,384 2,760
- ----------------------------------------------------------------------------------------------------------------------------------
10,989 20,027 6,575 6,853 10,675 2,703 8,413 66,235
- ----------------------------------------------------------------------------------------------------------------------------------
On-balance sheet gap 6,197 (610) (2,034) (2,320) 1,826 42 (3,101) -
- ----------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet
financial instruments - (1,799) 1,487 2,156 (1,855) 433 (256) 166
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 6,197 (2,409) (547) (164) (29) 475 (3,357) 166
- ----------------------------------------------------------------------------------------------------------------------------------
DOMESTIC
On-balance sheet total 4,875 528 (596) (572) 1,609 433 (2,611) 3,666
Off-balance sheet
financial instruments - (652) (2,427) 477 (1,111) 214 67 (3,432)
- ----------------------------------------------------------------------------------------------------------------------------------
Domestic - Total 4,875 (124) (3,023) (95) 498 647 (2,544) 234
- ----------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
On-balance sheet total 1,322 (1,138) (1,438) (1,748) 217 (391) (490) (3,666)
Off-balance sheet
financial instruments - (1,147) 3,914 1,679 (744) 219 (323) 3,598
- ----------------------------------------------------------------------------------------------------------------------------------
International - Total 1,322 (2,285) 2,476 (69) (527) (172) (813) (68)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 6,197 (2,409) (547) (164) (29) 475 (3,357) 166
- ----------------------------------------------------------------------------------------------------------------------------------
3 MONTHS 3 TO 6 6 TO 12 1 TO 5 OVER 5
INTEREST RATE AND UNDER MONTHS MONTHS YEARS YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities 3.94% 4.36% 4.49% 5.54% 6.07%
Loans 4.85 6.03 6.97 7.21 7.83
- ----------------------------------------------------------------------------------------------------------------------------------
Average weighted yield on assets 4.73 5.48 5.33 6.93 6.19
LIABILITIES
Deposits 4.68 4.80 4.80 6.03 6.28
Subordinated debt 4.48 - 10.88 6.90 7.85
- ----------------------------------------------------------------------------------------------------------------------------------
Average weighted cost of liabilities 4.67 4.80 4.81 6.06 7.66
- ----------------------------------------------------------------------------------------------------------------------------------
NET TOTAL 4.97% 2.23% 1.60% 10.03% 5.67%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 67
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
AS AT OCTOBER 31, 1997 BOOK VALUE FAIR VALUE DIFFERENCE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash resources $4,476 $4,476 $-
Securities 10,010 10,119 109
Loans 47,259 47,691 432
Other assets 4,490 4,490 -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $66,235 $66,776 $541
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits $43,270 $44,132 $862
Subordinated debt 1,069 1,111 42
Other liabilities 19,136 19,136 -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $63,475 $64,379 $904
- ----------------------------------------------------------------------------------------------------------------------------------
The fair value of derivatives is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
CONTRACTS HELD FOR TRADING PURPOSES CONTRACTS HELD FOR NON-TRADING PURPOSES TOTAL TOTAL
GROSS GROSS NET GROSS GROSS NET NET NET
ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES AMOUNT AMOUNT AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate contracts $137 $136 $1 $193 $100 $93 $94 $149
Foreign exchange contracts 705 619 86 204 207 (3) 83 32
Equity contracts - - - 46 - 46 46 45
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $842 $755 $87 $443 $307 $136 $223 $226
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE FOLLOWING METHODS AND ASSUMPTIONS WERE USED TO ESTIMATE THE FAIR VALUE OF
FINANCIAL INSTRUMENTS:
Cash resources, other
assets and other
liabilities: Due to their short-term maturity, the fair
values of these financial instruments are
assumed to be equal to their carrying values.
Securities: The fair values of securities are presented
in Note 3 to the financial statements. They
are based on quoted market prices. If quoted
market prices are not available, fair values
are estimated using the quoted market prices
of similar securities.
Loans: The fair values of variable-rate loans are
assumed to be equal to their carrying
values. The fair values of other loans are
estimated using a discounted cash flow
calculation that uses market interest rates
currently charged for similar new loans as
at the balance sheet date applied to
expected maturity amounts (adjusted for
any prepayments).
Deposits: The fair values of fixed-rate deposits are
determined by discounting the contractual
cash flows, using market interest rates
currently offered for deposits with the same
remaining terms. The fair values of deposits
with no stated maturity are assumed to be
equal to their carrying values.
Subordinated debt: The fair value of subordinated debt is
determined by discounting the contractual
cash flows, using market interest rates
currently offered for similar financial
instruments with the same remaining terms.
Derivatives: The fair values of derivatives are
determined, before the impact of master
netting agreements, using various
methodologies including quoted market
prices, prevailing market rates for
instruments with similar characteristics and
maturities, net present value analysis or
other pricing models as appropriate.
68 NATIONAL BANK OF CANADA
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
23. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Bank provides various banking services
to its subsidiaries which are recorded at the exchange value reflecting the
consideration determined and accepted by both parties.
The Bank also grants loans to its directors, officers and personnel under
various conditions. Total outstanding loans of this type amounted to:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans to directors (August 31) $270 $260
Loans to officers and personnel (October 31) $475 $462
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24. LITIGATION
Various legal proceedings are pending against the Bank and its subsidiaries.
In management's opinion, the aggregate amount of potential liability related
thereto will not have a material impact on the Bank's financial position.
25. DOMESTIC AND INTERNATIONAL OPERATIONS
Domestic operations encompass all business carried on by the Bank's network
of branches and commercial banking centres in Canada, treasury operations on
Canadian financial markets and international commercial operations carried
out by the Canadian branch network.
International operations comprise transactions on international financial
markets effected with public and private sector corporations in Canada and
abroad, and with governments and their agencies.
<TABLE>
DOMESTIC INTERNATIONAL TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
UNITED STATES OTHER
------------------ ------------------
1997 1996 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income (a) $ 1,143 $ 984 $ 118 $ 100 $ 63 $ 58 $ 1,324 $ 1,142
Other income 1,024 852 29 32 3 86 1,056 970
Provision for credit losses 246 190 32 43 12 2 290 235
Non-interest expenses 1,414 1,336 55 56 20 21 1,489 1,413
Income taxes (a) 205 103 25 16 13 17 243 136
Non-controlling interest 16 10 - - - - 16 10
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 286 $ 197 $ 35 $ 17 $ 21 $ 104 $ 342 $ 318
- ----------------------------------------------------------------------------------------------------------------------------------
Average total assets $46,901 $41,584 $4,997 $4,250 $3,626 $3,405 $55,524 $49,239
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) NET INTEREST INCOME WAS GROSSED UP BY $5 MILLION ($6 MILLION IN 1996) TO
BRING THE TAX-EXEMPT INCOME EARNED ON CERTAIN SECURITIES IN LINE WITH THE
INCOME ON OTHER FINANCIAL INSTRUMENTS. AN EQUAL AMOUNT WAS ADDED TO INCOME
TAXES.
26. ACQUISITIONS
FAMILY TRUST CORPORATION
On March 31, 1996, the Bank acquired all of the voting common shares of Family
Trust Corporation, an Ontario trust company, for a consideration of $16 million
paid in cash. The assets acquired amounted to approximately $229 million and
were composed mainly of mortgage loans, while the liabilities assumed, totalling
approximately $218 million, consisted chiefly of guaranteed investment
certificates.
This acquisition was accounted for using the purchase method.
The results of Family Trust Corporation are recorded in the Consolidated
Statement of Income as of the date of acquisition. Goodwill of $5 million is
amortized using the straight-line method over a 20-year period.
THE MUNICIPAL SAVINGS & LOAN CORPORATION
On August 21, 1996, the Bank acquired all of the common shares of The Municipal
Savings & Loan Corporation, an Ontario loan company, and its wholly owned
subsidiaries The Municipal Trust Company, MSL Properties Limited and Municipal
Securities Inc. As at October 31, 1996, the final acquisition price had not been
determined but an initial payment of $29 million had been made. The acquisition
was finalized during fiscal 1997, with the Bank paying an additional $9 million.
NATIONAL BANK OF CANADA 69
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
26. ACQUISITIONS (CONT.)
This acquisition was accounted for using the purchase method and is summarized
below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSETS ACQUIRED
Tangible assets
Cash resources and securities $281
Mortgages and other loans 596
Other assets 41
- ----------------------------------------------------------------------------------------------------------------------------------
918
- ----------------------------------------------------------------------------------------------------------------------------------
Less liabilities assumed
Deposits 883
Other liabilities 2
- ----------------------------------------------------------------------------------------------------------------------------------
885
- ----------------------------------------------------------------------------------------------------------------------------------
Net tangible assets acquired 33
Goodwill 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total cost of investment $38
- ----------------------------------------------------------------------------------------------------------------------------------
Consideration paid in cash $38
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The results of The Municipal Savings & Loan Corporation are recorded in the
Consolidated Statement of Income as of the date of acquisition. Goodwill is
amortized using the straight-line method over a 20-year period.
27. COMPARISON BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND
THE UNITED STATES
The consolidated financial statements of the Bank are prepared in accordance
with Canadian generally accepted accounting principles (GAAP), including the
requirements of the Superintendent of Financial Institutions Canada. Material
differences between Canadian and United States GAAP are described below.
CONSOLIDATED BALANCE SHEET
The first material difference, as at October 31, 1997 and 1996, between assets
and liabilities reported in the Consolidated Balance Sheet prepared under
Canadian GAAP as opposed to United States GAAP stems from the adoption of the
Statement of Financial Accounting Standard (SFAS) No. 115 regarding the
accounting of securities.
Under Canadian GAAP, the Bank classifies securities as trading account
securities if they are held for resale in the near term and as investment
account securities in other cases. Investment account securities are recorded at
amortized cost while trading account securities are reported at their fair
value. According to United States GAAP, the Bank's investment account securities
would be separated into two categories: securities held to maturity and
securities available for sale. Securities held to maturity include those which
the Bank has the positive intent and ability to hold to maturity and are
reported at amortized cost. Securities available for sale include those which
are not classified as either held to maturity or as trading account securities.
They are reported at fair value, with unrealized gains and losses excluded from
income and reported in a separate component of shareholders' equity.
If the Bank had reported its investment account securities as at October 31,
1997 in accordance with United States GAAP, securities would have increased by
$109 million, deferred income taxes included in "Other Assets" would have
declined by $43 million, and an after-tax net unrealized gain of $66 million
would have been reported as a separate component of shareholders' equity.
As at October 31, 1996, securities would have risen by $151 million, deferred
income taxes included in "Other Assets" would have decreased by $59 million, and
an after-tax net unrealized gain of $92 million would have been reported as a
separate component of shareholders' equity.
The second material difference results from the application of SFAS No. 106 on
employers' accounting for postretirement benefits other than pensions for United
States reporting purposes. In the United States, the cost of postretirement
benefits other than pension plans are recognized in the same way as pension
costs, namely, over the working lives of the employees covered, based on
actuarial assumptions. In Canada, these costs are charged to income as incurred.
Had the Bank adopted this standard, other liabilities and deferred income taxes
included in "Other Assets" would have increased by $69 million and $27 million
respectively and retained earnings would have declined by $42 million as at
October 31, 1997.
CONSOLIDATED STATEMENT OF INCOME
As stated in Note 16, further to the new accounting standard governing impaired
loans which took effect on November 1, 1995, the estimated realizable value of
impaired loans must be measured by discounting expected future cash flows. The
guidelines set out in SFAS No. 114 and 118, which also took effect on November
1, 1995, are similar to the Canadian standard in this regard. However, the
cumulative impact of adopting the United States standard must be charged to
income rather than reported as an after-tax charge to the opening balance of
retained earnings as at November 1, 1995, as prescribed by Canadian GAAP.
Had the Bank adopted SFAS No. 114 and 118 as at November 1, 1995, the provision
for credit losses would have increased by $84 million and net income after tax
would have decreased by $52 million for fiscal 1996. Earnings per share would
have decreased by 31 cents.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Except for the impact on shareholders' equity owing to the above differences,
there is no material difference between the Consolidated Statement of Changes in
Shareholders' Equity as reported under Canadian and United States GAAP.
CONSOLIDATED STATEMENT OF CHANGES
IN FINANCIAL POSITION
Except for the reporting of the cumulative impact of adopting the new standard
governing impaired loans effective November 1, 1995 and the after-tax unrealized
gain of $66 million in 1997 and $92 million in 1996 on investment account
securities, there is no material difference between the Consolidated Statement
of Changes in Financial Position as reported under Canadian and United States
GAAP.
70 NATIONAL BANK OF CANADA
<PAGE>
NOTES to the Consolidated Financial Statements
- -----------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND AFFILIATED CORPORATIONS
AS OF OCTOBER 31, 1997
PERCENTAGE INVESTMENT
PRINCIPAL OF VOTING AND AT COST
NAME OFFICE ADDRESS PARTICIPATING SHARES (MILLIONS OF $)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natcan Trust Company Montreal, Canada 100% $ 55
General Trust of Canada Montreal, Canada 100% $155
National Bank Life Insurance Company Montreal, Canada 100% $ 10
Fonds de placement SFBN Inc. Montreal, Canada 100% $ -
NBC Export Development
Corporation Inc. Montreal, Canada 100% $ -
Levesque, Beaubien and Company Inc. Montreal, Canada 75% $129
- Levesque Beaubien Geoffrion Inc. Montreal, Canada 75% $ -
National Bank Securities Inc. Montreal, Canada 100% $ 5
NBC Clearing Services Incorporated Montreal, Canada 100% $ -
Natcan Investment Management Inc. Montreal, Canada 100% $ 8
SIBN Calculus Inc. Montreal, Canada 100% $ -
Municipal Securities Inc. Barrie, Canada 100% $ -
Cancap Preferred Corporation Montreal, Canada 100% $ -
National Bank Financial Planning Inc. Montreal, Canada 100% $ -
Mercantile Canada Finance B.V. Amsterdam, Netherlands 100% $ 6
National Bank Information Corporation Montreal, Canada 100% $ -
NBC Holdings USA, Inc. New York, United States 100% $437
- National Canada Finance Corp. New York, United States 100% $ -
- National Canada Business Corp. New York, United States 100% $ -
- National Canada Corporation New York, United States 100% $ -
- National Canada Export Corporation New York, United States 100% $ -
NB Capital Corporation New York, United States 100% $258
NB Finance Ltd. Hamilton, Bermuda 100% $186
NatBC Holding Corporation Florida, United States 100% $ 19
- Natbank, F.S.B. Florida, United States 100% $ -
Natcan Holdings International Limited Nassau, Bahamas 100% $ 5
- National Bank of Canada
(International) Limited Nassau, Bahamas 100% $ -
Natcan Finance (Asia) Ltd. Hong Kong, China 100% $ 7
National Bank of Canada (Asia) Ltd. Singapore, Singapore 100% $ 3
Natcan Insurance Company Limited Bridgetown, Barbados 100% $ 1
- ----------------------------------------------------------------------------------------------------------------------------------
AFFILIATED CORPORATIONS
PERCENTAGE INVESTMENT
OF VOTING AND AT EQUITY
PARTICIPATING SHARES (MILLIONS OF $)
Natdev Inc. Quebec City, Canada 50% $ 1
National Bank Financial Services Inc. Montreal, Canada 50% $ 2
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NATIONAL BANK OF CANADA 71
<PAGE>
STATISTICAL REVIEW
<TABLE>
1997 1996 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash resources $ 4,476 $ 3,528 $ 5,174 $ 3,765 $ 3,204 $ 3,693 $ 1,883
Securities 10,010 8,414 7,285 6,071 5,985 4,273 3,899
Loans 47,259 37,935 33,795 32,226 30,692 30,003 28,360
Bankers' acceptances 2,273 1,725 1,293 1,255 1,081 940 1,335
Other assets 2,217 1,532 1,366 1,457 1,772 1,126 962
TOTAL ASSETS $ 66,235 $ 53,134 $ 48,913 $ 44,774 $ 42,734 $ 40,035 $ 36,439
Deposits $ 43,270 $ 40,125 $ 40,424 $ 36,850 $ 35,113 $ 33,433 $ 29,987
Other liabilities 19,136 9,494 4,895 4,253 4,476 3,645 3,451
Long-term debt
Variable-capital notes - - 106 113 120 - -
Bank debentures 1,069 1,016 1,177 1,241 1,037 969 806
Liabilities of subsidiaries - - - - 17 234 408
Capital stock
Preferred 376 376 376 532 426 468 385
Common 1,309 1,268 1,234 1,207 1,083 906 905
Retained earnings 1,075 855 701 578 462 380 497
TOTAL LIABILITIES AND
SHAREHOLDERS'EQUITY $ 66,235 $ 53,134 $ 48,913 $ 44,774 $ 42,734 $ 40,035 $ 36,439
Average assets $ 55,524 $ 49,239 $ 47,582 $ 43,160 $ 39,657 $ 38,908 $ 36,740
Average capital funds(1) 3,744 3,511 3,620 3,230 2,871 2,723 2,593
INCOME STATEMENT DATA
Net interest income $ 1,319 $ 1,136 $ 1,170 $ 1,081 $ 996 $ 1,012 $ 972
Other income 1,056 970 712 719 635 541 472
TOTAL INCOME $ 2,375 $ 2,106 $ 1,882 $ 1,800 $ 1,631 $ 1,553 $ 1,444
Provision for credit losses 290 235 255 275 325 570 270
Non-interest expenses 1,489 1,413 1,229 1,168 1,042 1,016 919
Income taxes 238 130 146 131 81 (41) 64
Non-controlling interest 16 10 7 9 8 7 5
NET INCOME $ 342 $ 318 $ 245 $ 217 $ 175 $ 1 $ 186
COMMON STOCK DATA
Number of common shares
at end of year (IN THOUSANDS) 170,461 167,151 163,963 160,976 148,474 127,152 127,031
Number of common shareholders
of record 34,433 36,549 39,053 41,974 46,121 49,200 56,901
Net income (loss) per share
- Basic $ 1.86 $ 1.76 $ 1.26 $ 1.12 $ 1.01 $ (0.29) $ 1.20
- Fully diluted $ 1.84 $ 1.74 $ 1.24 $ 1.10 $ 1.00 $ (0.29) $ 1.19
Dividend per share $ 0.575 $ 0.49 $ 0.40 $ 0.40 $ 0.40 $ 0.70 $ 0.80
Stock trading range
- -High 20.30 13.90 11.88 11.63 10.75 12.75 11.38
- -Low 13.20 10.38 8.63 8.25 7.25 7.38 7.00 7.13
- -Close 20.15 13.00 11.00 9.38 10.50 8.13 11.13
Book value per share $ 13.99 $ 12.70 $ 11.88 $ 11.09 $ 10.41 $ 10.11 $ 11.03
FINANCIAL RATIOS
Return on common
shareholders'equity 14.0% 14.5% 11.0% 10.5% 9.9% (2.6)% 11.0%
Return on average assets 0.62% 0.64% 0.51% 0.50% 0.44% -% 0.51%
Return on average
capital funds 10.5% 10.6% 8.3% 7.9% 7.3% 1.5% 8.7%
Capital ratios (BIS)
- -Tier 1 8.1% 6.9% 6.8% 6.9% (3)6.2% 5.0% 5.2%
- -Total 11.3% (2)10.2% 10.4% 11.1% (3)9.6% 8.7% 8.8%
OTHER INFORMATION
Impaired loans,net 297 406 511 688 904 1,097 733
Number ofBank employees
(full-time equivalent)(4)
- -In Canada 11,245 11,022 10,249 10,423 11,822 11,629 12,275
- -Outside Canada 406 380 371 323 327 333 369
- -LBG 1,676 1,425 1,578 1,481 1,398 1,339 1,293 1,291
Number of branches in Canada 637 632 629 641 650 652 662
Number of banking machines 738 712 624 551 496 482 454
(1) AVERAGE CAPITAL FUNDS INCLUDE COMMON SHAREHOLDERS' EQUITY, REDEEMABLE PREFERRED SHARES AND BANK DEBENTURES.
(2) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON NOVEMBER 1, 1996.
(3) TAKING INTO ACCOUNT THE REDEMPTION OF $100 MILLION IN DEBENTURES THROUGH THE ISSUE OF COMMON SHARES AS AT NOVEMBER 1, 1993.
(4) THE BASIS FOR DETERMINING FULL-TIME EQUIVALENCE WAS CHANGED IN 1996.
</TABLE>
<TABLE>
1990 1989 1988
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash resources $ 2,216 $ 2,206 $2,420
Securities 3,129 2,842 2,407
Loans 27,420 25,322 22,894
Bankers' acceptances 2,151 2,618 2,395
Other assets 987 939 810
TOTAL ASSETS $ 35,903 $ 33,927 $30,926
Deposits $ 28,929 $ 26,646 $24,319
Other liabilities 3,976 4,295 3,899
Long-term debt
Variable-capital notes - - -
Bank debentures 727 765 691
Liabilities of subsidiaries 535 589 446
Capital stock
Preferred 387 394 274
Common 904 828 786
Retained earnings 445 410 511
TOTAL LIABILITIES AND
SHAREHOLDERS'EQUITY $ 35,903 $ 33,927 $30,926
Average assets $ 36,040 $ 32,267 $30,909
Average capital funds(1) 2,463 2,397 2,261
INCOME STATEMENT DATA
Net interest income $ 902 $ 927 $887
Other income 439 381 301
TOTAL INCOME $ 1,341 $ 1,308 $1,188
Provision for credit losses 250 442 232
Non-interest expenses 868 785 611
Income taxes 54 55 123
Non-controlling interest - - -
NET INCOME $ 169 $ 26 $222
COMMON STOCK DATA
Number of common shares
at end of year (IN THOUSANDS) 126,875 118,200 114,725
Number of common shareholders
of record 60,911 64,478 66,914
Net income (loss) per share
- Basic $ 1.10 $ 0.01 $1.84
0.73%
- Fully diluted $ 1.09 $ 0.01 $1.81
Dividend per share $ 0.80 $ 0.72 $0.64
Stock trading range
- -High 14.00 15.13 12.63
- -Low 13.20 11.00 8.75
- -Close 7.13 14.00 12.00
Book value per share $ 10.63 $ 10.48 $11.30
FINANCIAL RATIOS
Return on common
shareholders'equity 9.8% 0.1 17.0%
Return on average assets 0.47% 0.08 0.73%
Return on average
capital funds 8.7% 3.3% 12.4%
Capital ratios (BIS)
- -Tier 1 4.9% 4.8% 5.0%
- -Total 8.2% 8.1% 8.3%
OTHER INFORMATION
Impaired loans, net 665 345 372
Number ofBank employees
(full-time equivalent)(4)
- -In Canada 12,210 12,030 11,661
- -Outside Canada 372 316 296
- -LBG 1,676 1,291 1,478 1,167
Number of branches in Canada 650 625 603
Number of banking machines 397 335 271
(1) AVERAGE CAPITAL FUNDS INCLUDE COMMON SHAREHOLDERS' EQUITY, REDEEMABLE PREFERRED SHARES AND BANK DEBENTURES.
(2) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON NOVEMBER 1, 1996.
(3) TAKING INTO ACCOUNT THE REDEMPTION OF $100 MILLION IN DEBENTURES THROUGH THE ISSUE OF COMMON SHARES AS AT NOVEMBER 1, 1993.
(4) THE BASIS FOR DETERMINING FULL-TIME EQUIVALENCE WAS CHANGED IN 1996.
</TABLE>
72 NATIONAL BANK OF CANADA
<PAGE>
CORPORATE GOVERNANCE PRACTICES OF THE BANK
This section gives effect to the requirements set out in Policy I-15 of the
Montreal Exchange and the rules of the Toronto Stock Exchange on the subject.
The Board of Directors of the Bank recognizes the importance of maintaining
sound internal governance practices at all times in the interest of the Bank's
shareholders. It also considers that the relevance of these
practices must be reevaluated on a regular basis to ensure their proper
implementation and development.
The text below is a report on the membership, main responsibilities and
activities of the Conduct Review and Corporate Governance Committee of the Board
of Directors of the Bank since November 1, 1996. It also describes the mandate
and composition of the Board of Directors and outlines certain preferred
corporate governance practices of the Bank.
COMPOSITION, MAIN DUTIES AND ACTIVITIES OF THE CONDUCT REVIEW AND CORPORATE
GOVERNANCE COMMITTEE
COMPOSITION OF THE COMMITTEE
The Committee consists mainly of directors who are considered unrelated
directors as defined in Policy I-15 of the Montreal Exchange(1) and who are not
affiliated with the Bank as defined in banking regulations(2). No officer or
employee of the Bank or its affiliated companies is a member of this Committee.
MAIN DUTIES OF THE COMMITTEE
Pursuant to the terms of its mandate, the Conduct Review and Corporate
Governance Committee advises or recommends to the Board of Directors, as
applicable, that the orientations, policies and practices of the Bank regarding
conduct review, human resources and corporate governance be adopted and updated.
The Committee has in particular the following powers and responsibilities:
- - Periodically review the selection criteria and procedures used at the Bank
to select new directors. Select these new directors in conjunction with the
Chairman of the Board and Chief Executive Officer as well as the President
and Chief Operating Officer of the Bank;
- - Periodically review the performance of the members of the Board of
Directors and of the various committees, together with the Chairman of the
Board and Chief Executive Officer as well as the President and Chief
Operating Officer of the Bank;
- - Submit, to the Board of Directors, recommendations concerning changes to be
made to the compensation and benefits payable to Bank directors;
- - Examine and submit recommendations regarding the salary policy and the
aggregate remuneration of executive officers;
- - Monitor and periodically assess the performance of executive officers,
taking into account previously determined quantitative and qualitative
objectives, in order to submit a report and make recommendations thereon to
the Board of Directors;
- - Periodically review the profile of officers possessing the required
competencies to hold senior management positions at the Bank;
- - Apply and monitor the requirements of the Bank Act with respect to
transactions with related parties of the Bank (directors and officers).
MAIN ACTIVITIES OF THE CONDUCT REVIEW AND CORPORATE GOVERNANCE COMMITTEE
Since November 1, 1996, the activities of the Committee have concerned various
matters; more specifically, the Committee:
CORPORATE GOVERNANCE
- - Identified and examined, after the last Annual Meeting of Shareholders of
the Bank, the major concerns of the Bank's shareholders regarding corporate
governance in order to ensure proper follow-up;
- - Reviewed and updated the mandates governing all the committees of the
Board, namely, the Conduct Review and Corporate Governance Committee, the
Executive Committee, the Credit Committee and the Audit Committee. The new
mandates contain a more precise description of the mission and
responsibilities of the various committees in relation to one another. The
revised mandates take into account the most recent statutory and regulatory
developments and provide for more flexible committee operations;
NATIONAL BANK OF CANADA 73
<PAGE>
CORPORATE GOVERNANCE PRACTICES OF THE BANK
- - Reviewed the Bank's position concerning the separation of the role of
Chairman of the Board from that of Chief Executive Officer. After due
consideration, the Conduct Review and Corporate Governance Committee still
recommends that these duties continue to be combined as it is of the
opinion that the reasons provided by the Board of Directors in October 1995
in this regard still apply;
- - Established criteria facilitating the preparation of a succession plan for
the Board aimed at ensuring adequate membership at all times in view of the
environment in which the Bank operates;
- - Made recommendations to the Bank's management concerning the selection of
new directors to sit on the Bank's Board of Directors commencing in 1998;
- - Held an informal meeting of Bank directors, without Bank officers being
present, enabling them to express their expectations of how the Board and
its committees should function.
HUMAN RESOURCES
- - Updated aggregate compensation of the executive officers of the Bank in
order for the Bank to remain competitive in relation to its comparison
market, taking into account the salary policy applied at the Bank. This
update also included the findings and intervention possibilities suggested
by an external consulting firm specializing in compensation.
Taking into consideration the results of the external consultants' study,
the Conduct Review and Corporate Governance Committee recommended that the
following orientations for the aggregate compensation of executive officers
be adopted:
- - Increase in salaries within the parameters of the Bank's compensation
policy;
- - Increase in the scope of the long-term incentive-based program;
- - Adoption of a new management method, as of fiscal 1997-98, for setting up
and distributing short-term incentive compensation, taking into account the
Bank's overall results and the individual performance of the officers
concerned;
- - Adoption of a process to refine, in the short and medium term, the concrete
and precise assessment standards used for executive officers.
CONDUCT REVIEW
- - Adopted a new policy applicable to the management and monitoring of
transactions with related parties of the Bank, with emphasis on the
supervision of these transactions in keeping with the current spirit of the
Bank Act;
- - Received and followed up on management's reports on transactions with
related parties of the Bank (directors and officers);
- - Reviewed the procedures for examining client complaints and statistical
reports produced for this purpose;
- - Reviewed procedures for regulatory disclosure of information to clients;
- - Approved the report to the Superintendent of Financial Institutions on the
work and other matters studied by the Committee for fiscal 1996-97.
MANDATE AND COMPOSITION OF THE BOARD OF DIRECTORS
MANDATE OF THE BOARD OF DIRECTORS
The Board of Directors helps to direct the business and internal affairs of the
Bank, and supervises the management thereof. It assumes, directly or through its
various committees, overall responsibility for supervision and management, in
particular with respect to the following:
- - Description of the Bank's mission, its objectives, both quantitative and
qualitative, and the approval of strategies geared to ensuring their
realization;
74 NATIONAL BANK OF CANADA
<PAGE>
CORPORATE GOVERNANCE PRACTICES OF THE BANK
- - Changes made from time to time to the Bank's management structures;
- - Policies on the business and financial practices of the Bank regarding
risks and internal controls and the annual compliance reports relating
thereto;
- - Credit risk management policies as well as credit limits and latitudes
applied at the Bank;
- - Aggregate compensation policies and annual salary conditions applicable to
employees, officers and executive officers of the Bank;
- - Selection and succession of the Bank's senior management, as well as the
compensation of its members and other employment conditions;
- - All matters for which directors are exclusively responsible under the Bank
Act.
COMPOSITION OF THE BOARD
As at October 31, 1997, three Bank directors were "related directors" as defined
in the rules of the Montreal and Toronto stock exchanges pertaining to corporate
governance. Consequently, 20 out of the 23 Bank directors, or 87% of the
duly-appointed directors, were not considered related directors as defined in
such rules.
As at the same date, 14 Bank directors were "affiliated with the Bank" as
defined in banking regulations. This number is within the limit of two-thirds
allowed under the Bank Act.
The Chairman of the Board and Chief Executive Officer as well as the President
and Chief Operating Officer of the Bank are both directors of the Bank. As at
the date hereof, the Board of Directors and the Conduct Review and Corporate
Governance Committee are still of the opinion that these executive officers'
in-depth knowledge of the Bank's operations and their participation in the
deliberations of the Board and certain of its committees make a significant
contribution to the efficiency and effectiveness of the Board and the committees
in question.
NUMBER AND REPRESENTATIVENESS OF THE NOMINEES PROPOSED FOR THE POSITION OF
DIRECTOR IN 1998
The Bank intends to propose the election of 24 directors at the next Annual
Meeting of Shareholders. At the previous meeting, 23 nominees were proposed.
It is important for the Board of Directors to be balanced from a geographical,
economic and socio-cultural standpoint. The nominees proposed as directors by
the Bank meet these requirements.
FUTURE ORIENTATION
The Board of Directors must simultaneously be experienced and dynamic. In the
years ahead, so as to ensure that the Bank has a good understanding of the new
issues facing it, special consideration should be given to selecting nominees
who will assist the Bank in making appropriate decisions in this regard. The
vision of the successors chosen, judiciously combined with the experience of
existing directors, will be indisputable assets for the future.
OTHER CORPORATE GOVERNANCE CONCERNS
COMMUNICATIONS OF THE BANK WITH ITS SHAREHOLDERS, CLIENTS AND THE GENERAL PUBLIC
Shareholders may communicate at any time with the Bank on a regular basis by
contacting the Corporate Secretary's Office, the Public Relations Department or
General Trust of Canada, the Bank's Transfer Agent and Registrar.
Within the framework of the annual meetings of shareholders, the Bank maintains
ongoing communications with its shareholders of record and non-registered
shareholders through General Trust of Canada and other financial intermediaries,
in particular by sending them disclosure material prescribed by statute or
regulation.
NATIONAL BANK OF CANADA 75
<PAGE>
CORPORATE GOVERNANCE PRACTICES OF THE BANK
In addition to the communications which it must provide to its clients by law,
the Bank remains close to its clients and the public in general through its
involvement in numerous charitable, social and business activities in the
community. The Bank also acts through its Business Development Committees in the
regions as well as its Farm Advisory and High Technology Committees, which
advise the Bank on the expectations and needs of its various client groups.
Further information in this regard is presented in the "Business Development
Committees" section on page 79 and on pages 82 to 84.
BOARD'S EXPECTATIONS OF MANAGEMENT
Important matters on which the Bank's management must provide reports and
recommendations on a regular basis are:
- - strategic issues;
- - business practices and strategies;
- - accounting procedures, internal controls and various risk management
conditions;
- - human resources management;
- - technological development;
- - monitoring of statutory and regulatory requirements.
For the Board of Directors and its committees to function properly, they rely on
the quality of the information provided, on the identification and analysis of
the various options and strategies available under the circumstances and lastly,
on the recommendation of the solution considered to be the most appropriate in
each individual case.
APPROVED BY THE BOARD OF DIRECTORS OF THE BANK ON
DECEMBER 18, 1997
(1) "UNRELATED DIRECTOR" MEANS A DIRECTOR WHO IS INDEPENDENT OF MANAGEMENT AND
IS FREE FROM ANY INTEREST AND ANY BUSINESS OR OTHER RELATIONSHIP WHICH
COULD, OR COULD REASONABLY BE PERCEIVED TO, MATERIALLY INTERFERE WITH THE
DIRECTOR'S ABILITY TO ACT IN THE BEST INTEREST OF THE COMPANY, OTHER THAN
INTERESTS AND RELATIONSHIPS ARISING FROM SHAREHOLDING.
(2) "DIRECTOR AFFILIATED WITH THE BANK" REFERS TO ANY DIRECTOR WHO IS AN
OFFICER OR EMPLOYEE OF THE BANK, AN OFFICER OR EMPLOYEE OF A CORPORATION
CONTROLLED BY THE BANK OR A PERSON WHO, DIRECTLY OR THROUGH COMPANIES WITH
WHOM SUCH PERSON IS AFFILIATED, MAINTAINS SIGNIFICANT RELATIONS COVERING A
RANGE OF BUSINESS OR SHAREHOLDING SITUATIONS, AS WELL AS THE SPOUSE OF SUCH
PERSON.
76 NATIONAL BANK OF CANADA
<PAGE>
DIRECTORS
ANDRE BERARD
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
National Bank of Canada
Montreal, Quebec
MAURICE J. CLOSS
CORPORATE DIRECTOR
St. Clair Beach, Ontario
GERARD COULOMBE
SENIOR PARTNER
Desjardins Ducharme
Stein Monast
Sainte-Marthe, Quebec
LEON COURVILLE
PRESIDENT AND
CHIEF OPERATING OFFICER
National Bank of Canada
Outremont, Quebec
FRANCOIS JEAN COUTU
PRESIDENT AND
CHIEF OPERATING OFFICER
The Jean Coutu Group
(PJC) Inc.
Outremont, Quebec
SHIRLEY A. DAWE
PRESIDENT
Shirley Dawe Associates Inc.
Toronto, Ontario
JEAN DOUVILLE
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
UAP Inc.
Montreal, Quebec
MARCEL DUTIL
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Canam Manac Group Inc.
Outremont, Quebec
PAUL GOBEIL
VICE-CHAIRMAN OF THE BOARD
Metro-Richelieu Inc.
Montreal, Quebec
DONALD M. GREEN
CHAIRMAN OF THE BOARD
ACD Tridon Inc.
Burlington, Ontario
SUZANNE LECLAIR
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Transit Truck Bodies Inc.
Laval, Quebec
BERNARD LEMAIRE
CHAIRMAN OF THE BOARD
Cascades Inc.
Kingsey Falls, Quebec
GASTON MALETTE
CHAIRMAN OF THE BOARD
Malette Inc.
Timmins, Ontario
LEONCE MONTAMBAULT
CORPORATE DIRECTOR
Sillery, Quebec
GORDON F. OSBALDESTON
PROFESSOR EMERITUS
Ivey School of Business
University of Western Ontario
London, Ontario
J.-ROBERT OUIMET
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Ouimet-Cordon Bleu Inc.
Montreal, Quebec
ROBERT PARIZEAU
CHAIRMAN OF THE BOARD
AON Parizeau Inc.
Montreal, Quebec
MICHEL PERRON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Somiper Inc.
Westmount, Quebec
RAYMOND ROYER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Domtar Inc.
Ile-Bizard, Quebec
GUY ST-GERMAIN
PRESIDENT
Placements Laugerma inc.
Outremont, Quebec
LINO SAPUTO
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Saputo Cheese Limited
Montreal, Quebec
CLAUDE F. SAVOIE
PRESIDENT
Acadian Construction
(1991) Ltd.
Moncton, New Brunswick
PAUL-GASTON TREMBLAY
PRESIDENT
Primo-Gestion Inc.
Chicoutimi, Quebec
NATIONAL BANK OF CANADA 77
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE
The Executive Committee reviews the policies concerning the Bank's business and
financial practices with respect to risk management and internal controls, the
related annual reports and the updates made to the Management Proxy Circular and
the Bank's Code of Ethics, and subsequently recommends the adoption thereof to
the Board of Directors. It examines the overall compensation policy and other
employment conditions applicable to the Bank's employees and officers, excluding
the five most highly compensated officers, and recommends the approval thereof
to the Board of Directors; it periodically examines officers' performance and
makes recommendations to the Board of Directors regarding salary increases and
short-term bonuses. As well, the Committee approves the investment policy of the
Pool Fund for Participating Pension Plans, the actuarial valuation and the
financial statements of these Plans and Pool Fund as well as the aggregate
performance of the Pool Fund and its managers.
The Executive Committee is authorized to exercise all the powers that come
within the purview of the Board of Directors, except for those assigned
exclusively to the Bank's directors under the Bank Act. When necessary, it also
exercises the functions of the Credit Committee. During the past fiscal year,
this Committee met seven times.
MEMBERS
ANDRE BERARD
CHAIR AND EX-OFFICIO MEMBER
LEON COURVILLE
EX-OFFICIO MEMBER
MARCEL DUTIL
BERNARD LEMAIRE
ROBERT PARIZEAU
GUY ST-GERMAIN
LINO SAPUTO
THE CHAIR OF EACH OF THE OTHER COMMITTEES OF THE BOARD OF DIRECTORS IS INVITED
ON A ROTATING BASIS.
- -------------------------------------------------------------------------------
CREDIT COMMITTEE
The Credit Committee approves the credits of clients, by borrower and by
group of borrowers, which exceed the powers delegated to Bank officers. It
approves any transaction between the Bank and related parties in accordance
with the requirements of the Bank Act and makes recommendations thereon to
the Board of Directors. This Committee ensures that changes in non-current
loans are monitored and approves the taking of provisions required in that
regard. It forwards to the Board of Directors the recommendations it deems
appropriate concerning matters that come within its competence. During the
past fiscal year, this Committee met nine times.
MEMBERS
RAYMOND ROYER
CHAIR
ANDRE BERARD
EX-OFFICIO MEMBER
LEON COURVILLE
EX-OFFICIO MEMBER
FRANCOIS JEAN COUTU
DONALD M. GREEN
J.-ROBERT OUIMET
LINO SAPUTO
THE MEMBERS OF THE BOARD OF DIRECTORS ARE INVITED ON A ROTATING BASIS.
- -------------------------------------------------------------------------------
AUDIT COMMITTEE
The Audit Committee examines all documents containing financial information and
the annual and quarterly financial statements of the Bank and its subsidiaries
and recommends approval thereof to the Board of Directors. It examines the
mandate, nature and scope of the Bank's internal and external audit work and
veries the effectiveness of its internal control policies, systems and
procedures; it ensures that internal audit personnel cooperates with the
external auditors. It ensures that the necessary measures are taken to follow up
the suggestions resulting from the internal and external auditors' reports and
recommends the appointment and remuneration of the Bank's external auditors. The
Committee meets with external auditors and representatives of the Office of the
Superintendent of Financial Institutions and takes their recommendations into
consideration. During the past fiscal year, this Committee met four times.
MEMBERS
PAUL-GASTON TREMBLAY
CHAIR
PAUL GOBEIL
SUZANNE LECLAIR
GASTON MALETTE
CLAUDE F. SAVOIE
78 NATIONAL BANK OF CANADA
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
CONDUCT REVIEW AND CORPORATE
GOVERNANCE COMMITTEE
This Committee makes recommendations to the Board of Directors concerning the
adoption and updating of the Bank's orientations, policies and practices with
respect to conduct review, human resources and corporate governance. It consists
exclusively of external Directors, most of whom are unrelated directors within
the meaning of the rules and corporate governance policies of the Montreal and
Toronto stock exchanges, and not affiliated directors of the Bank within the
meaning of the Bank Act.
The Conduct Review and Corporate Governance Committee has a threefold mandate:
- - With respect to conduct review, the Committee ensures that procedures for
reviewing transactions with related parties of the Bank are established and
followed. The Committee also monitors the application of procedures
established to resolve conflicts of interest and for disclosing information
to Bank clients.
- - With respect to human resources, the Committee appraises the performance of
the Named Executive Officers of the Bank and submits its recommendations
regarding their aggregate remuneration and other employment conditions to
the Board of Directors.
- - With respect to corporate governance, the Committee determines and
periodically revises the criteria for selecting directors and the terms and
conditions of their remuneration. It also oversees the entire disclosure
process with respect to any discrepancy between the Bank's conduct in terms
of corporate governance and the Montreal and Toronto stock exchange
guidelines.
During the past fiscal year, this Committee met six times.
MEMBERS
PAUL GOBEIL
CHAIR
GERARD COULOMBE
GASTON MALETTE
LEONCE MONTAMBAULT
ROBERT PARIZEAU
MICHEL PERRON
GUY ST-GERMAIN
- -------------------------------------------------------------------------------
BUSINESS DEVELOPMENT COMMITTEES
The mandate of the Business Development Committees is to help the Bank obtain a
better understanding of the needs of each region and of its development
potential. The members of these Committees therefore advise the Bank's regional
vice-presidents on the orientations, needs, means, business opportunities and
customer service in their respective regions. They contribute to the Bank's
visibility, defend its interests and act at all times as Bank ambassadors.
A senior Bank officer has been assigned to liaise with each of these Committees
in order to facilitate the exchange of information between the Committees and
the Bank's management. In addition, each year, one of the Business Development
Committees is selected as the "Business Development Committee of the Year" based
on a certain number of preset criteria dealing primarily with business
development.
MEMBERS
THE LIST OF MEMBERS APPEARS ON PAGES 82 TO 84.
NATIONAL BANK OF CANADA 79
<PAGE>
OFFICERS
ANDRE BERARD
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
LEON COURVILLE
PRESIDENT AND
CHIEF OPERATING OFFICER
SENIOR EXECUTIVE VICE-PRESIDENT
- --------------------------------------------------------------------------------
JEAN TURMEL
TREASURY, BROKERAGE
AND CORPORATE BANKING
SENIOR VICE-PRESIDENTS
- --------------------------------------------------------------------------------
GILLES BISSONNETTE
BANKING AND OPERATIONS
HARVEY L. BROOKS
ONTARIO AND WESTERN CANADA
RICHARD CARTER
PRESIDENT
National Bank
Information Corporation Inc.
JACQUES DAOUST
EXECUTIVE VICE-PRESIDENT
General Trust of Canada
PIERRE DESBIENS
INSURANCE
GISELE DESROCHERS
HUMAN RESOURCES AND ADMINISTRATION
JULES G. GAGNE
ELECTRONIC NETWORKS
JEAN HOUDE
BANKING AND RETAIL MARKET
MICHEL LABONTE
FINANCE AND CONTROL
MARIO LECALDARE
CORPORATE BANKING, CANADA
TONY P. METI
BANKING AND
COMMERCIAL MARKET
REAL RAYMOND
SENIOR EXECUTIVE VICE-PRESIDENT
CORPORATE FINANCING
Levesque Beaubien
Geoffrion Inc.
ROGER P. SMOCK
UNITED STATES
GABY TOUMA
INTERNATIONAL
EXECUTIVE VICE-PRESIDENTS
- --------------------------------------------------------------------------------
JEAN-PIERRE BELANGER
CHAIRMAN OF THE
CREDIT COMMITTEE
PIERRE DESROCHES
WEALTH MANAGEMENT AND PRESIDENT AND
CHIEF EXECUTIVE OFFICER
General Trust of Canada
PRESIDENTS OF SUBSIDIARIES
- --------------------------------------------------------------------------------
PIERRE BRUNET
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Levesque Beaubien
Geoffrion Inc.
MARC ST-PIERRE
PRESIDENT AND
CHIEF OPERATING OFFICER
Natcan Investment Management Inc.
OMBUDSMEN
- --------------------------------------------------------------------------------
ROLAND ROBICHAUD
INDEPENDENT BUSINESSES
JEAN-PIERRE NOBERT
CONSUMER SERVICES
80 NATIONAL BANK OF CANADA
<PAGE>
OFFICERS
VICE-PRESIDENTS
- --------------------------------------------------------------------------------
RICHARD BARRIAULT
TAXATION
ANDRE BELANGER
CORPORATE SERVICES
General Trust of Canada
GUY BERARD
RISK MANAGEMENT AND ADMINISTRATION
FINANCIAL MARKETS
ANDRE BOILEAU
CHAUDIERE/APPALACHES
ANDRE BOLDUC
FINANCE AND ADMINISTRATION
National Bank Securities Inc.
LUC BORDELEAU
LOWER ST. LAWRENCE/GASPE
MICHEL BROUILLETTE
DRUMMOND/BOIS-FRANCS
DIANE CADIEUX
MONTEREGIE SUD
JEAN-MARIE CANUEL
EASTERN TOWNSHIPS
JEAN-PAUL CARON
CORPORATE AFFAIRS
GILLES CHOQUET
LAURENTIANS/LANAUDIeRE
ROBERT COURCHESNE
SALES AND BUSINESS
DEVELOPMENT
PATRICIA CURADEAU-GROU
SPECIAL LOANS,
QUEBEC/ATLANTIC
AND REAL ESTATE
JEAN DAGENAIS
CHIEF ACCOUNTANT
FRANCE DAVID
AUDIT
PHILIPPE DESROSIERS
ATLANTIC
YVAN DESROSIERS
SAGUENAY/LAC SAINT-JEAN/ NORTH SHORE
FRANK DE VRIES
SPECIAL LOANS, ONTARIO,
WESTERN CANADA, UNITED STATES AND REAL ESTATE
TOM DOSS
CREDIT, UNITED STATES
LEVIS DOUCET
RICHELIEU/YAMASKA
CHRISTOPHER ELGAR
TREASURY, EUROPE
MICHEL FAUBERT
OPERATIONS SUPPORT
LUC FREDETTE
CREDIT, CANADA
F.W. LYNN GALLANT
CENTRAL ONTARIO EAST
FRANCINE GAUDREAULT
ABITIBI/TEMISCAMINGUE
RENALD GELINAS
GOVERNMENT AND
PUBLIC SECTOR BANKING
JACQUES GRANDMAISON
EASTERN AND NORTHERN ONTARIO
GORDON C. HAINSTOCK
LATIN AMERICA
RAYMOND H. KEROACK
BANK TOWER AND
NORTH/CENTRAL MONTREAL
PIERRETTE LACROIX
TREASURY, UNITED STATES
JEAN-PIERRE LAMBERT
OUTAOUAIS
JACQUES LATENDRESSE
NASSAU
RICHARD LECLERC
PERSONAL TRUST SERVICES
General Trust of Canada
REJEAN LEVESQUE
WESTERN MONTREAL
BENOIT LORANGER
CENTRAL MONTREAL
PAUL-ANDRE MALO
SPECIAL PROJECTS - REAL ESTATE
J. ARCHIE MARSHALL
CENTRAL ONTARIO NORTH
RENAUD NADEAU
SOUTH SHORE
MARTIN OUELLET
TREASURY
PAUL ANDRE PARADIS
EASTERN MONTREAL
DENIS PELLERIN
INTERNATIONAL CREDIT AND INVESTMENT
JACQUES PICHE
INTERNATIONAL
COMMERCIAL OPERATIONS
GERARD PROULX
LAVAL/NORTH SHORE
JOHN RICHTER
EASTERN UNITED STATES
NICOLE RONDOU
MARKETING
LILI J. SHAIN
CORPORATE BANKING
VINCENT SOFIA
ASIA
JOHN W. SWENDSEN
WESTERN CANADA
MARC TAILLON
SAINTE-FOY/PORTNEUF
DOMINIQUE VACHON
CHIEF ECONOMIST
JACINTHE VAILLANCOURT
QUEBEC CITY
KATHLEEN ZICAT
HUMAN RESOURCES DEVELOPMENT
NATIONAL BANK OF CANADA 81
<PAGE>
BUSINESS DEVELOPMENT COMMITTEE MEMBERS
ATLANTIC PROVINCES
NORMAND CAISSIE
PRESIDENT
Imperial Sheet Metal Ltd
Richibucto
BERNARD CYR *
PRESIDENT
Cyr Holding Inc.
Moncton
EUGENE DURETTE
PRESIDENT
Brunswick Shopping
Centre Ltd.
Edmundston
BRIGITTE ROBICHAUD
LAWYER
Drapeau, Robichaud & McNally
Moncton
JEAN-CLAUDE SAVOIE
PRESIDENT
Cedre Restigouche Ltee
Saint-Quentin
BRIGITTE SIVRET
LAWYER
Cabinet Brigitte Sivret
Bathurst
QUEBEC
ABITIBI/TEMISCAMINGUE
JACQUES AUBE
PRESIDENT
Gabriel Aube Inc.
La Sarre
LOUIS BLANCHETTE
Malartic
FRANTZ BOIVIN
MANAGER
CKVD & CHOI Rock DEtente
Val-d'Or
ROBERT CLOUTIER *
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Gestion Montemurro Ltee
Rouyn-Noranda
CLAUDE GAGNON
PRESIDENT
Corporation Zodiaque Ltee
Ville-Marie
NORMAND LANGLOIS
SECRETARY AND TREASURER
Blais & Langlois Inc.
Matagami
GEORGES LAROUCHE
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Papeterie Larouche Inc.
Amos
GUYLAINE PAQUIN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Lesage Tremblay Ultima
Rouyn-Noranda
JEAN-GUY ROBERGE
REGIONAL VICE-PRESIDENT
Imprimerie QuEbEcor Lebonfon
Val d'Or
CHAUDIERES/APPALACHES
RICHARD DUVAL
PRESIDENT
Les Lainages Victor Ltee
Saint-Victor
ANDRE GOSSELIN
PRESIDENT
Entreprises Dufour &
Gosselin Inc.
Quebec City
PAUL-EMILE GRENIER *
PRESIDENT
Societe Grenco Inc.
Thetford Mines
MONIQUE JACOB
CHARTERED ACCOUNTANT
Renaud & Jacob, C.A.
Ville Saint-Georges
DRUMMOND/BOIS-FRANCS
ALAIN DUMONT
PRESIDENT
Cercueils Vic Royal Inc.
Victoriaville
FERNAND LALLIER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Imprimerie d'Asbestos
(1980) Inc.
Asbestos
LUCIE LATRAVERSE
PRESIDENT
Voyage Conseil
Drummondville Inc.
Drummondville
MICHELINE LOCAS *
GENERAL MANAGER
Association des Clubs d'Entrepreneurs d'Etudiants - Quebec
Drummondville
CLAUDE PEPIN
SALES REPRESENTATIVE
Warwick
LEO-PAUL THERRIEN
PRESIDENT
Les Petroles Therrien Inc.
Drummondville
JEAN-LUC VIGNEAULT
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Vexco Inc.
Plessisville
EASTERN TOWNSHIPS
GERALD BOUCHARD
SECRETARY AND TREASURER
Service de l'Estrie
Sherbrooke
JACINTHE DUBE
PRESIDENT
Groupe Immobilier
Jacinthe Dube Courtier Inc.
Sherbrooke
GILLES FONTAINE *
LAWYER
Fontaine Desy et Associes
Sherbrooke
YVAN MICHEL
DIRECTOR OF
ADMINISTRATIVE SERVICES
Industries manufacturieres Megantic Inc.
Lac Megantic
JEAN PELCHAT
PRESIDENT
Marche Jean Pelchat Inc.
Magog
YOLANDE VANIER
COUNCILLOR
Municipality of Rock Forest
Rock Forest
MALCOLM L. WHEELER
PRESIDENT
Herwood Inc.
Windsor
LANAUDIERE
PAUL ARBEC *
PRESIDENT
Paul Arbec Inc.
Rawdon
MARIE BERNIER
VICE-PRESIDENT
Imprimerie Bernier & Fils Inc.
Repentigny
LISE CHARBONNEAU
OWNER
Ferme Lise Charbonneau
Saint-Roch-de-L'Achigan
LUC GAUDREAULT
PRESIDENT
Sabem Inc.
Repentigny
PAUL MICHAUD
PRESIDENT
Carriere Saint-Barthelemy
(1990) Ltee
Saint-Barthelemy
DIANE NICOLETTI
PRESIDENT
Maison de la Cigogne au Pierro
Joliette
GEORGES SAULNIER
PRESIDENT
Les Industries Saulnier Inc.
Saint-Gabriel-de-Brandon
LAURENTIANS
CAROLE BEAUCHAMP
NOTARY
Sainte-Adele
ANDRE BILODEAU
PRESIDENT
Pneus Legault Inc.
Saint-Jovite
ANDRE BOLDUC
PHARMACIST
Pharmacie Andre Bolduc
Mont-Laurier
LISE BOURGAULT
MANAGER - SPECIAL PROJECTS
Lafarge Canada
Chatham
DENIS DAVID
PRESIDENT
Esthetique d'auto Sainte-Agathe-des-Monts Inc.
Sainte-Agathe Sud
SUZANNE FORTIN
PARTNER
Prevost, Auclair, Fortin & D'Aoust
Saint-Jerome
FRANCOIS LEGER
MANAGER
Groupe Sutton Laurentides
Saint-Sauveur-des-Monts
CHANTAL ROCHETTE *
PRESIDENT
Au Coin du Jardin Inc.
Saint-Sauveur-des-Monts
82 NATIONAL BANK OF CANADA
<PAGE>
BUSINESS DEVELOPMENT COMMITTEE MEMBERS
LAVAL/NORTH SHORE
PIERRE BELLE
PRESIDENT
Groupe Litho Mille-Iles Ltee
Terrebonne
GUY BOISVERT
PRESIDENT
Boisvert Pontiac Buick Ltee
Blainville
DENIS F. GAUTHIER *
LAWYER
Gauthier, Dion, Avocats
Laval
PIERRE GRAND'MAISON
PRESIDENT
Thermoplast Inc.
Laval
MARIELLE HEBERT
PRESIDENT
ISO Concept Inc.
Laval
EDMOND LAVALLEE
CHARTERED ACCOUNTANT
Lavallee Hebert, C.A.
Saint-Eustache
CLAIRE LEGER
VICE-CHAIRMAN OF THE BOARD
Groupe Alimentaire
St-Hubert Inc.
Laval
BENOIT ROY
GENERAL MANAGER
Intermat
Terrebonne
LOWER ST. LAWRENCE/ GASPE
GILLES BERUBE
PRESIDENT
Groupe Cedrico Inc.
Price
GEORGES HARRISSON
MANAGEMENT CONSULTANT
Les Habitations Mont-Carleton 1994 Inc.
Carleton
CLAIRE LANGLOIS
NOTARY AND LEGAL ADVISOR
Amqui
DANIEL MARQUIS
PRESIDENT
Marquis Pontiac Buick Inc.
Matane
ANDRE RACINE
PRESIDENT
Boutique Vagabond Inc.
Rimouski
REINE-MARIE ROY *
LAWYER
Gendreau, Roy, Beaulieu & Carrier
Rimouski
RENAUD SAMUEL
PRESIDENT
Groupe RT
Riviere-au-Renard
PIERRE SIMON
PRESIDENT
Le Cable de Riviere-du-Loup Ltee
Riviere-du-Loup
MAURICIE
FERNANDE BOISVERT
PRESIDENT
Secretariat Plus
(Trois-Rivieres) Inc.
Trois-Rivieres
NICOLE DIAMOND-GELINAS
VICE-PRESIDENT AND
GENERAL MANAGER
Aspasie Inc.
Saint-Barnabe-Nord
LOUISE GAMACHE
VICE-PRESIDENT - FINANCE
Estampage J.P.L. Ltee
Sainte-Marthe-du-Cap-de-la-Madeleine
RAYMOND MAILHOT
PRESIDENT
B.S.G. Inc.
Cap-de-la-Madeleine
PIERRE TREMBLAY
CHAIRMAN OF THE COMMISSION SCOLAIRE DE TROIS-RIVIERES
Director of Personnel
Universite du Quebec
a Trois-Rivieres
Trois-Rivieres
LAURENT VERREAULT *
CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Groupe Laperriere &
Verreault Inc.
Trois-Rivieres
MONTEREGIE SUD
GILLES AUDETTE
FARM PRODUCER
Saint-Polycarpe
CLAUDE BOYER
CHARTERED ACCOUNTANT
Societe Bourassa Boyer, C.A.
Vaudreuil-Dorion
CLEMENT LEBLANC
NOTARY AND LEGAL ADVISOR
Chateauguay
YVES LOISELLE
PRESIDENT
Excavation Loiselle &
freres Inc.
Saint-Timothee
LOUISE MONTPETIT *
PRESIDENT
Automobiles Regate Inc.
Valleyeld
JEAN-PAUL REGIS
GENERAL MANAGER
Commission scolaire des
Trois-Lacs
Vaudreuil-Dorion
ANIE ROULEAU
EXECUTIVE VICE-PRESIDENT
Hydrocom International
Chateauguay
OUTAOUAIS
ANDRE BEAUDOIN *
PRESIDENT
Slush Puppie Canada Inc.
Hull
GUSTAVE BRUNET
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Sylvio Brunet & Fils Ltee
Fassett
GILLES DESJARDINS
PRESIDENT
Groupe Brigil Inc.
Gatineau
JEAN-GUY HUBERT
PRESIDENT
G. Hubert Auto Ltee
Maniwaki
MARTIN LACHAPELLE
MANAGER
Roger Lachapelle
Pontiac Buick G.M.
Hull
MAURICE MAROIS
PRESIDENT
Marois Electrique
(1980) Ltee
Hull
ROBERT ROY
PRESIDENT
Le Groupe Sotramont
Hull
RICHELIEU/YAMASKA
GERARD BERNARD
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Les Placements Robert
Bernard Ltee
Saint-Paul-d'Abbotsford
JEAN CARTIER *
PRESIDENT
Emballages Jean Cartier Inc.
Saint-Cesaire
MARIE-PAULE LANGELIER
PRESIDENT
Laboratoire M.P.
Langelier Inc.
Beloeil
JACQUELINE LAROCHELLE
Chambly
PIERRETTE LUSSIER
Granby
JEAN-PIERRE ROBIN
PRESIDENT
Gestion Valentine Inc.
Saint-Hyacinthe
REJANE SALVAIL
Sainte-Anne-de-Sorel
JACQUES SYLVESTRE
PARTNER
Sylvestre & Associes, avocats
Saint-Hyacinthe
SAGUENAY/LAC ST-JEAN/ NORTH SHORE
MARCEL BOUCHARD
OWNER
Auberge des 21
La Baie
GERMAIN DESCHENES
PRESIDENT
Hamilton & Bourassa
(1988) Enr.
Baie-Comeau
MARC-ANDRE LEVESQUE
CO-PRESIDENT
Groupe Radio Antenne 6
Roberval
PIERRE LEVESQUE
GENERAL MANAGER
Gravel & LEvesque Inc.
Jonquiere
MARLENE OUELLET *
NOTARY
Chicoutimi
NATIONAL BANK OF CANADA 83
<PAGE>
BUSINESS DEVELOPMENT COMMITTEE MEMBERS
BENOIT ROUSSEAU
PRESIDENT
Motel Chutes des Peres Inc.
Mistassini
RAOUL THIBEAULT
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Construction R. Thibeault
Sept-Iles
SOUTH SHORE
RAYMOND LANDRY
PRESIDENT
Gestion Savoie Landry Inc.
Saint-Hubert
JEAN MONTPETIT
VICE-PRESIDENT
Power Battery (Iberville) Ltd.
Iberville
CLAUDETTE PIGEON
CERTIFIED GENERAL ACCOUNTANT
Varennes
CAROLE ST-CHARLES
PRESIDENT
J.L. Freeman Inc.
Boucherville
PIERRE TRAHAN
PRESIDENT
Cedarome Canada Inc.
Brossard
FARM COMMITTEE
JACYNTHE GAGNON
FARM PRODUCER
Union des producteurs
agricoles
Sainte-Agnes
VICTOR GIROUARD
ENGINEER - AGRONOMIST
Saint-Valerien
HEINZ GROGG
FARM PRODUCER
Maskinonge
JEAN-MARC LACROIX
PRESIDENT
J.M. Lacroix & Fils
Laval
MARIE-CLAIRE LAFRENIERE
FARM PRODUCER
Saint-Charles-de-Bellechasse
HIGH TECHNOLOGY COMMITTEE
FRANCOIS AIRD
PRESIDENT
CEDROM SNi
Outremont
ROBERT CARRIER
PRESIDENT
Genicom Consultants Inc.
Montreal
RICHARD CORMIER
PRESIDENT
Jazz Reseau Medias
Montreal
GILLES L. GAGNON
EXECUTIVE VICE-PRESIDENT
Protec Microsystemes Inc.
Montreal
LOUISE GUAY
PRESIDENT
Public Technologies
Multimedias
Montreal
BERNARD HAMEL *
PRESIDENT
GTI Capital
Montreal
CLAUDE MARTEL
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Inno-Centre
Montreal
CLAUDE MCMASTER
PRESIDENT
Avingco Consulting
Group Inc.
Boucherville
SERGE PICHETTE
LAWYER - PARTNER
Hudon, Gendron, Harris, Thomas
Montreal
JACQUES PLOURDE
PRESIDENT AND
CHIEF OPERATING OFFICER
Institut de la technologie
du magnesium
Quebec City
REGIONAL COMMITTEE (ONTARIO)
CHARLES COPPA
PRESIDENT
Highland Farms Inc.
North York
JOHN K. MACDONALD
PRESIDENT
Armak Resilient Floor Covering Corporation
Mississauga
W. JOHN MORRIS
CHAIRMAN, MANAGING PARTNER
McLaren Morris & Todd Ltd.
Mississauga
MARLENE OILGISSER
Richmond Hill
TED PATTENDEN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
National Rubber
Toronto
CLAUDE THEBERGE *
CHIEF EXECUTIVE OFFICER
C.M.L. Industries Ltd.
Unionville
EASTERN ONTARIO (OTTAWA)
NOEL J. BERTHIAUME
LAWYER
Berthiaume, Perrier, Brisebois, D'Amours
Hawkesbury
JOCELYNE DOYLE-RODRIGUE
PRESIDENT
Translex Translations
Ottawa
JACQUES LAMARCHE
Lefaivre
CHRISTINE LAMOTHE-MOIR
MANAGING PARTNER
Performance Development Training
Ottawa
JEAN-GUY RIVARD
PRESIDENT
Valecraft Homes Limited
Orleans
ANDREW WOLFF
VICE-PRESIDENT - FINANCE AND CHIEF FINANCIAL OFFICER
Fulcrum Technologies Inc.
Ottawa
CAROLE WORKMAN *
VICE-RECTOR - RESOURCES
University of Ottawa
Ottawa
WINDSOR/ESSEX
FRED COWLIN
PRESIDENT
Clydesdale Insurance
Brokerage Limited
Windsor
MURRAY G. CUMMINGS
PRESIDENT
TSC Stores Ltd.
London
JOHN FURLAN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
H.E. Vannatter Limited
Wallaceburg
TOM O'BRIEN
SENIOR PARTNER
Price Waterhouse
Windsor
JOHN E. OMSTEAD
PRESIDENT
Family Tradition Foods Inc.
Wheatley
ELEANOR PAINE *
VICE-PRESIDENT
Capitol Theatre & Arts Centre
Windsor
KARL RICHTER
PRESIDENT
Schukra of North
America Ltd.
Windsor
JEFFREY M. SLOPEN
PARTNER
Wilson, Walker, Hochberg, Slopen
Windsor
MICHAEL G. SOLCZ
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Valiant Machine & Tool Inc.
Windsor
ROCHELLE TEPPERMAN
VICE-PRESIDENT
Tepperman Furniture
Appliance Electronic
Windsor
* CHAIR OF THE COMMITTEE
84 NATIONAL BANK OF CANADA
<PAGE>
MAJOR SUBSIDIARIES AND OFFICES ABROAD
SUBSIDIARIES
CANADA
TREASURY AND SECURITIES
Levesque Beaubien
Geoffrion Inc.
1155 Metcalfe, 5th Floor
Montreal, Quebec H3B 4S9
NBC Clearing Services Incorporated
1155 Metcalfe
Montreal, Quebec H3B 4S9
Natcan Investment Management Inc.
1100 University
Montreal, Quebec H3B 2G7
Innocap Investment Management Inc.
1100 University
Montreal, Quebec H3B 2G7
Cancap Preferred Corporation
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
EXPORT FINANCING
NatExport, a division of Natcan Trust Company
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
NBC Export Development Corporation Inc.
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
INFORMATION SERVICES
National Bank Information Corporation Inc.
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
WEALTH MANAGEMENT
INSURANCE
National Bank Life Insurance Company
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
National Bank Financial Services Inc.
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
TRUST SERVICES
General Trust of Canada
1100 University
Montreal, Quebec H3B 2G7
Natcan Trust Company
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
DISCOUNT BROKERAGE AND GROUP SAVINGS
National Bank Securities Inc.
1100 University
Montreal, Quebec H3B 2G7
Fonds de placement SFBN Inc.
1100 University
Montreal, Quebec H3B 2G7
Municipal Securities Inc.
70 Collier Street
P.O. Box 147
Barrie, Ontario L4M 4S9
FINANCIAL PLANNING
National Bank Financial
Planning Inc.
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
UNITED STATES
Natbank, F.S.B.
4031 Oakwood Boulevard
Oakwood Plaza
Hollywood, FL 33020
National Canada Corporation
125 West 55th Street
New York, NY 10019
National Canada
Finance Corp.
125 West 55th Street
New York, NY 10019
National Canada
Business Corp.
125 West 55th Street
New York, NY 10019
National Canada Export Corporation
125 West 55th Street
New York, NY 10019
BAHAMAS
National Bank of Canada (International) Limited
Charlotte House
Charlotte Street, P.O. Box N3015
Nassau, Bahamas
BARBADOS
Natcan Insurance Company Limited
Alleyne House
White Park Road
Bridgetown, Barbados
HONG KONG
Natcan Finance (Asia) Ltd.
Room 4001, Jardine House
1 Connaught Place, Central
Hong Kong
SINGAPORE
National Bank of Canada
(Asia) Ltd.
331 North Bridge Road
#11-04/06
Odeon Towers
Singapore 188720
OFFICES ABROAD
UNITED STATES
REGIONAL OFFICE
125 West 55th Street
New York, NY 10019
BRANCHES
225 West Washington Street
Suite 1100
Chicago, IL 60606
125 West 55th Street
New York, NY 10019
AGENCIES
200 Galleria Parkway, Suite 800
Atlanta, GA 30339
725 South Figueroa Street
Suite 1690
Los Angeles, CA 90017
REPRESENTATIVE OFFICES
World Trade Center
401 East Pratt Street, Suite 631
Baltimore, MD 21202
5100 Town Center Circle
Suite 430
Boca Raton, FL 33486
One Federal Street, 27th Floor
Boston, MA 02110
Empire Tower
350 Main Street, Suite 2540
Buffalo, NY 14202
Two First Union Center
Suite 2020
Charlotte, NC 28282
312 Walnut Street, Suite 1900
Cincinnati, OH 45202
One Cleveland Center
1375 East 9th Street, Suite 2430
Cleveland, OH 44114
2121 San Jacinto Street
Suite 1850
Dallas, TX 75201
One Tabor Center
1200 17th Street, Suite 2760
Denver, CO 80202
165 Madison Avenue
Suite 1610
Memphis, TN 38103
201 St. Charles Avenue
Suite 4205
New Orleans, LA 70170
NATIONAL BANK OF CANADA 85
<PAGE>
MAJOR SUBSIDIARIES AND OFFICES ABROAD
One Oxford Center
301 Grant Street, Suite 3440
Pittsburgh, PA 15219-6496
Riverfront Plaza
901 East Byrd Street
Suite 1140
Richmond, VA 23219
Columbia Seafirst Center
701 Fifth Avenue, Suite 6601
Seattle, WA 98104
Post Office Plaza
50 Division Street, Suite 201
Somerville, NJ 08876
American Center
27777 Franklin Road
Suite 1570
Southfield, MI 48034
One Metropolitan Square
Suite 2980
St. Louis, MO 63102
OFFICES OF NATIONAL CANADA CORPORATION
225 West Washington Street
Suite 1100
Chicago, IL 60606
725 South Figueroa Street
Suite 1690
Los Angeles, CA 90017
125 West 55th Street
New York, NY 10019
OFFICES OF NATIONAL CANADA BUSINESS CORP.
Two First Union Center
Suite 2020
Charlotte, NC 28282
One Cleveland Center
1375 East 9th Street
Suite 2350
Cleveland, OH 44114
165 Madison Avenue
Suite 1610
Memphis, TN 38103
Post Office Plaza
50 Division Street, Suite 201
Somerville, NJ 08876
American Center
27777 Franklin Road
Suite 1570
Southfield, MI 48034
OFFICES OF NATBANK, F.S.B.
4031 Oakwood Boulevard
Oakwood Plaza
Hollywood, FL 33020
990 North Federal Highway
Pompano Beach, FL 33062
CHILE
REPRESENTATIVE OFFICE
Pedro De Valdivia 100
Piso 13
Santiago, Chile
MEXICO
REPRESENTATIVE OFFICE
Montes Urales 723
Piso 3
Colonia Lomas de Chapultepec
C.P. 11000, Mexico, D.F.
EUROPE, AFRICA,
MIDDLE EAST
REGIONAL OFFICE
Princes House
95 Gresham Street
London, England EC2V 7LU
BRANCH
Princes House
95 Gresham Street
London, England EC2V 7LU
REPRESENTATIVE OFFICE
123, avenue des Champs-Elysees
Paris 75008 France
ASIA, PACIFIC
REGIONAL OFFICE
Room 4001, Jardine House
1 Connaught Place, Central
Hong Kong
BRANCHES
Room 4001, Jardine House
1 Connaught Place, Central
Hong Kong
6th Floor, Leema Building
146-1 Soosong-Dong
Chongro-Ku
Seoul 110-140
Republic of Korea
331 North Bridge Road
#11-04/06
Odeon Towers
Singapore 188720
REPRESENTATIVE OFFICES
8th Floor
117, Min Shen East Road
Section 3
Taipei, Taiwan 105
Republic of China
4-C Shanghai Apollo Building
1440 Yan An Road (C)
Shanghai 200040
People's Republic of China
86 NATIONAL BANK OF CANADA
<PAGE>
INFORMATION FOR SHAREHOLDERS AND INVESTORS
STOCK EXCHANGE LISTINGS
The Common Shares of the Bank as well as the First Preferred Shares, Series 7,
8, 10, 11 and 12 are listed on the Montreal, Toronto and Vancouver stock
exchanges. The First Preferred Shares, Series 5 are listed on the Montreal
Exchange. The ticker symbols and newspaper abbreviations for the Bank's shares
listed on the Montreal, Toronto and Vancouver stock exchanges are as follows:
- --------------------------------------------------------------------------------
TICKER NEWSPAPER
SYMBOL ABBREVIATIONS
- --------------------------------------------------------------------------------
Montreal Toronto
Exchange & Vancouver
Stock Exchanges
Common
Shares NA Natl Bk Natl Bk
- --------------------------------------------------------------------------------
First Preferred
Shares
- - Series 5 NA.PR.C Natl Bk s5 --
- - Series 7 NA.PR.D Natl Bk s7 Natl Bk s7
- - Series 8 NA.PR.E Natl Bk s8 Natl Bk s8
- - Series 10 NA.PR.G Natl Bk s10 Natl Bk s10
- - Series 11 NA.PR.H Natl Bk s11 Natl Bk s11
- - Series 12 NA.PR.I Natl Bk s12 Natl Bk s12
TRANSFER AGENT AND REGISTRAR
General Trust of Canada
1100 University
9th Floor
Montreal, Quebec
H3B 2G7
Telephone: (514) 871-7171
1-800-341-1419
HEAD OFFICE
National Bank Tower
600 de La Gauchetiere West
Montreal, Quebec
H3B 4L2
Telephone: (514) 394-5000
Telex: 0525181
(Nabacan Montreal)
Internet address:
http://www.nbc.ca/
General Trust of Canada acts as Transfer Agent and Registrar in Montreal,
Toronto, Regina, Calgary, Halifax, Saint John, Vancouver and Winnipeg.
DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
Under the Dividend Reinvestment and Share Purchase Plan, holders of Common
Shares or Preferred Shares of the Bank may invest in Common Shares of the Bank
without paying a commission or administration fee.
Participants in the Plan may acquire shares by reinvesting cash dividends paid
on shares held by them or by making optional cash payments of a minimum of $500
per cash payment, up to $5,000 per quarter.
For additional information, contact the Registrar, General Trust of Canada, at
(514) 871-7171 or 1-800-341-1419.
DIRECT DEPOSIT SERVICE
Shareholders of the Bank may elect to have their dividends deposited directly
into the bank account of their choice by advising General Trust of Canada.
NUMBER OF SHAREHOLDERS
As at October 31, 1997, there were 34,433 registered holders of Common Shares
listed with the Registrar.
PAYMENT OF DIVIDENDS
Declared dividend payments for Common Shares are made on the 1st of February,
May, August and November; for First Preferred Shares, Series 5, 7, 8, 10, 11 and
12, the dividend payment date is the 15th day of the above months.
The dividend record dates for Common Shares are December 29, 1997, and March 26,
June 25 and September 24, 1998; for First Preferred Shares, Series 5, 7, 8, 10,
11 and 12, they are January 9, April 9, July 10 and October 9, 1998.
INFORMATION
For any additional information, shareholders are requested to contact the
Transfer Agent and Registrar, General Trust of Canada.
Shareholders who receive more than one copy of a document, particularly of
quarterly or annual reports, are requested to notify the Registrar.
ANNUAL MEETING
The Annual Meeting of Holders of Common Shares of the Bank will be held on
Wednesday, March 11, 1998, at 8:30 a.m. at The Queen Elizabeth Hotel, 900
Rene-Levesque Blvd. West, Montreal, Quebec.
NATIONAL BANK OF CANADA 87
<PAGE>
GLOSSARY OF FINANCIAL TERMS
ALLOWANCE FOR CREDIT LOSSES
Reserve taken to absorb anticipated credit-related losses (loans, acceptances,
guarantees, letters of credit, deposits by other banks and derivatives), namely,
the sum of annual provisions less write-offs, net of recoveries. The allowance
for credit losses includes country risk allowances, specific provisions and the
general allowance.
ASSET-BASED LENDING
Loans or other forms of credit secured by assets belonging to the borrower (e.g.
accounts receivable or inventory items) which are strictly controlled by the
lender until settlement of the debt.
ASSETS UNDER ADMINISTRATION
Assets in respect of which a financial institution provides administrative
services such as custodial services, collection of investment income, settlement
of purchase and sale transactions and record-keeping. Assets under
administration, which are beneficially owned by clients, are not reported on the
balance sheet of the institution offering such services.
ASSETS UNDER MANAGEMENT
Assets managed by a financial institution which are beneficially owned by
clients. Management services are more comprehensive than administrative
services, and include selecting investments or offering investment advice.
Assets under management, which may also be administered by the financial
institution, are not reported on its balance sheet.
AVERAGE ASSETS
Daily average of balance sheet assets.
BANKERS' ACCEPTANCE
Short-term debt security traded on the money market which a bank guarantees on
behalf of a borrower and for which the borrower pays a stamping fee.
CAPITAL
Amount which would be owed to the holders of shares and bank debentures if
assets had to be liquidated to reimburse depositors and other creditors.
Capital consists of bank debentures, shareholders' equity, and
non-controlling interest.
CAPITAL RATIOS
Ratios of capital, as defined by regulatory authorities, to risk-weighted
assets. The Bank for International Settlements distinguishes two types of
capital: Tier 1 capital, or base capital, consists of common shareholders'
equity, non-cumulative preferred shares and non-controlling interest in
subsidiaries less goodwill. Tier 2, or supplementary capital, consists of other
preferred shares and subordinated debentures at their book value and the general
allowance for credit losses less investments in associated companies. Total
regulatory capital, or total capital, is the sum of Tier 1 and Tier 2 capital.
DERIVATIVES
Financial futures or options whose value is "derived" from interest rates,
foreign exchange rates or equity prices. Derivatives are used in treasury
operations as well as for hedging regular financial instruments. The most common
types of derivatives include foreign currency or interest rate futures, swaps
and options.
EARNING ASSETS
Total assets which generate interest for the Bank. Earning assets are calculated
as total assets less cash and other non-interest bearing assets.
FOREIGN CURRENCY AND INTEREST RATE SWAPS
Transactions in which counterparties agree to exchange, for a specified period,
currencies or streams of interest payments (generally by exchanging a fixed rate
for a floating one) based on an amount of notional principal.
FOREIGN CURRENCY FUTURE
Contractual obligation to buy or sell, on or before a specified future date, a
given quantity of foreign currency at a given exchange rate.
FOREIGN CURRENCY OR INTEREST RATE OPTION
The right, but not the obligation, to buy (call option) or sell (put option) at
or by a set date, a given amount of foreign currency or securities at a set
price (strike price).
GUARANTEES AND LETTERS OF CREDIT
Irrevocable assurances that
a bank will make payments for a client which cannot meet its financial
obligations to third parties.
IMPAIRED LOAN
A loan is considered impaired when, in the opinion of management, there is
reasonable doubt as to the payment of principal or interest. Any loan where
payments are 90 days past due falls into this category, unless there is no doubt
as to the collectibility of principal and interest.
INTEREST RATE FUTURE
Contractual obligation to buy or sell, on or before a specified future date, a
given quantity of a financial instrument at a given interest rate.
LIQUID ASSETS
Assets held as cash or securities easily convertible to cash, such as deposits
with other banks and securities.
NET INCOME PER SHARE
Net income available to holders of common shares, namely, net income less
dividends on preferred shares, divided by the average number of common shares
outstanding during the fiscal year.
NET INTEREST INCOME
Difference between the interest earned on assets and the interest paid on
liabilities. When expressed as a percentage of average assets, it is called net
interest margin or interest spread.
NOTIONAL PRINCIPAL
Contract amount used as a reference point to calculate payments for off-balance
sheet instruments such as forward rate agreements and interest rate swaps. It is
considered "notional" as the principal amount itself never changes hands.
POINT
Unit of measure equal to one percentage (1%).
PROVISION FOR CREDIT LOSSES
Amount added to the allowance for credit losses to bring it to a level that
management considers adequate, taking into account write-offs and recoveries
with respect to specific loans.
RETURN ON COMMON SHAREHOLDERS' EQUITY
Amount available to holders of common shares, namely, net income less dividends
on preferred shares, expressed as a percentage of average common shareholders'
equity.
RISK WEIGHTING
Risk-weighting factors are applied to the face value of certain assets in order
to present comparable risk levels. This procedure is also used to recognize the
risk in off-balance sheet instruments by adjusting the notional value to balance
sheet (or credit) equivalents and then applying the appropriate risk-weighting
factors. Total risk-weighted assets are used in calculating the various capital
ratios according to the rules of the Bank for International Settlements.
SECURITIZATION
Transaction in which certain assets, such as mortgages, are sold to an entity
which finances their acquisition by issuing negotiable securities.
SUBORDINATED DEBENTURE
Unsecured debt instrument issued by a bank and for which repayment, in the event
of liquidation, ranks behind the claims of depositors and certain other
creditors. Convertible subordinated debentures can be exchanged for shares at
the option of the holder, the issuer or both.
TAXABLE EQUIVALENT BASIS
Calculation method used to gross up certain tax-exempt income (primarily
dividends) by the income tax that would have been payable had it not been
taxable. The gross-up of such income permits a uniform comparison of the yield
on the various types of assets, such as those comprising net interest income,
regardless of their tax treatment.
TRADING ACCOUNT
Liquid assets used for trading on financial markets. This account is recorded on
the balance sheet at its market value.
88 NATIONAL BANK OF CANADA
<PAGE>
This Annual Report is published
by the Public Relations Department,
National Bank of Canada.
POUR OBTENIR UN EXEMPLAIRE DE LA
VERSION FRANCAISE DU RAPPORT ANNUEL,
VEUILLEZ VOUS ADRESSER A :
Service des relations publiques
Banque Nationale du Canada 600,
rue de La Gauchetiere Ouest
8e etage
Montreal (Quebec) H3B 4L2
Legal deposit: 4th quarter 1997
Bibliotheque nationale du Quebec
Printed in Canada
ISBN 2-921835-05-3
GRAPHIC DESIGN:
Belanger Legault
Communications Design ltee
PHOTOGRAPHY: MESSRS. BERARD AND COURVILLE
Guy Schiele
PRINTING:
Richard Veilleux imprimeur
<PAGE>
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