SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from ________
to ________.
Commission File Number: 1-14103
NB CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-2063921
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 West 55TH Street
New York, New York 10019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 632-8532
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value $ .01 per share, traded in the form of Depositary Shares,
each representing a one-fortieth interest therein
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of December 31, 1999, all Common Stock, par value $ .01 per share,
was held by an affiliate.
As of December 31, 1999, the number of shares of Common Stock
outstanding was 100.
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FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements and information
relating to NB Capital Corporation (the "Company" or "NB Capital") that are
based on the beliefs of the Company's management as well as assumptions made by
and information currently available to the Company's management. When used in
this report, the words "anticipate", "believe", "estimate", "expect" and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company's management with respect to future events and the
Company's future performance and are subject to certain risks, uncertainties and
assumptions. Should management's current view of the future or underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
EXCHANGE RATE
References to $ are to United States dollars; references to C$ are to
Canadian dollars. As of December 31, 1999, the Canadian dollar exchange rate was
C$1.4433 = $1.00 and certain amounts stated herein reflect such exchange rate.
<PAGE>
PART I
ITEM 1: BUSINESS
General
On August 20, 1997, NB Capital Corporation (the "Company") was
incorporated under the laws of the State of Maryland for the purposes 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 with the consummation of an offering of 300,000 shares of its
8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Series A
Preferred Shares"). The Series A Preferred Shares trade on the New York Stock
Exchange in the form of Depositary Shares, each representing a one-fortieth
interest in a Series A Preferred Share (the "Depositary Shares"). National Bank
of Canada (the "Bank") owns all of the Company's issued and outstanding common
stock, par value $.01 per share (the "Common Stock"). Accordingly, the Company
is a wholly owned subsidiary of the Bank.
The Company's principal business objective is to acquire, hold, finance
and manage assets consisting of obligations secured by real property ("Mortgage
Assets") as well as certain other qualifying real estate investment trust
("REIT") assets. The Mortgage Assets currently consist of twenty-two
"hypothecation" loans issued to the Company by NB Finance, Ltd. ("NB Finance"),
a Bermuda corporation and a wholly owned subsidiary of the Bank, that are
recourse only to the "Mortgage Loans. " Hypothecation loans are loans secured by
the pledge of mortgages as security therefor. The Mortgage Loans consist of
twenty-two pools of, at December 31, 1999, an aggregate 11,168 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. The Company has acquired and expects to continue to acquire 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 pursuant
to an Advisory Agreement, dated September 3, 1997, between the Bank and the
Company (the "Advisory Agreement"). The Bank also services the Mortgage Loans
pursuant to a Servicing Agreement, dated September 3, 1997, between the Bank and
NB Finance (the "Servicing Agreement"). Pursuant to an Assignment Agreement, NB
Finance has assigned to the Company all of its right, title and interest in the
Servicing Agreement.
In order to preserve the Company's status as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), substantially all of the assets
of the Company consist of the Mortgage Assets issued by NB Finance and other
real estate assets that are of the type set forth in Section 856(c)(6)(B) of the
Code.
For information regarding the Company's revenue and operating profit,
see the Company's financial statements, beginning on page F-1.
Automatic Exchange
Each Series A Preferred Share will be exchanged automatically for one
newly issued 8.45% Noncumulative First Preferred Share, Series Z, of the Bank (a
"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 on 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 of Financial
Institutions Canada (the "Superintendent") takes control of the Bank pursuant to
the Bank Act (Canada), as amended (the "Bank Act"), or proceedings are commenced
for the winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange (each, an "Exchange Event"). Upon an Exchange Event, the
holders of the Series A Preferred Shares shall be unconditionally obligated to
surrender to the Bank the certificates representing the Series A Preferred Share
held by such holder, and the Bank
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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.
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 canceled 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
Maryland General Corporation Law 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.
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 an automatic exchange as of the Time of Exchange.
Holders of the Series A Preferred Shares, by purchasing the Series A
Preferred Shares, 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.
Upon the occurrence of an Exchange Event, the Bank Preferred Shares to
be issued as part of an automatic exchange would constitute a newly issued
series of First Preferred Shares of the Bank and would constitute 100% of the
issued and outstanding Bank Preferred Shares. The Bank Preferred Shares would
have the same liquidation preference and be subject to redemption on the same
terms as the Series A Preferred Shares (except that there would be no redemption
for certain tax-related events). 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 pari passu, in terms of dividend payments and liquidation preference,
with, or senior to, any outstanding First Preferred Shares of the Bank. The Bank
Preferred Shares would not entitle the holders to vote except in certain
circumstances. Dividends on the Bank Preferred Shares would be non-cumulative
and payable at the rate of 8.45% per annum of the liquidation preference, if,
when and as declared by the Board of Directors of the Bank. The Bank does not
intend to apply for listing of the Bank Preferred Shares on any national
securities exchange or for quotation of the Bank Preferred Shares through the
National Association of Securities Dealers Automated Quotation System. Absent
the occurrence of an Exchange Event, however, the Bank will not issue any Bank
Preferred Shares, although the Bank will be able to issue First Preferred Shares
in series other than that of the Bank Preferred Shares. There can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred Shares
would develop or be maintained.
Holders of the Series A Preferred Shares cannot exchange the Series A
Preferred Shares for the Bank Preferred Shares voluntarily. In addition, absent
the occurrence of an 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.
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Advisory Agreement
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 lender approved by the National Housing Act (an
"NHA-Approved Lender"). As long as any Series A Preferred Shares and,
accordingly, any Depositary Shares remain outstanding, the Company may not
renew, terminate, or modify the Advisory Agreement without the approval of a
majority of the Board of Directors of the Company (the "Board of Directors") as
well as of a majority of the 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. 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 any of its obligations under the Advisory Agreement. As of the
date of this Form 10-K, the Bank has not subcontracted any of its obligations
under the Advisory Agreement.
The Advisory Agreement had an initial term of one year, and twice has
been 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 or Depositary Shares remain
outstanding, any decision by the Company to renew, terminate or modify the
Advisory Agreement must be approved by a majority of the Board of Directors, as
well as by a majority of the Independent Directors. The Bank is entitled to
receive an advisory fee equal to US$25,000 payable in equal quarterly
installments with respect to the advisory and management services provided by it
to the Company. Payment of such fees is subordinated to payments of dividends on
the Series A Preferred Shares and, accordingly, the Depositary Shares.
Servicing Agreement
The 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.
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 that service mortgage loans of the same
type as the Mortgage Loans, with any servicing guidelines promulgated by the
Company and with relevant government agency guidelines and procedures. The
Servicing Agreement requires the Bank to service Mortgage Loans solely with a
view toward the interests of the Company and without regard to the interests of
the Bank or any of its other affiliates (including NB Finance). The Bank
collects and remits principal and interest payments, administers mortgage escrow
accounts, submits and pursues mortgage insurance claims and supervises
foreclosure proceedings on any Mortgage Loans it services. The Bank also
provides accounting and reporting services with respect to such Mortgage Loans.
The Servicing Agreement requires the Bank to follow such collection procedures
as are customary in normal mortgage servicing practices of prudent mortgage
lending institutions that 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. As of the date of this
Form 10-K, the Bank has not subcontracted any of 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
<PAGE>
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 canceled 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. The termination fee will be based on the aggregate
outstanding principal amount of the Mortgage Loans then serviced under the
Servicing Agreement.
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.
Investment Policy
The Company's principal business objective is to acquire, hold, finance
and manage Mortgage Assets as well as certain other qualifying REIT assets. The
Company's current investment policy is to invest at least 85% of its portfolio
in Mortgage Assets issued by NB Finance and the remainder in any other assets
eligible to be held by a REIT. Such other assets include Mortgage Loans,
residential mortgage loans, mortgage-backed securities, commercial mortgage
loans, partnership interests, cash, cash equivalents, government securities and
shares or interests in other REITs. As of December 31, 1999, Mortgage Assets
issued by NB Finance comprised 83.5% of the Company's portfolio.
The Company expects to continue to follow the foregoing investment
policy. However, this policy may be amended or revised from time to time at the
discretion of the Board of Directors (in certain circumstances subject to the
approval of a majority of the Independent Directors) without a vote of the
Company's stockholders. Subject to the foregoing and other than with respect to
commercial mortgage loans that cannot comprise more than 5% of the Company's
portfolio, there is no specific policy with respect to the amount or percentage
of assets that will be invested in any specific property. All investments will
be made primarily for income.
Description of the Mortgage Assets
The Mortgage Assets issued by NB Finance are comprised of twenty-two
hypothecation loans issued by NB Finance to the Company. As of December 31,
1999, the principal amount of the Mortgage Assets was approximately US$404
million. Each of the twenty-two hypothecation loans comprising the Mortgage
Assets issued by NB Finance is secured by a pool of Mortgage Loans. As of
December 31, 1999, the Mortgage Loans were comprised of, in the aggregate,
11,168 Mortgage Loans in an aggregate amount of approximately C$720 million
(US$499 million). The value of each pool of Mortgage Loans comprising the
Mortgage Loans exceeds the principal
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amount of the hypothecation loan that it secures. Accordingly, the Mortgage
Assets issued by NB Finance are overcollateralized by the Mortgage Loans. The
aggregate amount of such overcollateralization is, as of December 31, 1999,
US$95 million. The Company acquired the Mortgage Assets issued by NB Finance
pursuant to the terms of a loan agreement with NB Finance.
Each Mortgage Asset issued by NB Finance is recourse only to the
Mortgage Loans securing such Mortgage Asset. Each pool of Mortgage Loans is
comprised of entirely CMHC-insured residential first mortgages. Each Mortgage
Asset issued by NB Finance is further secured by the residential real properties
underlying such CMHC-insured first mortgages. Such residential real properties
are located primarily in Quebec, Ontario and New Brunswick. Since the Mortgage
Loans are insured, the Company expects little or no loss of principal or
interest. However, CMHC insurance does not guarantee timely payment of interest
and principal. The Mortgage Assets have maturities ranging from January 2000 to
December 2003. The Mortgage Assets pay interest at rates ranging from 6.90% to
9.77%, with an average rate of approximately 8.37% per annum.
Payments of interest are made monthly out of payments on the 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 Mortgage Loans, retains a portion of
any such payments equal to the amount due and payable on the Mortgage Assets
issued by NB Finance and remits the balance, if any, to NB Finance. The Company
also retains a portion of any prepayments of principal in respect of the
Mortgage Loans equal to the proportion of such prepayments that the outstanding
principal amount of the Mortgage Loan bears to the outstanding principal amount
of the Mortgage Assets issued by NB Finance, which amount would be applied to
reduce the outstanding principal amount of the Mortgage Assets issued by NB
Finance. Repayment of the Mortgage Assets issued by NB Finance is secured by an
assignment of the Mortgage Loans to the Company pursuant to the Mortgage Loan
Assignment Agreement, which is governed by the laws of Bermuda.
The assignment of the Mortgage Loans by NB Finance to the Company is
without recourse. The Company has a security interest in the real property
securing the Mortgage Loans and, subject to fulfilling certain procedural
requirements under applicable Canadian law, is entitled to enforce payment on
the 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 a Mortgage Loan, the
amount of the Mortgage Assets issued by NB Finance will be reduced by an amount
equal to the portion thereof allocable to the defaulting mortgage.
Following repayment of the Mortgage Assets issued by NB Finance, the
Company will reassign any outstanding Mortgage Loans (without recourse) and
deliver them to, or as directed by, NB Finance. All payments in respect of the
Mortgage Loans are made in Canadian dollars. The amounts due on the Mortgage
Assets issued by NB Finance are retained by the Company free and clear of and
without withholding or deduction for or on account of any present or future
taxes imposed by or on behalf of Bermuda or any political subdivision thereof or
therein.
Description of the Mortgage Loans
All of the Mortgage Loans were originated in accordance with
underwriting policies customarily employed by the Bank, or with underwriting
policies acceptable to the Bank. With respect to its underwriting policies, the
Bank will not make any residential mortgage loans that exceed a loan to value
ratio of 75% unless such loan is insured. If the residential mortgage loan is
CMHC-insured (i) a cash down payment of between 5% and 24.9% is required, (ii)
the monthly payment for capital, interest, taxes and heating must not exceed 32%
of the gross monthly revenue of the borrower and (iii) the monthly payment for
capital, interest, taxes, heating and all other monthly payments (including,
without limitation, personal loans, lease payments and credit card debt service)
must not exceed 40% of the net monthly revenue of the borrower. Additionally,
for all mortgage loans, an external credit check must be positive. When a loan
is insured, an additional amount may be added to the principal amount of the
mortgage loan representing the premium related thereto. The premium rates vary
in accordance with the principal amount of the loan. Generally, the greater the
loan to value ratio, the greater the premium rate. As is generally the case in
the Canadian residential mortgage business, such underwriting policies are
derived from CMHC - approved underwriting criteria.
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As a CMHC - approved lender, the Bank has access to the National
Housing Act mortgage insurance program. All of the 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 Mortgage Loans are balloon mortgages. Accordingly, the
Mortgage Loans do not provide for the amortization of the principal balance
thereof equally over their term to maturity and a principal payment equal to the
original balance less any principal amount paid will be due on each Mortgage
Loan at maturity. 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 Mortgage Loans are
monthly pay mortgages. In general, loans are amortized over a period not
exceeding 25 years.
The Mortgage Loans provide for limited prepayment rights. For example,
typically up to 10% of the original principal amount of a Mortgage Loan may be
prepaid once annually without penalty. Moreover, a 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 Mortgage
Loan. In most other circumstances, prepayments or renegotiations of either the
interest rate or the term of a 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.
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.
Tax Status
The Company has elected to be taxable as a REIT under Sections 856
through 860 of the Code. As a REIT, the Company generally will not be liable for
United States federal income tax to the extent that it distributes its income to
the holders of its Common Stock and its preferred stock, including the Series A
Preferred Shares and, accordingly, Depositary Shares, and maintains its
qualification as a REIT.
As a REIT, the Company is subject to a number of organizational and
operational requirements, including a requirement that it currently distribute
to stockholders at least 95% of its "REIT taxable income. " REIT taxable income
is essentially taxable income, as determined in accordance with the Code, with
certain adjustments. The most significant of such adjustments are (i) no
deduction is allowed for dividends received, (ii) a deduction is allowed for
dividends paid (other than the portion of any dividend attributable to net
income from foreclosure property) and for taxes imposed for failing to satisfy
certain statutory REIT requirements, and (iii) net income from foreclosure
property and net income derived from prohibited transactions is excluded from
the determination.
Employees
The Company has six employees. The Company does not anticipate that it
will require any additional employees because the Company retains the Bank to
perform certain functions pursuant to the Advisory Agreement. Each employee of
the Company is currently also an officer and/or director of the Bank and/or an
affiliate 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
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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, 1999, the Bank held more than C$13 billion of
residential mortgage assets. Slightly more than 75% of such mortgages were
located in Quebec, the Bank's principal place of business. The major competitor
of the Bank in Quebec is the Caisses Populaires Desjardins (a credit union). The
market share of the Bank for such mortgages in Quebec is approximately 18.4%
compared with a significantly greater market share for Caisses Populaires
Desjardins.
ITEM 2: PROPERTIES
General
The principal executive offices of the Company are located in the U.S.
branch office of the Bank at 125 West 55th Street, New York, New York 10019. The
Company neither owns nor leases any properties.
ITEM 3: LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. The Company
is not currently involved in nor, to the Company's knowledge, currently
threatened with any material litigation with respect to the Mortgage Assets
issued by NB Finance or the Mortgage Loans other than routine litigation arising
in the ordinary course of business, most of which is expected to be covered by
liability insurance.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since the incorporation of the Company, the Bank has owned, and the
Bank expects to continue to own, all of the issued and outstanding shares of the
Common Stock of the Company. The Common Stock is the Company's only class of
common equity issued and outstanding. Accordingly, there is no established
public trading market for the Company's common equity.
For the year ended December 31, 1998, the Company paid three dividends
with respect to the Common Stock in the aggregate amount of $9,702,093. For the
year ended December 31,1999, the company paid one dividend with respect to the
Common Stock in an amount of $9,075,000.
On January 19, 1998, the Company sold 110 shares of its Adjustable Rate
Cumulative Senior Preferred Shares, par value $.01 per share (the "Senior
Preferred Shares") in a nonpublic offering. The Senior Preferred Shares are not
and were not required to be registered under the Securities Act of 1933, as
amended (the "Securities Act"). The offering of the Senior Preferred Shares was
not underwritten. The Senior Preferred Shares were offered to (a) accredited
investors (as defined in Rule 501(a) of Regulation D under the Securities Act)
in reliance on an exemption from registration pursuant to Section 4(2) of the
Securities Act relating to transactions not involving a public offering and (b)
certain directors and officers of the Company and its affiliates who reside in
Canada and who were able to make certain representations and warranties.
Investors were required to complete an Investor Questionnaire to verify their
status as (a) an accredited investor or (b) a resident of Canada in the
provinces of Quebec or Ontario. The Senior Preferred Shares are not convertible
or exchangeable. The Senior Preferred Shares were offered and sold for $3,000
each or $330,000 in the aggregate and the proceeds were used to meet the working
capital needs of the Company.
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended Year Ended September 3, 1997
December 31, 1999 December 31, 1998 to
December 31,
1997
<S> <C> <C> <C>
Statement of Income Data:
Operating Revenues................................ US$ 37,426,460 US$ 38,802,112 US$ 12,993,939
Income from Operations Before Income Taxes........ 35,915,518 36,728,402 11,993,093
Income Taxes (Recovery)........................... - (675) 80,000
------------------ -------------------- ------------------
Income from Operations............................ 35,915,518 36,729,077 11,913,093
Income from Operations per Common Share........... 359,155 367,291 119,131
Balance Sheet Data:
Total assets...................................... US$ 484,025,426 US$ 482,746,016 US$ 481,022,332
Total liabilities................................. 3,355,007 837,634 885,857
Stockholders' Equity.............................. 480,670,419 481,908,382 480,136,475
Cash Dividends Declared per Common Share.......... 120,750 102,020 -
</TABLE>
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
General
The Company's principal business objective is to acquire, hold, finance
and manage Mortgage Assets as well as other qualifying REIT assets. The Company
has elected to be taxed as a REIT under the Code and, accordingly, is generally
not liable for United States federal income tax to the extent that it
distributes at least 95% of its taxable income, subject to certain adjustments,
to its stockholders.
Results of Operations
Income from continuing operations for the year ended December 31, 1999
decreased by $1,375,652 or 3.5% over the prior year ended December 31, 1998 and
increased by $24,432,521 or 188% over the prior period ended December 31,1997.
Operating revenues for the year ended December 31, 1999, the year ended December
31,1998 and the period ended December 31,1997, which were comprised entirely of
interest income, were $37,426,460, $38,802,112 and $12,993,939, respectively.
Because the Company has elected to be taxed as a REIT, no income tax was
recorded during the year except for non-resident income taxes withheld.
Ninety-four percent of revenues were derived from the Mortgage Assets
issued by NB Finance. The Mortgage Assets issued by NB Finance are
collateralized by the Mortgage Loans that consist of twenty two pools of
residential first mortgages insured by CMHC and that are secured by real
property located in Canada. The balance of the revenues resulted from interest
on bank deposits and short-term investments (i.e., commercial paper of National
Bank of Canada and U.S. Treasury bills).
Expenses for the year ended December 31, 1999, the year ended December
31, 1998 and the period ended December 31,1997 totaled $1,510,942, $2,073,710
and $1,000,846, respectively, of which $1,276,740, $1,293,533 and $548,297,
respectively, represent servicing and advisory fees paid to the Bank pursuant to
the Servicing Agreement and the Advisory Agreement. Pursuant to those
agreements, the Bank performs all necessary operations in connection with
administering the Mortgage Assets issued by NB Finance and the Mortgage Loans.
Other professional fees include payment to the transfer agent, external
accounting fees and miscellaneous expenses.
During the year ended December 31, 1999, the Board of Directors of the
Company authorized dividends of, in the aggregate, $25,078,481 on Preferred
Stock (i.e., Senior Preferred Shares and the Series A Preferred Shares and,
accordingly, the Depositary Shares) and a dividend of $12,075,000 on Common
Stock.
Capital Resources and Liquidity
The Company's revenues are derived from its Mortgage Assets. As of
December 31, 1999, US$404 million of Mortgage Assets issued by NB Finance were
over-collateralized by the C$720 million (US$499 million) of Mortgage Loans. The
Company believes that the amounts generated from the payment of interest and
principal on such Mortgage Loans will provide more than sufficient funds to make
full payments with respect to the Mortgage Assets issued by NB Finance and that
such payments will provide the Company with sufficient funds to meet its
operating expenses and to pay quarterly dividends on the Senior Preferred Shares
and the Series A Preferred Shares and, accordingly, the Depositary Shares. To
the extent that the cash flow from its Mortgage Assets exceeds those amounts,
the Company will use the excess to fund the acquisition of additional Mortgage
Assets and make distributions on the Common Stock.
The Company does not require any capital resources for its operations
and, therefore, it does not expect to acquire any capital assets in the
foreseeable future.
As at December 31, 1999, the Company had cash resources of $58,048,336,
which represent 12.0% of total assets compared to $22,178,668 or 4.6% of total
assets as at December 31, 1998 and $20,003,943
<PAGE>
which represent 4.2% of total assets as at December 31,1997. The increase in
liquidity is attributable to cash received in repayment of Mortgage Assets. It
is expected that the Company will invest in additional Mortgage Assets when cash
resources reach 15% of total assets. The liquidity level is sufficient for the
Company to pay fees and expenses pursuant to the Servicing Agreement and the
Advisory Agreement.
The Company's principal short-term and long-term liquidity needs are to
pay quarterly dividends on the Senior Preferred Shares and the Series A
Preferred Shares and, accordingly, the Depositary 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.
Year 2000
The Company does not independently maintain either information
technology or non-information technology systems. Accordingly, the Company does
not believe that it has or will have a material Year 2000 issue.
The Bank began studying the issue associated with the changeover to the
year 2000 in 1996 when it set up a task force - the National Bank 2000 team.
This group of experts was given the mandate to mobilize the necessary resources
to analyze information technology systems, identify and correct problems, as
well as ensure the continuity of operations and customer service. An operating
budget of $43 million was allocated to the National Bank 2000 team for 1997
through to 2000. As at October 31,1999, 85% of this budget had been spent. The
National Bank 2000 team continues to carry out its mandate, set to end in the
middle of fiscal year 2000.
In the opinion of management, the Bank ensured that the necessary
preparations were carried out so that its systems functioned normally during the
changeover to the year 2000. The Bank has not experienced any problems with
customer accounts, financial data or any of its technology systems. Accordingly,
the Bank's ability to administer, performance and service the Mortgage Loans for
the Company was not interrupted. Similarly, the Company did not experience any
problems with other party service providers.
The Company, through the National Bank 2000 team, will continue to
monitor its systems for any unanticipated issues that may not yet have
manifested until the middle of fiscal year 2000.
Disclosure About Market Risk
Any market risk to which the Company would be exposed would result from
fluctuations in (a) interest rates and (b) currency exchange rates affecting the
interest payments received by the Company in respect of the Mortgage Assets
issued by NB Finance. Since the Mortgage Assets are significantly
overcollateralized by the Mortgage Loans, interest rate fluctuations should not
present significant market risk. The Company expects that the interest and
principal generated by the Mortgage Loans should enable full payment by NB
Finance of all of its obligations as they come due. Since the Mortgage Loans are
guaranteed by a fixed ratio of exchange predetermined on the date of purchase
and applicable until the maturity of the Mortgage Loans pursuant to the Mortgage
Loan Assignment Agreement, fluctuations in currency exchange rates should not
present significant market risk.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are contained on pages F-1 through F-9 of this
Form 10-K.
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors and Executive Officers
The Board of Directors of the Company consists of the individuals set
forth below. Mr. Belzile and Mr. Michel are Independent Directors. The Company
currently has six employees and does not anticipate that it will require
additional employees.
As of December 31, 1999, the persons who are directors and executive
officers of the Company are as follows:
Name Age Position and Offices Held Director Since
---- --- ------------------------- --------------
Andre Belzile 38 Director 1999
Alain Michel 50 Director 1997
Frank de Vries 44 Director; Chairman of the Board;
Chief Executive Officer;
President 1999
Thomas Doss 53 Director; Chief Financial
Officer; Treasurer 1998
Pierrette Lacroix 51 Director; Vice President 1998
James J. Hanks, Jr. (Secretary), Violaine Des Roches (Assistant
Secretary) and Jean Dagenais (Vice President) are the only other employees of
the Company. The following is a summary of the experience of the executive
officers and current directors of the Company.
Mr. Belzile has been Vice-president and Chief Financial Officer of
Cascades Inc since 1992. Prior to that, he was Corporate Director of Finances of
Cascades Inc from 1990. Prior to that, he worked as an external auditor for the
accounting firm of Coopers & Lybrand from 1984 to 1986. Mr. Belzile is a member
of the Board of Directors of Cascades Inc.
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 of Finance and Treasurer of Videotron beginning in July 1992.
Mr.Michel is a member of the Board of Directors of Group Goyette Inc., a public
transportation company. He is Vice-Chairman of the Board of Optel Inc.
Ms. Pierrette Lacroix joined the Montreal Head Office of National Bank
of Canada in 1975. As senior officer, she has been involved in various functions
related to the Treasury area of the Bank and has, over the years, participated
in several task forces within the Bank. She came to the United States in May
1993 to assume the position of Senior Vice President and Treasurer of the USA
Division. As such, she is responsible for the management of all Treasury-related
activities for the USA, including asset/liability management. She is also a
member of the USA Division's Management Committee.
<PAGE>
Mr. Doss joined the Bank in 1981 and 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.
Mr. De Vries has been Senior Vice President, United States, of the Bank
since September 1999. He joined the Bank in 1986 and previously occupied the
positions of Manager Real Estate (1986-1987), Senior Manager North American
Corporate Banking and Real Estate Banking (1987-1989), Senior Manager Credit
Banking (1989-1992), Vice-President Special Loan Group Ontario, Western Canada,
USA and Real Estate Banking, Senior Vice-President and General Manager United
States (1998-1999). He is also a member of the Board of Directors of several of
the Bank 's subsidiaries.
The Company pays the Independent Directors fees for their services. 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. The Company also pays the directors who comprise the audit committee
a fee for their additional services. The audit committee is comprised of the
Independent Directors. Each Independent Director receives annual compensation of
$1,500 per year plus a fee of $750 for attendance (in person or by telephone) at
each meeting of the audit committee. Additionally, Mr. Michel receives annual
compensation of $1,000 for acting as President of the audit committee.
The Company does not pay any compensation to its officers or employees
or to directors who are not Independent Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Mr. Belzile and Mr. De Vries failed to file a timely Initial Statement
of Beneficial Ownership of Securities on Form 3 ("Form 3"). Both of the
foregoing filed a delinquent Form 3 on a timely filed Annual Statement of
Beneficial Ownership of Securities on Form 5. Both of the foregoing were
required to file a Form 3 solely as a result of holding a directorship in the
Company. Neither of the foregoing owned at any time or currently owns any
securities of the Company. No other reports were delinquent.
ITEM 11: EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term
-------------------
Compensation
Awards
------
Name and Principal Position Year Salary Bonus Other Securities All Other
--------------------------- ------- ------------ --------- -----
Annual Underlying Compensation
------ --------------
Compensation SARs(#)
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Frank De Vries, CEO(1), (3) 1999 $185,000 $98,200(4) $ 9,897(5) 20,700 -
Harvey Brooks, CEO(2), (3) 1999 $124,137 $63,404 $63,987(6) - -
</TABLE>
- --------------------------
(1) Mr. De Vries was appointed CEO of the Company in September 1999.
(2) Mr. Brooks was appointed CEO of the Company in December 1998 and held such
office until replaced by Mr. De Vries in September 1999.
(3) Compensation disclosed in this table for Mr. De Vries and Mr. Brooks was
paid in consideration for all of Mr. De Vries' and Mr. Brooks' respective
services to the Bank and its subsidiaries. Only a portion of such
compensation is attributable to their respective services to the Company,
which portion was charged back to the Company by the Bank pursuant to the
terms of the Advisory Agreement. No executive officer of the Company was
paid more than US$100,000 of compensation for the fiscal year ended
December 31,
<PAGE>
1999 that would be attributable to services performed for the Company and
its subsidiaries and thus are not included in this table.
(4) Bonus granted in December 1999. (Paid in January 2000)
(5) Represents the imputed income related to allowances for auto, parking and
education.
(6) Represents allowances for car, housing and a special allowance for tax that
was paid as a result of the housing accomodations.
SAR Grants in Last Fiscal Year
The following table provides information about stock appreciation
rights ("SARs") awarded to Harvey Brooks and Frank De Vries during the fiscal
year ended December 31, 1999:
SAR Grants in the Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants(1)
-------------------- Potential
Number of % of Total Realizable Value at
Securities SARs Assumed Annual
Underlying Granted Rates of Stock Price
SARs to Appreciation
Granted Employees Base for SAR Term(2)
in Fiscal Price Expiration ------------------------
Name (#) Year (C$/Sh) Date 5% (C$) 10% (C$)
- ---- ------------- ------------ ---------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Harvey Brooks - - - - - -
Frank De Vries 20,700 1.1% $17.35 Dec. 31, 17,957 35,915
2009
</TABLE>
- ------------------
(1)The SARs granted to Harvey Brooks and Frank De Vries vest in four equal
annual installments commencing on the first anniversary of their date of
grant.
(2)Potential gains on SARs are net of base price, but before taxes associated
with exercise.
Pension Plan Table
<TABLE>
<CAPTION>
Canadian Dollars Years of Service
Remuneration
15 20 25 30 35
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
C$100,000 C$26,382 C$34,993 C$43,605 C$52,407 C$61,382
125,000 32,299 40,910 49,521 58,323 67,298
150,000 38,216 46,827 55,438 64,240 73,215
175,000 44,132 52,743 61,355 70,157 79,132
200,000 50,049 58,660 67,271 76,073 85,048
225,000 55,966 64,577 73,188 81,990 90,965
250,000 61,882 70,493 79,105 87,907 96,882
300,000 61,882 70,493 79,105 87,907 96,882
</TABLE>
<PAGE>
The above table illustrates the estimated annual retirement benefit
payable on a straight line annuity basis to participating employees at normal
retirement age (generally age 60), in the earnings and years of service
classifications indicated, under the defined benefit pension plan sponsored by
the Bank (the "Bank Pension Plan") and an excess benefit plan which covers
certain employees of the Bank and its subsidiaries. For each year of service
credited to a participant in the Bank Pension Plan, a participant will be
entitled to 2% of his or her annual eligible earnings, less the amount earned
under the Canada or Quebec pension plans while participating in the Bank Pension
Plan. Annual eligible earnings is defined as a participant's average earnings
for such participant's 60 highest-paid consecutive months, based on salary and
25% of bonus.
In addition to the Bank Pension Plan, certain employees of the Bank and
its subsidiaries, including those of the Company, may also participate in an
excess benefit plan for participants in the Bank Pension Plan whose benefits are
reduced pursuant to limitations on pensions imposed by the Income Tax Act
(Canada). Employees covered by the excess benefit plan receive a benefit equal
to the amount of benefit disallowed under the Pension Plan due to such
limitations.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Common Stock is the only voting security of the Company issued and
outstanding. As of December 31, 1999, 100 shares of Common Stock were issued and
outstanding and 100% were beneficially owned directly by the Bank. The Bank's
address is National Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec,
H3B 4L2. No officer or director beneficially owns more than five percent of any
class of the Company's securities.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank administers the day-to-day operations of the Company pursuant
to the Advisory Agreement. See "Business-Advisory Agreement." The Bank also
services the Mortgage Loans pursuant to the Servicing Agreement. See "Business-
Servicing Agreement."
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The report of independent auditors and financial statements
appearing in Item 8.
(2) The Company is not filing separately financial statement
schedules because of the absence of conditions under which they
are required or because the required information is included in
the financial statements or the notes thereto.
(3) The exhibits required by this item are listed in the Exhibit
Index which appears elsewhere in this Form 10-K and is
incorporated herein by reference. The Company is not a party to
any management contracts or compensation plans or arrangements
required to be filed as exhibits to this Form 10-K.
(b) During the quarter ended December 31, 1999, the Company did not file
any Current Reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st of March,
2000.
NB CAPITAL CORPORATION
(Registrant)
By: /s/ Frank De Vries
-------------------------------------
Frank De Vries
Chief Executive Officer, President
(Principal Executive Officer)
By: /s/ Thomas Doss
-------------------------------------
Thomas Doss
Chief Financial Officer, Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 31st day of March, 2000.
By: /s/ Alain Michel
-------------------------------------
Alain Michel
Director
By: /s/ Andre Belzile
-------------------------------------
Andre Belzile
Director
By: /s/ Pierrette Lacroix
-------------------------------------
Pierrette Lacroix
Director
By: /s/ Frank De Vries
-------------------------------------
Frank De Vries
Director
By: /s/ Thomas Doss
-------------------------------------
Thomas Doss
Director
<PAGE>
NB CAPITAL CORPORATION
Financial statements as of December 31, 1999, 1998, and 1997
and
Independent Auditors' Report
<PAGE>
NB CAPITAL CORPORATION
Table of contents
================================================================================
Independent Auditors' Report..................................................F1
Balance sheets................................................................F2
Statements of income..........................................................F3
Statements of stockholders' equity............................................F4
Statements of cash flows......................................................F5
Notes to the financial statements..........................................F6-F9
<PAGE>
Deloitte &
Touche
[GRAPHIC OMITTED]
- ----------------- --------------------------------------------------
Deloitte & Touche, LLP
Chartered Accountants
1 Place Ville-Marie Telephone: (514) 393-7115
Suite 3000 Facsimile: (514) 390-4111
Montreal QC H3B 4T9
Independent Auditors' Report
To the Board of Directors and Stockholders of
NB Capital Corporation
We have audited the accompanying balance sheets of NB Capital Corporation as of
December 31, 1999 and 1998 and the related statements of income, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1999 and for the period from August 20, 1997 (date of incorporation) to December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
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 audits provide a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and 1998
and the results of its operations and its cash flows for the two years in the
period ended December 31, 1999 and for the period from August 20, 1997 (date of
incorporation) to December 31, 1997, in conformity with generally accepted
accounting principles in the United States of America.
/s/ Deloitte & Touche LLP
Chartered Accountants
Montreal, Canada
January 27, 2000
- ---------------
Deloitte Touche
Tahmatsu
<PAGE>
NB CAPITAL CORPORATION
<TABLE>
<CAPTION>
Balance sheets
as of December 31, 1999 and 1998
(in U.S. dollars)
- -------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
$ $
<S> <C> <C>
Assets
Cash and cash equivalents 58,048,336 22,178,668
Due from an affiliated company 22,056,729 8,667,391
Promissory notes 403,846,210 451,899,957
Accrued interest on cash equivalents 74,151 -
- -------------------------------------------------------------------------------------------------------------------
484,025,426 482,746,016
- -------------------------------------------------------------------------------------------------------------------
Liabilities
Due to the parent company 327,807 303,777
Accounts payable 27,200 33,857
Dividend payable 3,000,000 500,000
- -------------------------------------------------------------------------------------------------------------------
3,355,007 837,634
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $0.01 par value per share;
10,000,000 shares authorized,
300,000 Series A shares issued and paid 3,000 3,000
110 Senior preferred shares issued and paid 1 1
Common stock, $0.01 par value per share;
1,000 shares authorized,
100 shares issued and paid 1 1
Additional paid-in capital 476,761,014 476,761,014
Retained earnings 3,906,403 5,144,366
- -------------------------------------------------------------------------------------------------------------------
480,670,419 481,908,382
- -------------------------------------------------------------------------------------------------------------------
484,025,426 482,746,016
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
Page F2 of F9
<PAGE>
NB CAPITAL CORPORATION
<TABLE>
<CAPTION>
Statements of income
years ended December 31, 1999, 1998 and 1997
(in U.S. dollars)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
$ $ $
(12 months) (12 months) (4 months)
<S> <C> <C> <C>
Revenue
Interest income
Short-term investments 2,279,534 741,571 133,403
Promissory notes 34,972,083 36,290,389 12,760,418
Bank interest 174,843 1,770,152 100,118
- -------------------------------------------------------------------------------------------------------------------
37,426,460 38,802,112 12,993,939
- -------------------------------------------------------------------------------------------------------------------
Expenses
Legal 125,490 314,886 226,144
Other professional fees 108,712 465,291 226,405
Servicing fees 1,251,740 1,268,533 539,964
Advisory fees 25,000 25,000 8,333
- -------------------------------------------------------------------------------------------------------------------
1,510,942 2,073,710 1,000,846
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,915,518 36,728,402 11,993,093
(Recovery) income taxes - (675) 80,000
- -------------------------------------------------------------------------------------------------------------------
Net income 35,915,518 36,729,077 11,913,093
Preferred stock dividends 25,078,481 25,084,711 8,211,000
- -------------------------------------------------------------------------------------------------------------------
Income available to common stockholders 10,837,037 11,644,366 3,702,093
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 100 100 100
- -------------------------------------------------------------------------------------------------------------------
Earnings per common share - basic 108,370 116,444 37,021
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
Page F3 of F9
<PAGE>
NB CAPITAL CORPORATION
<TABLE>
<CAPTION>
Statements of stockholders' equity
as of December 31, 1999, 1998 and 1997
(in U.S. dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Senior Additional
Preferred Preferred Common Paid-in Retained
Stock Stock Stock Capital Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity as of
December 31, 1997 3,000 - 1 476,431,381 3,702,093 480,136,475
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of senior preferred stock, net
of issuance costs of $366 - 1 - 329,633 - 329,634
Net income - - - - 36,729,077 36,729,077
Dividends on senior preferred stock and
Series A preferred stock - - - - (25,084,711) (25,084,711)
Dividend on common stock - - - - (10,202,093) (10,202,093)
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity as of
December 31, 1998 3,000 1 1 476,761,014 5,144,366 481,908,382
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 35,915,518 35,915,518
Dividends on senior preferred stock and
Series A preferred stock - - - - (25,078,481) (25,078,481)
Dividend on common stock - - - - (12,075,000) (12,075,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity as of
December 31, 1999 3,000 1 1 476,761,014 3,906,403 480,670,419
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
Page F4 of F9
<PAGE>
NB CAPITAL CORPORATION
<TABLE>
<CAPTION>
Statements of cash flows
years ended December 31, 1999, 1998 and 1997
(in U.S. dollars)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
$ $ $
(12 months) (12 months) (4 months)
<S> <C> <C> <C>
Operating activities
Net income 35,915,518 36,729,077 11,913,093
Items not affecting cash resources
Due from an affiliated company (13,389,338) (4,162,827) (4,504,564)
Due to the parent company 24,030 (244,520) 548,297
Accounts payable and income
taxes payable (6,657) (303,703) 337,560
Accrued interest on cash
equivalents (74,151) - -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,469,402 32,018,027 8,294,386
- -------------------------------------------------------------------------------------------------------------------
Investing activities
Investment in promissory notes (85,989,303) (55,716,724) (476,588,453)
Repayments of promissory notes 134,043,050 60,330,592 20,074,628
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 48,053,747 4,613,868 (456,513,825)
- -------------------------------------------------------------------------------------------------------------------
Financing activities
Issue of senior preferred stock, net of costs - 329,634 -
Issue of common stock - - 183,338,454
Issue of Series A preferred stock, net
of discount and fees - - 293,095,928
Dividends (34,653,481) (34,786,804) (8,211,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (34,653,481) (34,457,170) 468,223,382
- -------------------------------------------------------------------------------------------------------------------
Cash position, beginning of year 22,178,668 20,003,943 -
- -------------------------------------------------------------------------------------------------------------------
Cash position, end of year 58,048,336 22,178,668 20,003,943
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
Page F5 of F9
<PAGE>
NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 1999, 1998 and 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
1. Incorporation and nature of operations
NB Capital Corporation (the "Company") was incorporated in the state of
Maryland on August 20, 1997. The Company's principal business is to
acquire, hold, finance and manage mortgage assets. The Company issued,
through an Offering Circular dated August 22, 1997, $300 million of
preferred stock and simultaneously, National Bank of Canada, the parent
company, made a capital contribution in the amount of $183 million. The
Company used the aggregate net proceeds of $477 million to acquire
promissory notes of NB Finance, Ltd., a wholly-owned subsidiary of
National Bank of Canada.
2. Significant accounting policies
Financial statements
The financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America and are
expressed in U.S. dollars.
Income taxes
The Company has elected to be taxable as a Real Estate Investment Trust
("REIT") under the Internal Revenue Code of 1986, as amended, and
accordingly is generally not liable for United States federal income tax
to the extent that it distributes at least 95% of its taxable income to
its stockholders, maintains its qualification as a REIT and complies
with certain other requirements.
Per share data
Basic earnings per share with respect to the Company for the years ended
December 31, 1999 and 1998 and for the four-month period ended December
31, 1997 are computed based upon the weighted average number of common
shares outstanding during the year.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting year. Actual
results could differ from those estimates.
Page F6 of F9
<PAGE>
NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 1999, 1998 and 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
3. Promissory notes
The Company entered into loan agreements evidenced by promissory notes
with NB Finance, Ltd., an affiliated company. The promissory notes are
collateralized only by mortgage loans which are secured by residential
first mortgages and insured by the Canada Mortgage and Housing
Corporation.
The promissory notes have maturities ranging from January 2000 to
December 2003, at rates ranging from 6.90% to 9.77%, with a weighted
average rate of approximately 8.37% per annum.
These rates approximate market interest rates for loans of similar
credit and maturity provisions and, accordingly, management believes
that the carrying value of the promissory notes receivable approximates
their fair value.
1999 1998
--------------------------------
$ $
Promissory notes, beginning of year 451,899,957 456,513,825
Acquisitions 85,989,303 55,716,724
Principal repayments (134,043,050) (60,330,592)
------------------------------------------------------------------------
Promissory notes, end of year 403,846,210 451,899,957
------------------------------------------------------------------------
The scheduled principal repayments as of December 31, 1999 are as
follows:
$
2000 154,305,893
2001 204,485,467
2002 28,598,917
2003 16,455,933
Page F7 of F9
<PAGE>
NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 1999, 1998 and 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
4. Transactions with an affiliated company
During the year, the Company earned interest from NB Finance, Ltd. on
the promissory notes, in the amount of $34,972,083 ($36,290,389 in 1998
and $12,760,418 in 1997) (see Note 3).
The amounts due from an affiliated company as of December 31, 1999 and
1998 represent interest and principal repayments due on the promissory
notes from NB Finance, Ltd.
5. Transactions with the parent company
In 1997, the Company entered into agreements with National Bank of
Canada in relation to the administration of the Company's operations.
The agreements are as follows:
Advisory agreement
In exchange for a fee equal to $25,000 per year, payable in equal
quarterly instalments, National Bank of Canada will furnish advice and
recommendations with respect to all aspects of the business and affairs
of the Company.
Servicing agreement
National Bank of Canada will service and administer the promissory notes
and the collateralized mortgage loans and will perform all necessary
operations in connection with such servicing and administration.
The fee will equal one-twelfth (1/12) of 0.25% per annum of the
aggregate outstanding balance of the collateralized mortgage loans as of
the last day of each calendar month. The average outstanding balance of
the collateralized mortgage loans securing the promissory notes amounted
to $525,133,159 ($540,268,000 in 1998). During the year, fees of
$1,251,740 ($1,268,533 in 1998 and $539,964 in 1997) were charged to the
Company.
Custodian agreement
National Bank of Canada will hold all documents relating to the
collateralized mortgage loans. During the years ended December 31, 1999,
1998 and for the four-month period ended December 31, 1997, no fee was
charged to the Company.
Page F8 of F9
<PAGE>
NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 1999, 1998 and 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
6. Income taxes
For the four-month period ended December 31, 1997, the Company was
subject to a 4% non-deductible excise tax on undistributed taxable
income amounts.
7. Stockholders' equity
Common stock
The Company is authorized to issue up to 1,000 shares of $0.01 par value
common stock.
Preferred stock
The Company is authorized to issue up to 10,000,000 shares of $0.01 par
value preferred stock as follows:
o 300,000 shares authorized and issued as 8.35% Non-cumulative
Exchangeable Preferred Stock, Series A, non-voting, ranked senior
to the common stock and junior to the Adjustable Rate Cumulative
Senior Preferred Shares, with a liquidation value of $1,000 per
share, redeemable at the Company's option on or after September
3, 2007, except upon the occurrence of certain changes in tax
laws in the United States of America and in Canada, on or after
September 3, 2002.
Each Series A share is exchangeable, upon the occurrence of
certain events, for one newly issued 8.45% Non-cumulative First
Preferred Share, Series Z, of National Bank of Canada.
These Series A shares are traded in the form of Depositary
Shares, each representing a one-fortieth interest therein.
o 1,000 shares authorized and 110 shares issued as Adjustable Rate
Cumulative Senior Preferred Shares, non-voting, ranked senior to
the common stock and to the 8.35% Non-cumulative Exchangeable
Preferred Stock, with a liquidation value of $3,000 per share,
redeemable at the Company's option at any time and retractable at
the holders' option on December 30, 2007 and every ten-year
anniversary thereof.
Page F9 of F9
<PAGE>
INDEX TO EXHIBITS
Page
Exhibit Number Description Number
- -------------- ----------- ------
3.1.1 Articles of Incorporation and Articles of Amendment
and Restatement and Articles Supplementary of NB
Capital Corporation*
3.2.1 Bylaws 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*
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*
10.5 Deed of Sale of Mortgage Loans dated September 3,
1997 between National Bank of Canada and NB Finance,
Ltd.*
10.6 Mortgage Loan Assignment Agreement dated September
3, 1997 among National Bank of Canada, NB Capital
Corporation and NB Finance, Ltd.*
10.7 Promissory Notes representing the sixteen
hypothecation loans executed by NB Finance, Ltd. in
favor of NB Capital Corporation*
10.8 Deposit Agreement among NB Capital Corporation,
National Bank of Canada and The Bank of Nova Scotia
Trust Company of New York, including Form of
Depositary Receipt*
10.9 First Supplemental Servicing Agreement dated
December 4, 1998 between National Bank of Canada and
NB Capital Corporation**
<PAGE>
10.10 Loan Agreement dated as of December 4, 1998 between
NB Finance, Ltd. and NB Capital Corporation**
10.11 Custodial Agreement dated as of December 4, 1998
between NB Capital Corporation and National Bank of
Canada**
10.12 Deed of Sale of Mortgage Loans dated December 4,
1998 between National Bank of Canada and NB Finance,
Ltd.**
10.13(i) Mortgage Loan Assignment Agreement dated as of
December 4, 1998 among NB Finance, Ltd., NB Capital
Corporation and National Bank of Canada**
10.13(ii) Mortgage Loan Assignment Agreement dated as of
December 4, 1998 among NB Finance, Ltd., NB Capital
Corporation and National Bank of Canada**
10.14(i) Promissory Note representing $25,836,597.23 executed
by NB Finance, Ltd. in favor of NB Capital
Corporation**
10.14(ii) Promissory Note representing $29,880,126.51 executed
by NB Finance, Ltd. in favor of NB Capital
Corporation**
27 Financial Data Schedule***
* As previously filed on the Registration Statement on Form S-11 of the
Company (Registration Statement No. 333-47157).
** As previously filed on Form 10-K of the Company for the year ended December
31, 1998.
*** As filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NB CAPITAL
CORPORATION'S 12/31/99 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001049551
<NAME> NB Capital
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> DEC-31-2000
<EXCHANGE-RATE> 1
<CASH> 58,048,336
<SECURITIES> 0
<RECEIVABLES> 425,977,090
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 484,025,426
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 484,025,426
<CURRENT-LIABILITIES> 3,355,007
<BONDS> 0
0
3,001
<COMMON> 1
<OTHER-SE> 480,670,419
<TOTAL-LIABILITY-AND-EQUITY> 484,025,426
<SALES> 0
<TOTAL-REVENUES> 37,426,460
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,510,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 35,915,518
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,915,518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,915,518
<EPS-BASIC> 108,370
<EPS-DILUTED> 108,370
</TABLE>
