As filed with the Securities and Exchange Commission on March 2, 1998
Registration Statement No.333-41009
Registration Statement No. 333-41009-01
Registration Statement No. 333-41009-02
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
-------------------------------
Amendment No. 3 to Form F-9/Amendment No. 4 to Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
<TABLE>
<CAPTION>
Amendment No. 3 to Form F-9 Amendment No. 4 to Form S-4
National Bank of Canada National Bank of Canada NB Capital Corporation NB Finance, Ltd.
<S> <C>
(Exact Name of Registrant as Specified in its Charter) (Exact Name of Registrants as Specified in its Charter)
Canada Canada Maryland Bermuda
(Province or Other Jurisdiction of Incorporation or (Province or Other Jurisdiction of Incorporation or Organization)
Organization)
6021 6021 6798 9999
(Primary Standard Industrial Classification Code Number) (Primary Standard Industrial Classification Code Number)
Not Applicable Not Applicable 52-2063921 Not Applicable
(I.R.S. Employer Identification No. if Applicable) (I.R.S. Employer Identification No. if Applicable)
National Bank Tower National Bank Tower 125 West 55th Street Clarendon House
600 de La Gauchetiere Street West 600 de La Gauchetiere New York, New York 2 Church Street
Montreal, Quebec, Canada H3B 4L2 (212) Street West 10019 Hamilton HM11
(514) 394-6080 Montreal, Quebec, Canada (212) 632-8500 Bermuda
H3B 4L2 None
(514) 394-6080
</TABLE>
(Address, including postal code and telephone number, including area
code, of Registrant's principal executive offices)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NB Capital Corporation National Bank of Canada NB Capital Corporation NB Finance, Ltd.
Francois Bourassa Francois Bourassa Francois Bourassa Francois Bourassa
Vice-President Legal and Secretary Vice-President Legal and 125 West 55th Street Vice-President Legal and
125 West 55th Street Secretary New York, New York Secretary
New York, New York 10019 125 West 55th Street 10019 125 West 55th Street
(212) 632-8693 New York, New York (212) 632-8693 New York, New York
10019 10019
(212) 632-8693 (212) 632-8693
</TABLE>
(Address, including postal code and telephone number, including area
code, of Registrant's agent for service)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
<PAGE>
<TABLE>
<CAPTION>
Amendment No. 3 to Amendment No. 4 to
Form F-9 Form S-4
<S> <C>
(Principal jurisdiction regulating this Form F-9 offering If the securities being registered on this Form are
if applicable) being offered in connection with the formation of a
It is proposed that this filing shall holding company and there is compliance with General
become effective (check appropriate box): Instruction G, check the following box. |_|
A. |_| upon filing with the Commission, If this Form is filed to register additional securities
pursuant to Rule 467(a) (if in connection with an for an offering pursuant to Rule 462(b) under the
offering being made contemporaneously in the Securities Act, check the following box and list the
United States and Canada). Securities Act registration statement number of the earlier
B. |x| at some future date (check the appropriate box effective registration statement for the same offering. |_|
below)
1.|_| pursuant to Rule 467(a) on ( ) at ( ) If this Form is a post-effective amendment filed
(designate a time not sooner than 7 calendar days pursuant to Rule 462(d) under the Securities Act, check
after filing). the following box and list the Securities Act registration
2.|_| pursuant to Rule 467(b) on ( ) at ( ) statement number on the earlier effective registration
(designate a time 7 calendar days or sooner after statement for the same offering. |_|
filing) because the securities regulatory authority
in the review jurisdiction has issued a receipt or
notification of clearance on ( ).
3.|x| pursuant to Rule 467(b) as soon as practicable
after notification of the Commission by the
Registrant or the Canadian securities regulatory
authority of the review jurisdiction that a
receipt or notification of clearance has been
issued with respect hereto.
4.|_| after the filing of the next amendment to this
Form (if preliminary material is being filed).
If any of the securities being registered on this
Form are to be offered on a delayed or continuous basis
pursuant to the home jurisdiction's shelf prospectus
offering procedures, check the following box. |_|
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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.$238,400,000 U.S.$1,000 U.S.$238,400,000 N/A (1)
Exchangeable Preferred
Stock, Series A
8.45% Noncumulative U.S.$300,000,000 U.S.$1,000 U.S.$300,000,000 N/A (1)
First Preferred Shares,
Series Z
</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 300,000 shares of
its 8.35% Noncumulative Exchangeable Preferred Stock, Series A ("Preferred
Shares"). Pursuant to Amendment No. 3 to Form S-4/Amendment No. 2 to Form
F-9 filed with the Securities and Exchange Commission on February 17, 1998,
the number of Preferred Shares registered hereunder was reduced to 238,400
(i.e., a reduction of 61,600 Preferred Shares). The 61,600 Preferred Shares
are being registered pursuant to a Registration Statement to Form S-11/Form
F-9 that has been separately filed on the date hereof.
Each share of 8.35% Noncumulative Exchangeable Preferred Stock, Series A,
is convertible into one 8.45% Noncumulative First Preferred Share, Series
Z, of National Bank of Canada. Accordingly, pursuant to Rule 457(i) under
the Securities Act, no registration fee is due with respect to the
registration of the 8.45% Noncumulative First Preferred Shares, Series Z of
National Bank of Canada.
* The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registration Statement
shall become effective as provided in Rule 467 under the Securities Act of 1933
or on such date as the Commission, acting pursuant to Section 8(a) of the Act,
may determine.
** The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until this Registration
Statement shall become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
================================================================================
* Solely with respect to Amendment No. 3 to Form F-9. ** Solely with respect to
Amendment No. 4 to Form S-4.
================================================================================
iii
<PAGE>
EXPLANATORY NOTE
On November 25, 1997, NB Capital Corporation (the "Company")
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-4 (the "Form S-4") pertaining to the
registration of 300,000 shares of its 8.35% Noncumulative Exchangeable Preferred
Stock, Series A (the "New Preferred Shares"). As indicated therein and herein,
the New Preferred Shares will be offered in exchange (the "Exchange Offer") for
up to 300,000 shares of its 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, currently outstanding (the "Old Preferred Shares" and together with
the New Preferred Shares, the "Preferred Shares"). The New Preferred Shares are
identical in all respects to the Old Preferred, except that (i) the New
Preferred Shares will be registered under the Securities Act, and therefore,
will not bear legends restricting their transfer and (ii) holders of New
Preferred Shares will not be entitled to registration rights available to
holders of Old Preferred Shares under the Registration Rights Agreement, dated
September 3, 1997, among the Company, the National Bank of Canada, the direct
parent of the Company (the "Bank") and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Initial Purchaser"), which rights with respect to the Old
Preferred Shares will terminate upon consummation of the Exchange Offer.
As more fully described in the Form S-4 and herein, upon the
occurrence of certain events, including events related to the Bank's financial
condition (each, an "Exchange Event"), each Preferred Share will be
automatically exchanged for one newly issued 8.45% Noncumulative First Preferred
Share, Series Z (the "Bank Preferred Shares") of the Bank. The Bank Preferred
Shares were registered in Canada pursuant to a short-form prospectus filed by
the Bank with the Quebec Securities Commission on December 4, 1997. On December
11, 1997, the Quebec Securities Commission approved the registration of the Bank
Preferred Shares. On December 19, 1997, the Company and the Bank, pursuant to
the multi-jurisdictional disclosure system, filed Amendment No. 1 to
Registration Statement on Form S-4/Registration Statement on Form F-9
("Amendment No.1 to Form S-4/Form F-9") in order to register the Bank Preferred
Shares in the United States. The Bank and the Company intend for the
registration of the New Preferred Shares and the Bank Preferred Shares to become
effective at approximately the same time. Accordingly, the Bank will delay
filing the notice of effectiveness issued by the Quebec Securities Commission
until such time as the Commission indicates that the registration of the New
Preferred Shares will be declared effective.
On January 27, 1998, the Bank and the Company filed with the
Commission Amendment No. 2 to Registration Statement on Form S-4/Amendment No. 1
to Registration Statement on Form F-9/Registration Statement on Form S-1
("Amendment No. 2 to Form S-4/Amendment No. 1 to Form F-9/Form S-1") to (i)
respond to the comment letter (the "First Comment Letter") received by the Bank
and the Company from the staff of the Commission (the "Staff") with respect to
Amendment No. 1 to Form S-4/Form F-9 and (ii) permit the resale of 61,600 Old
Preferred Shares currently held by the Initial Purchaser as an unsold allotment.
On February 17, 1998, the Bank and the Company filed with the
Commission (i) Amendment No. 3 to Registration Statement on Form S-4/Amendment
No.2 to Form F-9 ("Amendment No. 3 to Form S- 4/Amendment No.2 to Form F-9") and
(ii) Registration Statement on Form S-1/Registration Statement on Form F-9
("Form S-1/Form F-9") to respond to a second comment letter received from the
Staff on February 10, 1998 with respect to Amendment No. 2 to Form S-4/Amendment
No. 1 to Form F-9/Form S-1.
On February 26, 1998, the Bank and the Company received from
the Staff a third comment letter (the "Third Comment Letter") with respect to
(i) Amendment No. 3 to Form S-4/Amendment No. 2 to Form F-9 and (ii) Form
S-1/Form F-9. Accordingly, the Bank, the Company and NB Finance, Ltd. are filing
this Amendment No. 4 to Registration Statement on Form S-4/Amendment No. 3 to
Registration Statement on Form F-9 and separately filing a Registration
Statement on Form S-11/Registration Statement on Form F-9 to respond to the
Third Comment Letter.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH __, 1998
PRELIMINARY PROSPECTUS
National Bank of Canada
NB Capital Corporation
NB Finance, Ltd.
Offer to Exchange
8.35% Noncumulative Exchangeable Preferred Stock, Series A, of NB Capital
Corporation for up to 238,400 shares of
8.35% Noncumulative Exchangeable Preferred Stock, Series A, of NB Capital
Corporation
NB Capital Corporation (the "Company"), a wholly owned
subsidiary of National Bank of Canada (the "Bank"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and in the accompanying Letter of Transmittal (which together with
the Prospectus constitute the "Exchange Offer"), to exchange up to 238,400
shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "New Preferred Shares") for up to 238,400 shares of
its outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "Old Preferred Shares" and together with the New
Preferred Shares, the "Preferred Shares") at the rate of one New Preferred Share
for each Old Preferred Share.
The Company's principal business objective is to acquire,
hold, finance and manage assets consisting of obligations secured by real
property, as well as certain other qualifying real estate investment trust
("REIT") assets ("Mortgage Assets"). The Mortgage Assets of the Company
currently consist of sixteen "hypothecation" loans (the "Initial Mortgage
Assets") issued to the Company by NB Finance Ltd., a wholly owned subsidiary of
the Bank ("NB Fianance"), that are recourse only to the "Initial Mortgage
Loans." Hypothecation loans are loans secured by the pledge of mortgages as
security therefor. The Initial Mortgage Loans consist of sixteen pools of, at
December 31, 1997, 11,701 "Mortgage Loans." Mortgage Loans consist of
residential first mortgages insured by Canada Mortgage and Housing Corporation,
an agency of the Government of Canada ("CMHC"), that are secured by real
property located in Canada.
See "Risk Factors" commencing on page 15 for a discussion of
certain factors that should be considered by potential holders of New Preferred
Shares, including the following:
o The Company's income consists principally of payments of interest and,
therefore, is heavily dependent upon prevailing interest rates.
Additionally, the Company's income is denominated in Canadian dollars.
Consequently, a significant decline in interest rates or in the value of
the Canadian dollar may have an adverse effect on the Company, its assets
and its ability to make dividend payments with respect to the New Preferred
Shares.
o The Company's operations may be affected by prevailing real estate market
conditions. Consequently, there can be no assurance that prevailing real
estate market conditions will not adversely affect the Company's ability to
pay dividends.
o All of the residential real properties securing the Initial Mortgage Assets
issued by NB Finance are, and in the future are expected to be, located
outside the United States, primarily in Quebec. Consequently, the Company
will be subject to the laws of a foreign jurisdiction with respect to any
actions taken and may be subject to a greater risk of default than
investments in comparable U.S. real property.
o The Initial Mortgage Assets issued by NB Finance are recourse only to the
Initial Mortgage Loans. Consequently, in the event of default on the
Initial Mortgage Assets issued by NB Finance, the Company's only recourse
will principally be foreclosure on the real property securing the Initial
Mortgage Assets issued by NB Finance, and in certain circumstances, CMHC
insurance may not be available or receipt of payment thereof may be
delayed.
o Dividends on the New Preferred Shares are not cumulative. Consequently, if
the Board of Directors of the Company (the "Board of Directors") does not
authorize and declare a dividend on the New Preferred Shares for any
particular quarterly dividend period, the holders of the New Preferred
Shares would not be entitled to recover such dividend even if funds are, or
subsequently become, available for payment thereof.
o As a subsidiary of the Bank, Canadian banking authorities could, under
certain circumstances, impose certain restrictions on the operations of the
Company. Consequently, under such circumstances, such restrictions could
cause the Company to fail to qualify as a REIT as well as affect its
ability to pay dividends.
o The Company may not qualify as a REIT for United States federal income tax
purposes. Consequently, the Company may be subject to United States federal
income tax at normal corporate tax rates.
<PAGE>
o The Board of Directors may amend or revise the Company's policies and
strategies in the future without a vote of stockholders, including holders
of the New Preferred Shares. Consequently, the holders of New Preferred
Shares cannot preclude the Board of Directors from making such amendments
or revisions even though the ultimate effect to the holders of New
Preferred Shares may be negative.
o The assets of the Company consist of obligations that do not provide for
complete amortization of principal over their term to maturity and,
therefore, require a balloon payment. Consequently, holders of New
Preferred Shares may be accepting a greater degree of risk relative to an
investment with underlying assets that are comprised of fully amortizing
obligations.
o The Company has not obtained a third party valuation of its assets for the
purposes of the Exchange Offer. Consequently, there can be no assurance
that the fair market value of such assets does not differ from the purchase
price thereof.
o Under certain circumstances, including when the Bank is experiencing
financial difficulties or its financial condition is deteriorating, the New
Preferred Shares could be exchanged (an "Exchange Event") automatically for
the Bank's 8.45% Noncumulative First Preferred Shares, Series Z (the "Bank
Preferred Shares"). Consequently, the Bank Preferred Shares would represent
an investment in the Bank and not in the Company at a time when the Bank is
experiencing such financial difficulties or such deterioration of financial
condition.
o The Company is dependent upon the Bank and its affiliates in virtually
every phase of its operations. However, the interests of the Company and
the Bank may not be identical. Consequently, because of the relationship
between the Company and the Bank and its affiliates, conflicts of interest
may arise between the Company and the Bank.
o The assignment of the Initial Mortage Loans to the Company has not been
registered. Consequently, a bona fide purchaser who completes all necessary
legislation formalities prior to the Company would be recognized as the
owner of the Initial Mortage Loans.
o Holders of Old Preferred Shares who fail to exchange their Old Preferred
Shares for New Preferred Shares pursuant to the Exchange Offer will
continue to hold Old Preferred Shares that continue to be subject to the
transfer restrictions set forth in the legends thereon. Consequently,
holders of the Old Preferred Shares may not be offered or sold, unless
registered under the Securities Act of 1933, as amended (the "Securities
Act"), except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable securities laws of states and
other jurisdictions.
o The Company is under no obligation, and currently has no intention, to list
the New Preferred Shares on a national exchange. Additionally, there is no
existing market for the New Preferred Shares and there can be no assurance
as to the liquidity of any markets that may develop, the ability of holders
to sell their New Preferred Shares or the sale price thereof. Consequently,
holders of New Preferred Shares may find it difficult to sell their New
Preferred shares or to sell their New Preferred Shares at a price
equivalent to the purchase price thereof.
The form and terms of the New Preferred Shares are identical
in all material respects to the form and terms of the Old Preferred Shares,
except that (i) the New Preferred Shares have been registered under the
Securities Act, and, therefore, will not bear legends restricting their transfer
and (ii) holders of the New Preferred Shares will not be entitled to the
registration rights available to holders of the Old Preferred Shares under the
Registration Rights Agreement (the "Registration Rights Agreement") dated
September 3, 1997, among the Company, the Bank and Merrill Lynch, Pierce, Fenner
& Smith Incorporated (the "Initial Purchaser") which registration rights with
respect to the Old Preferred Shares will terminate upon completion of the
Exchange Offer. See "Description of the New Preferred Shares."
On September 3, 1997 (the "Issue Date"), 300,000 shares of the
Company's 8.35% Noncumulative Exchangeable Preferred Stock, Series A, were
issued in a transaction not registered under the Securities Act in reliance upon
an exemption from the registration requirements thereof. The Initial Purchaser
currently holds 61,600 shares of the Company's 8.35% Noncumulative Exchangeable
Preferred Shares, Series A, as an unsold allotment (the "Unsold Allotment"). The
Unsold Allotment is being concurrently offered for resale by the Initial
Purchaser. The New Preferred Shares are being offered hereby to satisfy certain
obligations of the Company contained in the Registration Rights Agreement. Based
on interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the New Preferred Shares issued pursuant to the Exchange
Offer in exchange for Old Preferred Shares may be offered for resale, resold or
otherwise transferred by any holder thereof (other than any holder that is a
broker-dealer or an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Preferred Shares are acquired in the ordinary course of such holder's business,
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Preferred Shares and neither such holder nor any
such other person is engaging in or intends to engage in a distribution of New
Preferred Shares. The Company has not sought, and does not intend to seek, its
own no-action letter, and there can be no assurance that the Commission or its
staff would make a similar determination with respect to the Exchange Offer.
Notwithstanding the foregoing, each broker-dealer that receives New Preferred
Shares for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Preferred
Shares. The Letter of Transmittal states that by so
ii
<PAGE>
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.
- --------------------
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.
CERTAIN PERSONS PARTICIPATING IN THIS EXCHANGE OFFER MAY
ENGAGE IN TRANSACTIONS THAT STABLIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF
THE PREFERRED SHARES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING,THE PURCHASE OF
THE PREFERRED SHARES TO COVER SYNDICATE SHOT POSITIONS AND THE IMPOSITION OF
PENALTY BIDS.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY
ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PREFERRED SHARES IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE PURSUANT HERETO SHALL
UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
FOR NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN
APPLICATION FOR A LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW
HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT
MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS
AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS
PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN
APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR
CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY
REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
-------------------
The date of this Prospectus is March __, 1998.
iii
<PAGE>
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting
and other informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As a result of the 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 (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
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PROSPECTUS SUMMARY.............................................................................................. 1
The Company............................................................................................ 1
The Bank .............................................................................................. 2
NB Finance............................................................................................. 3
Summary Risk Factors................................................................................... 4
Business and Strategy.................................................................................. 6
Tax Status of the Company.............................................................................. 7
The Exchange Offer..................................................................................... 7
The New Preferred Shares............................................................................... 10
Selected Financial Data................................................................................ 14
RISK FACTORS.................................................................................................... 15
Interest Rate Risk and Maturity of Initial Mortgage Loans.............................................. 15
Currency Exchange Rate Risk............................................................................ 15
Real Estate Market Conditions.......................................................................... 15
Geographic Concentration of the Real Property Securing the Initial Mortgage Assets..................... 15
Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC Insurance...................... 16
Tax Risks.............................................................................................. 16
Dividends Not Cumulative............................................................................... 18
Dividend and Other Regulatory Restrictions on Operations of the Company................................ 18
Risk of Future Revisions in Policies and Strategies by Board of Directors.............................. 19
Balloon Payments....................................................................................... 19
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations with
Affiliates.................................................................................... 19
Relationship with the Bank and Its Affiliates; Conflicts of Interest................................... 20
Dependence upon the Bank............................................................................... 20
Consequences of Failure to Exchange Old Preferred Shares............................................... 20
Absence of Public Market............................................................................... 21
Risks Associated with the Bank......................................................................... 21
Canadian Legal Considerations.......................................................................... 22
THE ISSUERS..................................................................................................... 24
The Bank .............................................................................................. 24
The Company............................................................................................ 24
NB Finance............................................................................................. 24
USE OF PROCEEDS................................................................................................. 25
CAPITALIZATION.................................................................................................. 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES..................................................................... 26
The Company............................................................................................ 26
NB Finance............................................................................................. 27
THE EXCHANGE OFFER.............................................................................................. 28
General .............................................................................................. 28
Purpose of the Exchange Offer.......................................................................... 28
Terms of the Exchange.................................................................................. 29
v
<PAGE>
Expiration Date; Extension; Termination; Amendment..................................................... 29
Procedures for Tendering Old Preferred Shares.......................................................... 30
Terms and Conditions of the Letter of Transmittal...................................................... 32
Withdrawal Rights...................................................................................... 33
Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred Shares...................... 34
Certain Conditions to the Exchange Offer............................................................... 34
Exchange Agent......................................................................................... 36
Solicitation of Tenders; Fees and Expenses............................................................. 36
Transfer Taxes......................................................................................... 37
Accounting Treatment................................................................................... 37
Consequences of Failure to Exchange.................................................................... 37
Resale of New Preferred Shares......................................................................... 38
BUSINESS AND STRATEGY........................................................................................... 38
General .............................................................................................. 38
Description of the Company's Dividend Policy........................................................... 39
Description of NB Finance's Dividend Policy............................................................ 40
Description of the Company's Investment Policy......................................................... 40
Description of NB Finance's Investment Policy.......................................................... 44
Description of the Company's Management Policies....................................................... 44
Description of NB Finance's Management Policies........................................................ 47
Description of the Initial Mortgage Assets............................................................. 47
Description of the Initial Mortgage Loans.............................................................. 50
Effect of Interest Rate Fluctuation on Assets and Earnings............................................. 52
Servicing.............................................................................................. 53
Employees.............................................................................................. 54
Competition............................................................................................ 54
Legal Proceedings...................................................................................... 55
MANAGEMENT...................................................................................................... 55
Directors and Executive Officers--The Company.......................................................... 55
Directors and Executive Officers--NB Finance........................................................... 56
Compensation of Executive Officers..................................................................... 57
Options Exercised and Year-End Option/SAR Holdings..................................................... 58
Pension Plan........................................................................................... 59
Independent Directors.................................................................................. 59
Audit Committee........................................................................................ 60
Compensation of Directors and Officers................................................................. 60
Limitation of Liability and Indemnification of Directors and Officers.................................. 60
The Bank as Advisor.................................................................................... 61
DESCRIPTION OF NEW PREFERRED SHARES............................................................................. 62
General .............................................................................................. 62
Dividends.............................................................................................. 62
Automatic Exchange..................................................................................... 63
Ranking .............................................................................................. 65
Voting Rights.......................................................................................... 65
Redemption............................................................................................. 66
Rights upon Liquidation................................................................................ 68
Independent Director Approval.......................................................................... 69
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EXCHANGE OFFER; REGISTRATION RIGHTS............................................................................. 69
DESCRIPTION OF CAPITAL STOCK.................................................................................... 72
The Company............................................................................................ 72
Common Stock........................................................................................... 72
Preferred Stock........................................................................................ 73
Power to Issue Additional Shares of Common Stock and Preferred Stock................................... 74
Restrictions on Ownership and Transfer................................................................. 74
Supermajority Director Approval........................................................................ 76
Business Combinations.................................................................................. 76
Control Share Acquisitions............................................................................. 76
Form, Denomination, Book-Entry Procedures and Transfer................................................. 77
Depositary Procedures.................................................................................. 77
Certificated New Preferred Shares...................................................................... 79
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS................................................................. 80
Tax Impact of the Exchange Offer....................................................................... 80
Qualification of the Company as a REIT................................................................. 80
Stock Ownership Tests.................................................................................. 81
Asset Tests............................................................................................ 81
Gross Income Tests..................................................................................... 82
Distribution Requirement............................................................................... 82
Taxation of the Company................................................................................ 82
Tax Treatment of Automatic Exchange.................................................................... 83
Taxation of New Preferred Shares....................................................................... 83
Taxation of Tax-Exempt Entities........................................................................ 84
State and Local Taxes.................................................................................. 85
Taxation of Bank Preferred Shares...................................................................... 85
Certain United States Federal Income Tax Considerations Applicable to Foreign Holders.................. 85
Information Reporting and Backup Withholding........................................................... 86
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS...................................................................... 86
Automatic Exchange..................................................................................... 87
Taxation of Dividends.................................................................................. 87
Disposition of Bank Preferred Shares................................................................... 87
Redemption of Bank Preferred Shares.................................................................... 87
ERISA CONSIDERATIONS............................................................................................ 87
Status Under Plan Asset Regulations.................................................................... 88
Publicly-Offered Security Exception.................................................................... 89
Exemptions from Prohibited Transactions................................................................ 89
Unrelated Business Taxable Income...................................................................... 90
RATINGS ....................................................................................................... 90
PLAN OF DISTRIBUTION............................................................................................ 90
LEGAL MATTERS................................................................................................... 91
EXPERTS ....................................................................................................... 91
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.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus. The offering by NB
Capital Corporation (the "Company") of up to 238,400 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share
(the "New Preferred Shares") in exchange for up to 238,400 shares of the
outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par
value US$.01 per share (the "Old Preferred Shares" and together with the New
Preferred Shares, the "Preferred Shares"), of the Company is referred to herein
as the "Exchange Offer." References to dollars and US$ are to United States
dollars; references to C$ and $ are to Canadian dollars. As of , 1997, the
Canadian dollar exchange rate was C$ =US$1.00 and certain amounts stated herein
reflect such exchange rate.
The Company
General
The Company is a Maryland corporation incorporated on August
20, 1997. All of the common stock, par value $.01, of the Company (the "Common
Stock") is owned by National Bank of Canada (the "Bank"). The Company's
principal business objective is to acquire, hold, finance and manage assets
consisting of obligations secured by real property, as well as certain other
qualifying REIT assets ("Mortgage Assets"). The Company will elect to be taxable
as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and
generally will not be liable for United States federal income tax to the extent
that it distributes its income to its stockholders and maintains its
qualification as a REIT. See "United States Federal Income Tax
Considerations--Qualification of the Company as a REIT." The Bank has indicated
to the Company that, for as long as any of the New Preferred Shares are
outstanding, the Bank intends to continue to own all of the outstanding shares
of the Common Stock. The Company was formed to provide investors with the
opportunity to invest in Canadian residential mortgages and other real estate
assets and to provide the Bank with a cost-effective means of raising capital.
The Company began operations on September 3, 1997.
Mortgage Assets
The Mortgage Assets currently consist of sixteen hypothecation
loans (the "Initial Mortgage Assets"), in an aggregate amount at December 31,
1997 of US$456 million, issued to the Company by NB Finance that are recourse
only to the "Initial Mortgage Loans." The Initial Mortgage Loans consist of
sixteen pools of, at December 31, 1997, 11,701 "Mortgage Loans" in an aggregate
amount at December 31, 1997 of C$793 million (US$554 million). Accordingly, the
Initial Mortgage Assets issued by NB Finance are overcollateralized by US$98
million . Mortgage Loans consist of CMHC-insured residential first mortgages
that are secured by real property located in Canada. The Initial Mortgage Assets
issued by NB Finance will mature semi-annually beginning in 2000, and the
proceeds thereof (net of distributions and expenses) are expected to be
reinvested in additional Mortgage Assets as described under "Business and
Strategy--Description of Mortgage Assets; Investment Policy."
The Company acquired the Initial Mortgage Assets (which are
U.S. dollar denominated) backed by the Initial Mortgage Loans (which are
Canadian dollar denominated), rather than purchasing the Initial Mortgage Loans
directly, in order to eliminate potential foreign exchange gain or loss and to
provide a U.S. dollar denominated income stream that matched its obligations on
the Preferred Stock.
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. Its head office and principal place of business is located at the National
Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, H3B 4L2, and its
telephone number is (514) 394-5000.
The Bank is a Schedule I bank under the Consolidated Bank Act
(Canada), as amended (the "Bank Act"). The Bank Act is the charter governing all
banks in Canada (both domestic banks and branches of foreign banks operating in
Canada). "Schedule I" of the Bank Act lists all Canadian domestic banks.
"Schedule II" of the Bank Act lists all subsidiaries of foreign banks with
branches in Canada. The specific provisions of the Bank Act which govern a
particular bank depend upon the schedule on which such bank is listed. As a
Canadian domestic bank, the Bank is a "Schedule I Bank."
The Bank, which ranks sixth among Canadian banks in terms of
total assets, is present in each of Canada's provinces. It delivers an extensive
range of financial services to individuals, commercial enterprises, financial
institutions and governments both in Canada and abroad.
Additional information regarding the Bank is included in the
Bank's short-form prospectus related to the Bank Preferred Shares affixed to
this Prospectus as Annex A.
Preferred Shares of the Bank
The authorized preferred capital of the Bank consists of an
unlimited number of First Preferred Shares ("First Preferred Shares") and up to
15 million Second Preferred Shares which may be issued for a maximum aggregate
consideration of C$1 billion and C$300 million, respectively, or the equivalent
thereof in other currencies. The Board of Directors of the Bank may by
resolution establish the terms of series of preferred shares. The Bank currently
has six series of First Preferred Shares outstanding with an aggregate
liquidation preference as of October 31, 1997 of C$376 million.
Canadian Statutory Requirements
Under Canadian law, the Bank is required to maintain adequate
capital in relation to its operations. The Office of Superintendent of Financial
Institutions Canada (the "Superintendent") has issued guidelines concerning the
maintenance of adequate capital (the "Capital Guideline") and has statutory
authority to direct the Bank to increase its capital even if the Bank is in
compliance with the Capital Guideline. Pursuant to the Capital Guideline,
requirements are applied to the Bank on a consolidated basis including all
subsidiaries except insurance subsidiaries or other regulated financial
institutions whose leverage is inappropriate for a deposit-taking institution
and which, because of their size, would have a material impact on the leverage
of the consolidated entity. Under the Capital Guideline, it is expected that the
Bank's total assets, including specified off-balance sheet items, should be no
greater than 20 times the Bank's total capital. It is also expected that the
Bank's total capital not be less than 8% of risk-weighted assets and
risk-weighted off-balance sheet items, unless a higher ratio is prescribed by
the Superintendent. The Capital Guideline prescribes risk-weighting and the
treatment of off-balance sheet items. The ratio of total capital to
risk-weighted off-balance sheet items is the "risk-based capital ratio" and is
based upon standards adopted by the Bank for International Settlement. The
Capital Guideline recognizes two tiers of capital. Tier 1 capital comprises the
highest quality capital elements based upon the attributes of permanence,
freedom from mandatory fixed charges against earnings and 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
2
<PAGE>
instruments. Tier 1 capital elements consist of common shareholders equity,
qualifying non-cumulative perpetual preferred shares and qualifying
non-controlling interests in subsidiaries arising on consolidation from Tier 1
capital instruments. Tier 1 capital instruments and preferred shares qualifying
as hybrid instruments in Tier 2A are intended to be permanent. Where the share
or instrument provides for redemption by the issuer after 5 years with
supervisory approval, the Superintendent would not normally prevent such
redemption by a healthy and viable bank where the instrument is or has been
replaced by equal or higher quality capital including an increase in retained
earnings, or if the bank is downsizing. All capital instruments must be issued
and fully paid for in money or, with the approval of the Superintendent, in
property. Net of amortization, the amount of Tier 2 capital may not exceed 100%
of Tier 1 capital after deducting goodwill and, consequently, the Capital
Guideline requires the amount of Tier 1 capital to be not less than 4% of
risk-weighted assets and risk-weighted off-balance sheet items, unless a higher
ratio is prescribed by the Superintendent. Also under the Capital Guideline, the
amount of Tier 2B capital net of amortization shall not exceed 50% of Tier 1
capital after deducting goodwill.
After giving effect to the issuance of the Old Preferred
Shares on September 3, 1997, the Tier 1 risk-based capital ratio and total
risk-based capital ratio levels of the Bank as of October 31, 1997 were 8.1% and
11.3%, respectively. The Bank's Tier 1 risk-based capital ratio and total
risk-based capital ratio were 6.9% and 10.2% at October 31, 1996, 6.8% and 10.4%
at October 31, 1995 and 6.9% and 11.1% at October 31, 1994.
Section 485 of the Bank Act requires Canadian banks to
maintain adequate capital and adequate and appropriate forms of liquidity and to
comply with related regulations. Under subsection 485(3), the Superintendent
may, by order, direct a bank to increase its capital or to provide additional
liquidity in such forms and amounts as the Superintendent may require. The
Superintendent may act under subsection 485(3) even if a bank is in compliance
with all applicable guidelines and regulations.
Exchange Event
Each of the New Preferred Shares will be exchanged
automatically (the "Automatic Exchange") for one Bank Preferred Share (i)
immediately prior to such time, if any, at which the Bank fails to declare and
pay or set aside for payment when due any dividend on any issue of its
cumulative First Preferred Shares or the Bank fails to pay or set aside for
payment when due any declared dividend on any of its non-cumulative First
Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based
capital ratio of less than 4.0% or a total risk-based capital ratio of less than
8.0%, (iii) in the event that the Superintendent takes control of the Bank
pursuant to the Bank Act, or proceedings are commenced for the winding-up of the
Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the
event that the Superintendent, by order, directs the Bank to act pursuant to
subsection 485(3) of the Bank Act and the Bank elects to cause the exchange
(each, an "Exchange Event"). In connection with the Exchange Offer, the Bank
Preferred Shares will be registered with the Commission. See "Risk
Factors--Certain Risks Associated with the Bank" and "Description of New
Preferred Shares--Automatic Exchange."
NB Finance
NB Finance was incorporated on September 3, 1997 under the
laws of Bermuda. 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. Pursuant to an order (the "OSFI Order"), dated September 2, 1997,
of the Canadian Office of the Superintendent of Financial Institutions ("OSFI"),
the Canadian bank regulatory agency, the acquisition of the common stock of NB
Finance by the Bank was approved. Such approval is, however, conditional upon
(i) the Bank continuing to own at all times such commmon stock, (ii) NB Finance
not incurring any indebtedness and (iii) NB Finance not engaging in any business
activities other than the ownership of Mortgage Loans and activities incidental
thereto. See "Business and Strategy -- Description of theInitial Mortgage
Loans." Accordingly, the Bank has indicated to the Company that it intends to
maintain 100% ownership of the ordinary shares of NB Finance so long as the
Initial Mortgage Assets issued by NB Finance or any other obligations of NB
Finance are owned by the Company. The registered offices of NB Finance are
located at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda. NB Finance
does not have a telephone number.
3
<PAGE>
Organizational Diagram
The following diagram outlines the relationship between the
Bank and the Company relevant to the Exchange Offer: [Description of diagram:
The Bank on the top level of a two-tier diagram connected to the Company and NB
Finance on the second level of the two-tier diagram. Lines connect the Bank and
NB Finance and the Bank and the Company and indicate that the Bank owns 100% of
the common stock of the Company and 100% of the common stock of NB Finance.
Arrows indicate that the flow of Initial Mortgage Loans (footnote number 1) from
the Bank to NB Finance and the flow of Initial Mortgage Assets (footnote number
2) from NB Finance to the Company. A line connects the Company to Investors and
indicates that 100% of the Preferred Shares (footnote number 3) are owned by
investors. The following footnotes are included:
Footnote number 1: CMHC-insured residential first mortgages originated
by the Bank or acquired by the Bank from other NHA-Approved Lenders
(as defined).
Footnote number 2: Secured by residential real property and recourse
only to the Initial Mortgage Loans.
Footnote number 3: Subject to automatic exchange for the Bank
Preferred Shares in certain circumstances.]
Summary Risk Factors
The Preferred Shares offered hereby are subject to certain
risks. See "Risk Factors." Among such risks are the following:
o The Company's income consists principally of payments of
interest and, therefore, is heavily dependent upon
prevailing interest rates. Additionally, the Company's
income is denominated in Canadian dollars. Consequently, a
significant decline in interest rates or in the value of the
Canadian dollar may have an adverse effect on the Company,
its assets and its ability to make dividend payments with
respect to the New Preferred Shares.
o The Company's operations may be affected by prevailing real
estate market conditions. Consequently, there can be no
assurance that prevailing real estate market conditions will
not adversely affect the Company's ability to pay dividends.
o All of the residential real properties securing the Initial
Mortgage Assets issued by NB Finance are, and in the future
are expected to be, located outside the United States,
primarily in Quebec. Consequently, the Company will be
subject to the laws of a foreign jurisdiction with respect
to any actions taken and may be subject to a greater risk of
default than investments in comparable U.S. real property.
o The Initial Mortgage Assets issued by NB Finance are
recourse only to the Initial Mortgage Loans. Consequently,
in the event of default on the Initial Mortgage Assets
issued by NB Finance, the Company's only recourse will
principally be foreclosure on the real property securing the
Initial Mortgage Assets issued by NB Finance, and in certain
circumstances, CMHC insurance may not be available or
receipt of payment thereof may be delayed.
o The sale of the Initial Mortgage Loans to NB Finance and the
subsequent assignment thereof by NB Finance to the Company
have not been registered. Consequently, a bona fide
purchaser who completed all necessary registration
formalities prior to the Company would be recognized as the
owner of the Initial Mortgage Loans.
4
<PAGE>
o Dividends on the New Preferred Shares are not cumulative.
Consequently, if the Board of Directors of the Company (the
"Board of Directors") does not authorize and declare a
dividend on the New Preferred Shares for any particular
quarterly dividend period, the holders of the New Preferred
Shares would not be entitled to recover such dividend even
if funds are, or subsequently become, available for payment
thereof.
o As a subsidiary of the Bank, Canadian banking authorities
could, under certain circumstances, impose certain
restrictions on the operations of the Company. Consequently,
under such circumstances, such restrictions could cause the
Company to fail to qualify as a REIT as well as affect its
ability to pay dividends.
o The Company may not qualify as a REIT for United States
federal income tax purposes. Consequently, the Company may
be subject to United States federal income tax at normal
corporate tax rates.
o The Board of Directors may amend or revise the Company's
policies and strategies in the future without a vote of
stockholders, including holders of the New Preferred Shares.
Consequently, the holders of New Preferred Shares cannot
preclude the Board of Directors from making such amendments
or revisions even though the ultimate effect to the holders
of New Preferred Shares may be negative.
o The assets of the Company consist of obligations that do not
provide for complete amortization of principal over their
term to maturity and, therefore, require a balloon payment.
Consequently, holders of New Preferred Shares may be
accepting a greater degree of risk relative to an investment
with underlying assets that are comprised of fully
amortizing obligations.
o The Company has not obtained a third party valuation of its
assets for the purposes of the Exchange Offer. Consequently,
there can be no assurance that the fair market value of such
assets does not differ from the purchase price thereof.
o Under certain circumstances, including when the Bank is
experiencing financial difficulties or its financial
condition is deteriorating, the New Preferred Shares could
be exchanged automatically for the Bank's 8.45%
Noncumulative First Preferred Shares, Series Z (the "Bank
Preferred Shares"). Consequently, the Bank Preferred Shares
would represent an investment in the Bank and not in the
Company at a time when the Bank is experiencing such
financial difficulties or such deterioration of financial
condition.
o The assignment of the Initial Mortgage Loans to the Company
has not been registered. Consequently, a bona fide
purchaseer who completes all necessary registration
formalities prior to the Company would be recognized as the
owner of the Initial Mortgage Loans.
o The Company is dependent upon the Bank and its affiliates in
virtually every phase of its operations. However, the
interests of the Company and the Bank may not be identical.
Consequently, because of the relationship between the
Company and the Bank and its affiliates, conflicts of
interest may arise between the Company and the Bank.
o The Old Preferred Shares may not be offered or sold, unless
registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the
Securities Act and applicable securities laws of states and
other jurisdictions. Consequently, holders of Old Preferred
Shares who fail to exchange their Old Preferred Shares for
New Preferred Shares pursuant to the Exchange Offer will
continue to be subject to the transfer restrictions set
forth in the legends thereon.
o The Company is under no obligation, and currently has no
intention, to list the New Preferred Shares on a national
exchange. Additionally, there is no existing market for the
New
5
<PAGE>
Preferred Shares and there can be no assurance as to the
liquidity of any markets that may develop, the ability of
holders to sell their New Preferred Shares or the sale price
thereof. Consequently, holders of New Preferred Shares may
find it difficult to sell their New Preferred shares or to
sell their New Preferred Shares at a price equivalent to the
purchase price thereof.
Business and Strategy
General
The Company's principal business objective is to acquire,
hold, finance and manage Mortgage Assets that will generate net income for
distribution to stockholders. The Mortgage Assets of the Company initially
consist solely of the Initial Mortgage Assets (sixteen hypothecation loans, in
an aggregate amount at December 31, 1997 of US$456 million, issued by NB Finance
to the Company that are recourse only to the Initial Mortgage Loans (which are
sixteen pools of, at December 31, 1997, 11,701 CMHC-insured residential first
mortgages, in an aggregate amount at December 31, 1997 of C$793 million (US$554
million) and that are secured by the residential real property underlying the
Initial Mortgage Loans). See "Business and Strategy-- Description of the Initial
Mortgage Assets" and "-- Description of the Initial Mortgage Loans." The Company
has acquired substantially all of its Mortgage Assets from the Bank and/or
affiliates of the Bank on terms that are comparable to those that could be
obtained by the Company if such Mortgage Assets were purchased from unrelated
third parties. The Company may also from time to time acquire Mortgage Assets
comparable to the Initial Mortgage Assets issued by NB Finance acquired from the
Bank or from unrelated third parties. As of the date of this Prospectus, the
Company has not entered into any agreements with third parties with respect to
the purchase of Mortgage Assets. Other than with respect to the temporary
investment of payments of interest and principal on its Mortgage Assets, the
Company anticipates that it will purchase Mortgage Assets from unrelated third
parties only if neither the Bank nor any affiliate of the Bank has an amount or
type of Mortgage Assets sufficient to meet the requirements of the Company.
The Company's current investment policy and current intention
is to invest at least 90% of its portfolio in the Initial Mortgage Assets issued
by NB Finance and obligations that are comparable to the Initial Mortgage Assets
issued by NB Finance. Accordingly, potentially 10% of the Company's portfolio
could consist of investments in other assets permitted under the Company's
investment policy. See "Business and Strategy--Description of the Company's
Investment Policy" and "--Description of the Company's Management Policies."
The Company intends and has the ability to hold the Mortgage
Loans to maturity unless there is a prepayment by the customer or a Mortgage
Loan is impaired. Therefore the Mortgage Loans will be recorded as a long-term
investment in the balance sheet of the Company.
Pursuant to the OSFI Order, NB Finance is not permitted to
engage in any business activities other than the ownership of Mortgage Loans and
activities incidental thereto.
Management
The Board of Directors of the Company 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."
6
<PAGE>
The Board of Directors of NB Finance is composed of seven
members, two of whom are Independent Directors. The Company currently has four
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.
Pursuant to the OSFI Order, NB Finance is not permitted to
engage in any business activities other than the ownership of Mortgage Loans and
activities incidental thereto. Accordingly, NB Finance does not have a material
Year 2000 issue.
Tax Status of the Company
The Company will elect to be taxable as a REIT under sections
856 through 860 of the Code, commencing with its taxable year ending December
31, 1997. As a REIT, the Company generally will not be liable for United States
federal income tax to the extent that it distributes its income to the holders
of its Common Stock and Preferred Stock, including the New Preferred Shares, and
maintains its qualification as a REIT. See "United States Federal Income Tax
Considerations--Qualifications of the Company as a REIT."
A REIT is subject to a number of organizational and
operational requirements, including a requirement that it currently distribute
to stockholders at least 95% of its ("REIT taxable income. REIT taxable income
is essentially taxable income, as determined in accordance with the Code, with
certain admustments. 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 probibited transactions is excluded from
the determination. Notwithstanding its election to be taxable as a REIT, the
Company may be subject to federal, state and/or local tax. See "Risk
Factors--Tax Risks" and "United States Federal Income Tax Considerations."
The Exchange Offer
For a more complete description of the terms of the New
Preferred Shares specified in the following summary, see "Description of New
Preferred Shares."
The Exchange Offer The Company is offering to exchange pursuant to
the Exchange Offer up to 238,400 shares of its New
Preferred Shares for up to 238,400 of its
outstanding Old Preferred Shares at a rate of one
New Preferred Share for each Old Preferred Share.
The form and terms of the New Preferred Shares
(including the dividend rate, liquidation
preference and redemption rights) are
7
<PAGE>
identical in all material respects to the form and
terms of the Old Preferred Shares, except that the
New Preferred Shares have been registered under
the Securities Act, and therefore, will not bear
legends restricting their transfer. Further, the
holders of New Preferred Shares will not be
entitled to the registration rights of holders of
Old Preferred Shares under the Registration Rights
Agreement, which rights with respect to the Old
Preferred Shares will terminate upon consummation
of the Exchange Offer. The issuance of the New
Preferred Shares is intended to satisfy certain
obligations of the Company contained in the
Registration Rights Agreement. Subject to certain
conditions, a holder of Old Preferred Shares who
wishes to tender must transmit a properly
completed and duly executed Letter of Transmittal
to The Bank of Nova Scotia Trust Company of New
York (the "Exchange Agent") on or prior to the
Expiration Date. For procedures related to
tendering, see "The Exchange Offer." As of the
date hereof, 300,000 shares of Old Preferred Stock
were outstanding. The Initial Purchaser currently
holds 61,600 Old Preferred Shares as an unsold
allotment.
Minimum Condition The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old
Preferred Shares being tendered for exchange.
Expiration Date; Withdrawal The Exchange Offer will expire at 5:00 p.m., New
York City time, on the "Expiration Date." As used
herein, the term "Expiration Date" means 5:00
p.m., New York City time, on , 1998; unless the
Company, in its sole discretion, extends the
period of time for which the Exchange Offer is to
remain open. The tender of Old Preferred Shares
pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date by sending a
written notice of withdrawal to the Exchange
Agent.
Any Old Preferred Shares so withdrawn will be
deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any
Old Preferred Shares not accepted for exchange for
any reason will be returned without expense to the
tendering holder thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer. See "The Exchange
Offer--Expiration Date; Extension; Termination;
Amendment" and "--Withdrawal Rights."
Exchange Date The date of acceptance and exchange for the Old
Preferred Shares will be the business day
following the Expiration Date.
Conditions to the
Exchange Offer The Exchange Offer is subject to certain customary
conditions which may be waived by the Company. The
Company currently expects that each of these
conditions will be satisfied and that no waivers
will be necessary. See "The Exchange
Offer--Certain Conditions to the Exchange Offer."
The Company reserves the right to terminate or
amend the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition.
Procedure for
Tendering Old
Preferred Shares Each holder of Old Preferred Shares wishing to
accept the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and
8
<PAGE>
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."
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
9
<PAGE>
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 Up to 238,400 Noncumulative Exchangeable Preferred
Shares, Series A, of the Company.
Ranking The New Preferred Shares rank senior to the Common
Stock with respect to dividend rights and rights
upon liquidation. In order to qualify as a REIT,
the capital stock of the Company must be held by
at least 100 holders during approximately 90% or
more of the taxable year beginning in the
Company's second taxable year and in each
subsequent taxable year. See "United States
Federal Income Tax Considerations--Stock Ownership
Tests." 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
10
<PAGE>
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,
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."
11
<PAGE>
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 not
a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating organization.
Use of Proceeds There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Federal Income Tax
Consequences For federal income tax purposes, the exchange
pursuant to the Exchange Offer will not result in
any income gain or loss to the holders or the
Company. See "United States Federal Income Tax
Considerations."
Exchange Agent The Bank of Nova Scotia Trust Company of New York
is serving as Exchange Agent in connection with
the Exchange Offer.
ERISA Consideration Each holder of the New Preferred Shares will, by
exchanging its Old Preferred Shares for New
Preferred Shares, be deemed to have directed the
Company to invest in the Initial Mortgage Assets
issued by NB Finance (as well as the other assets
held by the Company and identified at the time of
12
<PAGE>
purchase) and represented and agreed that either
(A) no part of the assets to be used by it to
acquire and hold such New Preferred Shares
constitutes the assets of any (I) employee benefit
plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA")) subject to Title I of ERISA, (II) plan
(as defined in section 4975(e)(1) of the Code) or
(III) entity whose underlying assets include "plan
assets" under Department of Labor Regulation 29
C.F.R. Section 2510.3-101 (collectively, "Plans")
or (B) one or more prohibited transaction
statutory or class exemptions apply such that the
use of such plan assets to acquire and hold such
New Preferred Shares will not constitute a
nonexempt prohibited transaction under ERISA or
the Code.
In addition, in the event that the New Preferred
Shares are not treated as "publicly offered
securities" (within the meaning of the
above-referenced regulations) as of the date on
which the Exchange Offer is consummated or (if no
Exchange Offer is consummated) the shelf
registration statement, which the Company is
required to file, pursuant to the Registration
Rights Agreement, in lieu of or in addition to the
Registration Statement in the event (i) the
Company is not permitted to effect the Exchange
Offer, (ii) for any reason, the Registration
Statement is not declared effective within 180
days of the Issue Date, or (iii) in certain other
circumstances (the "Shelf Registration
Statement"), is declared effective, then during
the period commencing on such date and ending on
the date on which the New Preferred Shares become
"publicly-offered securities", each Plan purchaser
will be deemed to have appointed an independent
fiduciary (the "Independent Fiduciary"), which
will be identified by the Company to exercise any
discretionary authority with respect to
transactions involving both the Company and the
Bank or any Bank affiliate. The Independent
Fiduciary will be identified prior to any such
transaction and will be subject to removal and
replacement by a majority of the holders of the
New Preferred Shares.
Any Plan fiduciary that proposes to cause a Plan
to exchange New Preferred Shares for Old Preferred
Shares should consult with its counsel with
respect to the potential applicability of ERISA
and the Code to such investment and whether any
exemption or exemptions would be applicable and
determine on its own whether all conditions of
such exemption or exemptions have been satisfied.
Any such Plan fiduciary should also determine
whether the exchange of New Preferred Shares for
Old Preferred Shares is permitted under the
governing Plan instruments and is appropriate for
the Plan in view of the overall investment policy
and the composition and diversification of its
portfolio.
13
<PAGE>
Selected Financial Data
The selected financial data presented below (i) for the
Company as of and for the period from August 20, 1997 (date of inception) to
December 31, 1997 and (ii) for NB Finance as of and for the period from
September 3, 1997 (date of inception) to December 31, 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
periods presented have been derived from the audited financial statements of the
Company which, in the opinion of management, include all adjustments, which
consist only of normal recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations for such period. The
following financial data should be read in conjunction with the Financial
Statements contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NB Capital Corporation NB Finance, Ltd.
-------------------------- ----------------------
August 20, 1997 September 3, 1997
(date of inception) to (date of inception) to
December 31, 1997 December 31, 1997
-------------------------- ----------------------
<S> <C> <C>
Statement of Income Data:
Revenue....................................................... $ 12,993,939 $14,364,680
Operating expenses............................................ 1,000,846 14,208,947
-------------- -----------
Operating profit.............................................. 11,993,093 155,733
Other income (expense):
Income tax.................................................... $ 80,000 $ -
-------------- --------------
Net income.................................................... $ 11,913,093 $ 155,733
Ratio of Earnings to Fixed Charges and Preferred [____] [____]
Dividends..................................................
Balance Sheet Data:
Total assets.................................................. $ 481,022,332 $593,532,430
Total liabilities............................................. 866,647 461,029,139
8.35% Noncumulative Exchangeable 3,000
Preferred stock, Series A.................................. -
Common stock.................................................. 1 12,000
Contribution Surplus.......................................... 476,543,430 132,335,558
Retained Earnings............................................. 3,609,254 155,733
</TABLE>
14
<PAGE>
RISK FACTORS
Prospective exchanging stockholders should carefully consider
the following information in conjunction with the other information contained in
this Prospectus before exchanging Old Preferred Shares for the New Preferred
Shares in the Exchange Offer. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include those discussed
below.
Interest Rate Risk and Maturity of Initial Mortgage Loans
The Company's income currently consists of interest payments
from the Initial Mortgage Assets issued by NB Finance. Interest and principal
amounts generated by the Initial Mortgage Loans currently enables full payment
with respect to the Initial Mortgage Assets. The Initial Mortgage Assets and the
Initial Mortgage Loans mature between January 2000 and July 2001. Consequently,
(i) if there is a significant decline in interest rates at a time when the
Company must reinvest payments of interest and principal, the Company may find
it difficult to purchase additional Mortgage Assets or Mortgage Loans that
generate sufficient income to support the payment of dividends on the New
Preferred Shares, and (ii) there can be no assurance that a significant decline
in interest rates would not adversely affect the Company's ability to pay
dividends on the New Preferred Shares.
Currency Exchange Rate Risk
The Company's income consists principally of interest payments
from the Initial Mortgage Assets issued by NB Finance and obligations which are
comparable to the Initial Mortgage Assets issued by NB Finance. While the
Initial Mortgage Assets are, and the Company's future Mortgage Assets likely
will be, denominated in United States dollars, Mortgage Loans are denominated
and payable in Canadian dollars. Consequently, if there is a significant
decrease in the value of the Canadian dollar, the value in U.S. dollars of the
cash flow from Mortgage Loans assigned to the Company by NB Finance (including
principal payments) may decrease, which may adversely affect the cash flow to
the Company and the Company's ability to pay the dividends on the New Preferred
Shares. From the beginning of 1994 to and including , 1998, the exchange rate of
the Canadian dollar to the United States dollar has ranged from C$ to US$1.00 on
to C$ to US$1.00 on , with an average for such period of C$ to US$1.00.
Real Estate Market Conditions
The results of the Company's operations will be affected by
various factors, many of which are beyond the control of the Company, such as:
(i) local and other economic and political conditions affecting real estate
values, particularly in Quebec, (ii) the level of interest income generated by
the Company's Mortgage Assets, (iii) the market value of the Company's Mortgage
Assets and (iv) the supply of and demand for the Company's Mortgage Assets.
Further, there can be no assurance that the value of the Initial Mortgage Assets
issued by NB Finance, or the value of the real property securing the Initial
Mortgage Assets issued by NB Finance, will remain at the levels existing on the
dates of origination of the Initial Mortgage Assets. Consequently, there can be
no assurance that prevailing real estate market conditions will not adversely
affect the Company's operations and its ability to pay dividends on the New
Preferred Shares. These foregoing factors may also have an effect on the
business and financial condition of the Bank. Consequently, such factors may
increase the likelihood of an Exchange Event.
Geographic Concentration of the Real Property Securing the Initial Mortgage
Assets
All of the real property securing the Initial Mortgage Assets
issued by NB Finance is geographically concentrated in Canada, primarily located
in Quebec and New Brunswick, and the real property securing additional Mortgage
Assets acquired by the Company is also expected to be geographically
15
<PAGE>
concentrated in Canada. Consequently, any actions taken by or on behalf of the
Company with respect to such real property will be dependent upon the laws of
the jurisdictions in which such real property is located.
In addition, from time to time Canada may experience weaker
economic conditions and housing markets than the United States which may
adversely affect the value of real property and mortgages thereon. Consequently,
the Initial Mortgage Assets issued by NB Finance may be subject to a greater
risk of default, individually and in the aggregate, than comparable obligations
secured by U.S. real property or comparable obligations secured by real property
that is less geographically concentrated.
Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC
Insurance
The Initial Mortgage Assets issued by NB Finance are recourse
only to the Initial Mortgage Loans, which have been assigned to the Company by
NB Finance, and are secured by residential real property underlying the Initial
Mortgage Assets issued by NB Finance. Consequently, in the event of nonpayment
of interest or other default on the Initial Mortgage Assets issued by NB
Finance, the Company's only recourse will be to exercise its rights under the
Initial Mortgage Loans (principally through foreclosure on the real property
securing the Initial Mortgage Assets issued by NB Finance), either directly or
through the Bank.
It is anticipated that additional Mortgage Assets acquired by
the Company will consist of similar limited recourse obligations. The CMHC
insurance with respect to the Initial Mortgage Loans is not a guarantee of
timely payment of principal and interest on such Mortgage Loans. Typically, CMHC
will only make payments pursuant to its insurance after the approved lender has
taken certain actions which may be time consuming and can cause delays in the
receipt of such payments. In addition, the CMHC insurance will cease to be in
force if any such Initial Mortgage Loan is sold to a person other than a lender
approved by CMHC unless such Initial Mortgage Loan continues to be administered
by CMHC or a lender approved by CMHC. The regulations of the CMHC stipulate that
the terms of repayment of Mortgage Loans shall not be altered and that no
derogation from the rights of the mortgagee against the mortgaged property by
way of postponement, partial discharge or otherwise shall be granted without
first obtaining the approval of the CMHC. Consequently, even though the Mortgage
Loans are CMHC insured, payments of principal and interest in respect of any
Mortgage Loan in default may not be available from CMHC or, if available,
receipt thereof may be delayed.
16
<PAGE>
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. 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 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."
17
<PAGE>
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 issued by NB Finance are not subject to any
imposition of withholding tax. There can be no assurance, however, that as a
result of any change in any applicable law, treaty, rule or regulation or any
interpretation thereof, the payments on the Initial Mortgage Loans or the
Initial Mortgage Assets issued by NB Finance might not in the future become
subject to withholding tax. In the event that any withholding tax is imposed on
payments of interest on the Initial Mortgage Loans, neither NB Finance nor the
Company will be entitled to receive additional amounts to compensate for such
withholding tax and accordingly, such tax would reduce the amount available to
make payments on the Initial Mortgage Assets issued by NB Finance. Consequently,
there can be no assurance that the remaining payments on the Initial Mortgage
Assets issued by NB Finance would be sufficient to make timely payments of
dividends on the New Preferred Shares.
Ownership of the New Preferred Shares
If the possibility of the occurrence of the Automatic Exchange
caused the Bank to be viewed from the date of issuance of the New Preferred
Shares as the holder for U.S. federal income tax purposes of the New Preferred
Shares, distributions on the New Preferred Shares would be subject to
withholding of United States federal income tax at a 30 percent rate.
Consequently, the Company, as withholding agent, would be
18
<PAGE>
liable for the payment of such tax, which would reduce the amount available to
pay dividends on the New Preferred Shares.
Dividends Not Cumulative
Dividends on the New Preferred Shares are not cumulative. The
Board of Directors may determine, in its business judgment, that it would be in
the best interests of the Company to pay less than the full amount of the stated
dividend on the New Preferred Shares or no dividend for any quarterly dividend
period, notwithstanding that funds are available to pay such dividend. Factors
that may be considered by the Board of Directors in making this determination
are the Company's financial condition and capital needs, legal or regulatory
requirements, economic conditions, and such other factors as the Board may deem
relevant. Consequently, if the Board of Directors does not authorize and declare
a dividend on the New Preferred Shares for a quarterly dividend period, the
holders of the New Preferred Shares would not be entitled to recover such
dividend, even if funds are, or subsequently become, available for payment
thereof. Notwithstanding the foregoing, to remain qualified as a REIT, the
Company must distribute annually at least 95% of its "REIT taxable income" (not
including capital gains) to stockholders. See "--Tax Risks" and "United States
Federal Income Tax Considerations--Taxation of the Company."
Dividend and Other Regulatory Restrictions on Operations of the Company
Because the Company and NB Finance are subsidiaries of the
Bank, the Superintendent has the right to examine the Company and NB Finance and
their respective activities. Under certain circumstances, including any
determination that the Bank's relationship with the Company or NB Finance
results in an unsafe and unsound banking practice, the Superintendent has the
authority to restrict the ability of the Company or NB Finance to transfer
assets, to engage in transactions with the Bank, to make distributions to their
stockholders (including dividends to the holders of the New Preferred Shares, as
described below), or to redeem shares of Preferred Stock. The Superintendent
could also require the Bank to sever its relationship with or divest its
ownership of the Company. Consequently, such actions could potentially result in
the Company's failure to pay dividends in respect of the New Preferred Shares or
failure to qualify as a REIT, and therefore, result in the Company being (i)
subject to United States income tax in the same manner as a regular, domestic
corporation and (ii) unless entitled to relief, disqualified from treatment as a
REIT for four taxable years following the year during which such qualification
was lost. Failure to qualify as a REIT would not necessarily give the Company
the right to redeem the New Preferred Shares or give the holders thereof the
right to have the New Preferred Shares redeemed. See "--Tax Risks." In addition,
as subsidiaries of the Bank, the Company and NB Finance are subject to
supervision by U.S. bank regulators.
Risk of Future Revisions in Policies and Strategies by Board of Directors
The Board of Directors has established the investment policies
and operating policies and strategies of the Company, certain of which are
described in this Prospectus. These policies may be amended or revised from time
to time at the discretion of the Board of Directors (in certain circumstances
subject to the approval of a majority of the Independent Directors) without a
vote of the Company's stockholders, including holders of the New Preferred
Shares. Consequently, holders of the New Preferred Shares cannot preclude the
Board of Directors from revising such policies and strategies and the ultimate
effect of such revision in the policies and strategies of the Company on a
holder of the New Preferred Shares may be negative. See "Business and
Strategy--Management Policies and Programs."
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<PAGE>
Balloon Payments
The Initial Mortgage Loans do not provide for the amortization
of the principal balance thereof over their term to maturity. Accordingly, a
principal payment equal to the original balance of such Initial Mortgage Loan
less any prepayments thereon will be due on each Initial Mortgage Loan at its
maturity date. The ability of the borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
mortgaged property. In attempting to do so, the borrower will be affected by a
number of factors, including the level of available mortgage rates at the time
of attempted sale or refinancing, the mortgagor's equity in the mortgaged
property, and prevailing economic conditions and the availability of credit for
residential real estate generally. Consequently, Mortgage Loans requiring
balloon payments may involve a greater degree of risk than fully amortizing
loans.
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations
with Affiliates
The Company and the Bank believe that the fair market value of
the Initial Mortgage Assets issued by NB Finance at acquisition was at least
equal the amount that the Company paid for the Initial Mortgage Assets issued by
NB Finance (approximately US$477 million). However, no third party valuations
were obtained for purposes of the Exchange Offer. Consequently, there can be no
assurance that the fair market value of the Initial Mortgage Assets issued by NB
Finance did not differ from the amount that the Company paid for the Initial
Mortgage Assets issued by NB Finance.
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
20
<PAGE>
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."
Unregistered Sale and Assignment of Initial Mortgage Loans
In order to avoid significant transaction costs, the Company
has not and does not currently intend to register its interest in the Initial
Mortgage Loans in the registry offices where the properties securing the Initial
Mortgage Loans are located. Under Quebec law, such registration formalities are
required in order for the mortgagors under the Initial Mortgage Loans and third
parties to recognize the Company's interest in the Initial Mortgage Loans.
Accordingly, if the Bank were to sell the Initial Mortgage Loans in breach of
its fiduciary obligations to the Company to a bona fide third party purchaser,
such purchaser's interest in the Initial Mortgage Loans could take priority over
that of the Company. Such purchaser would, however, have to register its
interest in the Initial Mortgage Loans prior to the Company registering its
interest therein. Currently, the Bank continues to be the registered owner of
the Initial Mortgage Loans. The Company can complete the necessary registration
formalities at any time.
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. The Company has agreed
that, for a period of six months after the date of this Prospectus, it will make
this Prospectus, as it may be amended or supplemented, available to any
broker-dealer for use in connection with any such resales and will update this
Prospectus, as required, during such six-month period.
Absence of Public Market
The Company is under no obligation, and currently has no
intention, to list the New Preferred Shares on a national exchange.
Additionally, there is no existing market for the New Preferred Shares and there
can be no assurance as to the liquidity of any markets that may develop for the
New Preferred Shares, the ability of the holders to sell their New Preferred
Shares or at what price holders of the New Preferred Shares will be able to sell
their New Preferred Shares. Future liquidity and trading prices of the New
Preferred Shares will depend on many factors including, among other things,
prevailing interest rates, the Company's operating results, the market for
similar securities and whether the New Preferred Shares are listed on a national
21
<PAGE>
exchange. The Initial Purchaser has informed the Company that the Initial
Purchaser may make a market in the Series A Preferred Shares. However, the
Initial Purchaser is not obligated to do so and any such market making activity
may be terminated at any time without notice to the holders of the New Preferred
Shares. In addition, such market making activity will be subject to the limits
of the Securities Act and may be limited during the pendency of the Registration
Statement or the Shelf Registration Statement. Consequently, holders of New
Preferred Shares may find it difficult to sell their New Preferred Shares or to
sell their New Preferred Shares at a price equivalent to the purchase price
thereof. Risks Associated with the Bank
Automatic Exchange
The exchange of Old Preferred Shares for New Preferred Shares
involves risks to the holders of New Preferred Shares with respect to the
performance and capital levels of the Bank. An imminent failure to pay dividends
on preferred shares of the Bank when due, a decline in the capital levels of the
Bank or an act of the Superintendent could result in the New Preferred Shares
being exchanged automatically for the Bank Preferred Shares. Consequently, (i)
the Bank Preferred Shares would be an investment in the Bank and not in the
Company and (ii) as a result of an Exchange Event, holders of the New Preferred
Shares would be required to exchange their New Preferred Shares for Bank
Preferred Shares and become preferred shareholders of the Bank at a time when
the Bank is experiencing financial difficulties or its financial condition is
deteriorating or when the Bank has been taken over by the Superintendent or
proceedings for the winding-up of the Bank have been commenced. An Exchange
Event includes the Superintendent electing to cause the Automatic Exchange.
Investment in the Bank
An investment in the Bank is also subject to risks that are
distinct from the risks associated with an investment in the Company, including
the general risks inherent in equity investments in depository institutions. In
the event of a winding-up of the Bank, the claims of depositors and secured,
senior, general and subordinated creditors of the Bank would be entitled to a
priority of payment over the claims of holders of equity interests, such as the
Bank Preferred Shares. Consequently, if the Bank were to be wound up, the
holders of the New Preferred Shares likely would receive, if anything,
substantially less than they would have received had the New Preferred Shares
not been exchanged for the Bank Preferred Shares.
Dividend Restrictions on Bank Preferred Shares
If an Exchange Event occurs, the Bank would likely be
prohibited from paying dividends on the Bank Preferred Shares. The Bank's
ability to pay dividends on the Bank Preferred Shares would also be subject to
various restrictions under applicable regulations and certain contractual
provisions. In addition, dividends on the Bank Preferred Shares owned by U.S.
investors will generally be subject to Canadian nonresident withholding tax.
Consequently, in the event of an Exchange Event, holders of New Preferred Shares
automatically exchanged for Bank Preferred Shares would likely receive no
dividends or, in the alternative, if dividends were paid on the Bank Preferred
Shares, holders of New Preferred Shares automatically exchanged for Bank
Preferred Shares would become subject to Canadian nonresident withholding tax.
The Bank currently has outstanding three series of cumulative First Preferred
Shares and three series of non-cumulative First Preferred Shares. The Bank may
not, without the approval of the holders of all such series and any future
series, create or issue any shares ranking in priority to or equally therewith
if any cumulative dividends have not been declared and paid or set aside for
payment or any declared and unpaid non-cumulative dividends have not been paid
or set aside for payment. Immediately prior to any failure by the Bank to
declare and pay or set aside for payment, the New Preferred Shares will be
automatically exchanged for Bank Preferred Shares. See "Canadian Federal Income
Tax Considerations." Potential holders of the New Preferred Shares should
carefully consider the foregoing.
22
<PAGE>
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.
23
<PAGE>
THE REGISTRANTS
The Bank
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, 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 Preferred
Shares, if issued, will be a series of First Preferred Shares. 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.
The Company
On August 20, 1997, the Company was incorporated under the
laws of the State of Maryland for the purpose of providing U.S. investors with
the opportunity to invest in Canadian residential mortgages and other real
estate assets. The Company began operations on September 3, 1997. The Company's
principal business objective is to acquire, hold, finance and manage Mortgage
Assets that will generate net income for distribution to stockholders. Mortgage
Assets are obligations secured by real property as well as certain other
qualifying REIT assets. The Company's Mortgage Assets currently consist of
sixteen hypothecation loans (the "Initial Mortgage Assets") issued to the
Company by NB Finance that are recourse only to sixteen pools of, at December
31, 1997, 11,701 Mortgage Loans (the "Initial Mortgage Loans"). Mortgage Loans
consist of CMHC-insured residential first mortgages that are secured by real
property located in Canada. See "Business and Strategy--Description of Initial
Mortgage Assets" and "--Description of Initial Mortgage Loans." At least 90% of
the Company's Mortgage Assets consist of obligations that are recourse only to
Mortgage Loans and that are secured by real property.
Generally, the Company acquired its Mortgage Assets from the
Bank and affiliates of the Bank. The Company may also from time to time,
however, acquire Mortgage Assets from unrelated third parties. The Bank
administers the day-to-day operations of the Company under the Advisory
Agreement. All of the Common Stock is owned by the Bank. The Company will elect
to be taxable as a REIT under the Code and will generally not be liable for
United States federal income tax to the extent that it distributes its income to
its stockholders and maintains its qualification as a REIT. For a further
description of the operations of the Company, see "Business and Strategy,"
"Management," "Risk Factors" and "United States Federal Income Tax
Considerations."
The New Preferred Shares will be exchanged automatically on a
one-for-one basis for the Bank Preferred Shares upon the occurrence of the
Exchange Event. CONSEQUENTLY, HOLDERS OF THE NEW PREFERRED SHARES COULD BE
REQUIRED TO EXCHANGE THEIR NEW PREFERRED SHARES FOR BANK PREFERRED SHARES,
WITHOUT ANY ACTION BY THE HOLDER THEREOF, AT A TIME WHEN THE BANK IS
EXPERIENCING FINANCIAL DIFFICULTIES OR ITS FINANCIAL CONDITION IS DETERIORATING
OR WHEN THE SUPERINTENDENT HAS TAKEN CONTROL OF THE BANK OR PROCEEDINGS FOR THE
WINDING-UP OF THE BANK HAVE BEEN COMMENCED. See "Description of New Preferred
Shares--Automatic Exchange."
NB Finance
On September 3, 1997, NB Finance was incorporated under the
laws of Bermuda. NB Finance was organized solely for the purpose of acquiring
Mortgage Loans and issuing Initial Mortgage Assets, and other similar
obligations, to the Company. Pursuant to the OSFI Order,
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<PAGE>
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.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange
pursuant to the Exchange Offer.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the
Company as of December 31, 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>
December 31, 1997
(In thousands, except
share data)
<S> <C> <C>
Debt
Total long-term debt......................................................................... US$ --
Stockholders' Equity
Preferred Stock, US$.01 par value per share; none authorized,
issued and outstanding, actual and 10,000,000 shares authorized, 300,000 shares
issued and outstanding, as adjusted................................................. 3
Common Stock, US$.01 par value per share; 1,000 shares
authorized, 100 shares issued and outstanding, actual and as adjusted............... (1)
-----------
Additional paid-in capital................................................................... 476,431
Retained earnings............................................................................ 3,702
Total stockholders' equity................................................................... 480,136(1)
Total Capitalization......................................................................... US$480,136
===========
</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 the
Initial Purchaser's discount of US$6,000,000 ("Initial Purchaser's
Discount") and the expenses of issuing the Old Preferred Shares and the
formation of the Company of US$904,072. The additional paid-in capital of
US$476,431,381 represents (i) total capital contributions made by the Bank
to the Company minus the aggregate Initial Purchaser's Discount and
expenses related to the formation of the Company and issuing the Old
Preferred Shares and (ii) the full US$300,000,000 of proceeds of the Old
Preferred Shares minus the aggregate US$3,000 par value of the Old
Preferred Shares. Retained Earnings of US$3,702,093 represents net income
of US$11,820,254 minus dividends paid on the Old Preferred shares of
US$8,211,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES
The Company
General
The Company was incorporated on August 20, 1997 and is a
Maryland corporation. The Company's principal business objective is to acquire,
hold, finance and manage assets consisting of obligations secured by real
property as well as other qualifying REIT assets. On September 3, 1997, the
Company issued US$300 million of Preferred Stock and, simultaneously, received a
capital contribution from the Bank of US$183 million. The Company used the
aggregate net proceeds of US$477 million to acquire the Initial Mortgage Assets.
issued by NB Finance The Company is under no obligation, and currently has no
intention, to list the New Preferred Shares on a national exchange.
In connection with its organization, the Company has incurred
significant legal and other advisory fees which will not be recurring.
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<PAGE>
Liquidity and Capital Resources
The Company's principal short-term and long-term liquidity
needs are to pay quarterly dividends on the 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.
As of December 31, 1997, the US$456 million of Initial Mortgage Assets issued by
NB Finance are over-collateralized by the C$793 million (US$554 million) of
Initial Mortgage Loans. The Company believes that the amounts generated from the
payment of interest and principal on such Initial Mortgage Loans will provide
more than sufficient funds to make full payments with respect to the Initial
Mortgage Assets issued by NB Finance and that such payments will provide the
Company with sufficient funds to meet its operating expenses and to pay
quarterly dividends on the New Preferred Shares. To the extent that the cash
flow from its Mortgage Assets exceeds those amounts, the Company will use the
excess to fund the acquisition of additional Mortgage Assets and make
distributions on the Common Stock.
Significant Accounting Policy
The Company's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.
The Company has been organized and will elect to be taxable as a REIT under the
Code and, as such, expects to pay an aggregate amount of dividends with respect
to its outstanding shares of stock equal to not less than 100% of its REIT
taxable income, subject to certain adjustments. In order to remain qualified as
a REIT, the Company must distribute annually at least 95% of its REIT taxable
income, subject to certain adjustments. As a REIT, the Company will not
generally be liable for United States federal income tax to the extent it
complies with the foregoing criteria.
NB Finance
General
NB Finance was organized on September 3, 1997 under the laws
of Bermuda. 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. Pursuant to the OSFI Order, NB Finance is not
permitted to incur any indebtedness or engage in any business activities other
than ownership of Mortgage Loans and activities incidental thereto. Pursuant to
the Loan Agreement, dated September 3, 1997, between NB Finance and the Company,
NB Finance issued to the Company the Initial Mortgage Assets for US$477 million.
The proceeds from the issuance of the Initial Mortgage Assets, in addition to a
deemed capital contribution from the Bank, were used to acquire the Initial
Mortgage Loans from the Bank for C$846 million (US$ million).
Liquidity and Capital Resources
NB Finance's principal short-term and long-term liquidity
needs are to, with respect to the Initial Mortgage Assets, pay principal when
due (maturity dates range between January 15, 2000 to January 15, 2011) and
monthly interest payments. Pursuant to the terms of the Mortgage Loan Assignment
Agreement, dated September 3, 1997, between the Company, NB Finance and the Bank
(the "Mortgage Loan Assignment Agreement"), NB Finance has assigned its entire
right, title and interest in, to and under the Initial Mortgage Loans to the
Company and permits the Company to administer, perform and enforce the Initial
Mortgage Loans. Pursuant to the Servicing Agreement, the Initial Mortgage Loans
are serviced by the Bank. Accordingly, no interest or principal payments with
respect to the Initial Mortgage Assets are made directly by NB Finance.
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<PAGE>
NB Finance's revenues are derived from its Mortgage Loans. As
of December 31, 1997, the US$456 million of Initial Mortgage Assets are
over-collateralized by C$793 million (US$554 million) of the Initial Mortgage
Loans. Pursuant to the Mortgage Loan Assignment Agreement, all payments made in
respect of the Initial Mortgage Loans are made to the Company (through the Bank
as servicer under the Servicing Agreement). Any such amount, if any, in excess
of the amount due and payable on the Initial Mortgage Assets is remitted to NB
Finance. Pursant to the OSFI Order, NB Finance is not permitted to incur
indebtedness, nor does it have any other material capital expenditures, balloon
payments or other payments due on long-term obligations. No negative covenants
have been imposed on NB Finance.
Significant Accounting Policies
NB Finance's financial statements are prepared in accordance
with generally accepted accounting principles in Canada and are expressed in
U.S. dollars. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's best
knowledge of current events and actions that NB Finance may undertake in the
future, actual results could differ from the estimates. NB Finance does not pay
any income taxes on the Bermuda income.
The Mortgage loans are recorded at their principal amounts
less allowances for credit losses. The premium paid on mortgage loans is
amortized on a straight-line basis over a three-year period.
Monetary assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at year-end rates of exchange.
Revenue and expense items are translated at rates prevailing at the transaction
dates. Gains and losses resulting from translation are reflected in the
statement of income. NB Finance uses cross currency swaps to manage the currency
risk exposure of the mortgage loans. The gains and losses resulting from the
valuation of these instruments are deferred and amortized to income over the
life of the hedged assets.
General
The Company hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the Exchange Offer), to exchange up to
238,400 New Preferred Shares for a like number of Old Preferred Shares properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
pursuant to the procedures described below. The Exchange Offer is being made
with respect to all of the Old Preferred Shares.
As of the date of this Prospectus, the aggregate number of the
Old Preferred Shares outstanding is 300,000. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about , 1998, to all holders of
Old Preferred Shares known to the Company. The Company's obligation to accept
Old Preferred Shares for exchange pursuant to the Exchange Offer is subject to
certain conditions set forth under "--Certain Conditions to the Exchange Offer"
below. The Company currently expects that each of the conditions will be
satisfied and that no waivers will be necessary.
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<PAGE>
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 of which this Prospectus forms a part.
The Exchange Offer is being made by the Company to satisfy
certain of its obligations under the Registration Rights Agreement. The term
"holder," with respect to the Exchange Offer, means any person in whose name Old
Preferred Shares are registered on the books of the Company or any other person
who has obtained a properly completed stock power from the registered holder, or
any person whose Old Preferred Shares are held of record by The Depository Trust
Company. Other than pursuant to the Registration Rights Agreement, the Company
is not required to file any registration statement to register any outstanding
Old Preferred Shares. Holders of Old Preferred Shares who do not tender their
Old Preferred Shares or whose Old Preferred Shares are tendered but not accepted
would have to rely on exemptions to registration requirements under the
securities laws, including the Securities Act, if they wish to sell their Old
Preferred Shares.
Terms of the Exchange
The Company hereby offers to exchange, subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus, each New Preferred Share for each Old Preferred Share. The terms of
the New Preferred Shares are identical in all material respects to the terms of
the Old Preferred Shares for which they may be exchanged pursuant to this
Exchange Offer, except that the New Preferred Share will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. See "Description of New Preferred Shares."
The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Preferred Shares being tendered for exchange.
The Company is making the Exchange Offer in reliance on the
position of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letters, and there can be no assurance that the
Commission would make a similar determination with respect to the New Preferred
Shares. Based on these interpretations by the staff of the Commission, the
Company believes that New Preferred Shares issued pursuant to the Exchange Offer
in exchange for Old Preferred Shares may be offered for sale, resold and
otherwise transferred by any holder of such New Preferred Shares (other than any
such holder that is a broker-dealer or an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Preferred Shares are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Preferred Shares and
neither such holder nor any other
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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 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
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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 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
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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.
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.
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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.
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.
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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.
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.
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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
(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
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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.
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
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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 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
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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.
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.
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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, at December 31, 1997, 11,701 CMHC-insured residential
first mortgages secured by real property located in Canada (the "Initial
Mortgage Loans"). The Company acquired the Initial Mortgage Assets issued by NB
Finance for an aggregate purchase price of approximately US$477 million. See
"--Description of Initial Mortgage Assets" and "--Description of Initial
Mortgage Loans."
In order to preserve its status as a REIT under the Code,
substantially all of the assets of the Company will consist of the Initial
Mortgage Assets issued by NB Finance and other real estate assets that are of
the type set forth in Section 856(c)(6)(B) of the Code. See "United States
Federal Income Tax Considerations."
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. Pursuant to the OSFI Order, NB Finance is not
permitted to engage in any business activity other than ownership of Mortgage
Loans and activities incidental thereto.
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Description of the Company's Dividend Policy
Dividends on the New Preferred Shares are payable at the rate
of 8.35% per annum of the liquidation preference (an amount equal to US$83.50
per annum per share, calculated by multiplying the annual dividend rate of 8.35%
by the liquidation preference of US$1,000 per share, assuming authorization and
declaration by the Board of Directors of four quarterly dividends), if, when and
as authorized and declared by the Board of Directors. As of December 31, 1997,
the US$456 million of Initial Mortgage Assets issued by NB Finance are
overcollateralized by C$793 million (US$554 million) of Initial Mortgage Loans.
The Company believes that the amounts generated from the payment of interest and
principal on such Initial Mortgage Loans will more than provide sufficient funds
to make full payments with respect to the Initial Mortgage Assets and that such
payments will provide the Company with sufficient funds to meet its operating
expenses and to pay quarterly dividends on the New Preferred Shares. In order to
remain qualified as a REIT, the Company must distribute to stockholders annually
at least 95% of its taxable income computed without regard to the dividends paid
deduction and the Company's net capital gain ("REIT taxable income"). The
Company expects to pay an aggregate amount of dividends with respect to its
outstanding shares of stock equal to not less than 100% of the Company's REIT
taxable income. The Company anticipates that none of the dividends on the New
Preferred Shares and none or no material portion of the dividends on the Common
Stock will constitute non-taxable returns of capital.
Dividends will be authorized and declared at the discretion of
the Board of Directors after considering the Company's distributable funds and
financial requirements, tax considerations and other factors. There are,
however, several limitations on the Company's ability to pay dividends on the
Common Stock (none of which should adversely affect the legal right of the
Company to pay dividends on the New Preferred Shares). First, under the
Company's current dividend policy, the Company may not make any distribution in
respect of the Common Stock to the extent that, after taking into account such
proposed distribution, total cash or property distributions on the Company's
outstanding shares of Preferred Stock and Common Stock in any year would exceed
105% of the Company's REIT taxable income for that year, plus net capital gains
of the Company for that year. This policy regarding the limitation on payment of
dividends on the Common Stock may not be modified without the approval of a
majority of the Independent Directors. Second, if the Company fails to authorize
and declare and pay the stated dividend on the New Preferred Shares in any
dividend period, the Company may not pay any dividends with respect to the
Common Stock until such time as dividends on all outstanding New Preferred
Shares have been (i) authorized and declared and paid for three consecutive
dividend periods and (ii) authorized and declared and paid or authorized and
declared and a sum sufficient for the payment thereof set apart for the fourth
consecutive dividend period. See "Description of New Preferred
Shares--Dividends." Third, the Maryland General Corporation Law ("MGCL")
provides that dividends may be paid on the stock of a corporation only if, after
payment of the distribution, (i) the corporation would be able to pay its
indebtedness as such indebtedness becomes due in the usual course of business
and (ii) the corporation's total assets would not be less than the sum of its
total liabilities plus, unless the corporation's charter provides otherwise
(which the Charter does), the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights on dissolution of stockholders whose rights on dissolution
are superior to those receiving the distribution. It is possible that these
limitations on the Company's ability to pay dividends on the Common Stock could
affect the ability of the Company to qualify as a REIT under the Code. See
"United States Federal Income Tax Considerations--Taxation of the Company."
Description of NB Finance's Dividend Policy
There are no corporate restrictions on the ability of NB
Finance to declare and pay a dividend to its stockholder.
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Description of the Company's Investment Policy
General
The Company has formulated the following investment policy.
The Company's current intention is to follow the investment policy as described
below. However, this policy may be amended or revised from time to time at the
discretion of the Board of Directors (in certain circumstances subject to the
approval of a majority of the Independent Directors) without a vote of the
Company's stockholders, including holders of New Preferred Shares. See "Risk
Factors -- Risk of Future Revision in Policies and Strategies by the Board of
Directors." Accordingly, the following description of the Company's investment
policy includes descriptions of assets in which the Company does not currently,
but may in the future, have investments. There is no specific policy with
respect to the amount or percentage of assets which will be invested in any
specific property. All investments will be made primarily for income.
Initial Mortgage Assets
Percentage of current portfolio: 100%. The Company's
investments currently consist solely of the Initial Mortgage Assets (i.e.,
sixteen hypothecation loans, in the aggregate amount at December 31, 1997 of
US$456 million, issued by NB Finance to the Company) that are recourse only to
the Initial Mortgage Loans (i.e., sixteen pools of CMHC-insured residential
first mortgages, in the aggregate amount at December 31, 1997 of C$793 million
(US$554 million) originated by the Bank or acquired by the Bank from other
lenders approved by the National Housing Act (an "NHA-Approved Lender"). The
Initial Mortgage Assets issued by NB Finance are secured by residential real
property located primarily in Quebec, Ontario and New Brunswick underlying the
Initial Mortgage Loans. See "--Description of the Initial Mortgage Assets."
In order to perfect its security interest in the Initial
Mortgage Loans, the Company would need to register the transfer and assignment
of each one of the Initial Mortgage Loans in each land registry or land titles
office in Canada where the real properties securing the Initial Mortgage Loans
are located. The Company would also be required to properly notify each one of
the hypothecary debtors and mortgagors under the Initial Mortgage Loans of the
existence of such transfer and assignment. These procedures could be fulfilled
for any specific mortgage loan comprising the Initial Mortgage Loans or for all
of them. The Company can comply with these procedures at any time and,
therefore, decided not to currently incur the registration and signification
fees related to such procedures.
The Servicing Agreement entered into between the Bank and the
Company provides that the Bank, on behalf of the Company, would foreclose on the
properties in accordance with the National Housing Act and normal mortgage
servicing practices of prudent mortgage lending institutions.
The Company's current investment policy is to invest at least
90% of its portfolio in the Initial Mortgage Assets issued by NB Finance and
obligations that are comparable to the Initial Mortgage Assets issued by NB
Finance. The maturities of the Initial Mortgage Assets issued by NB Finance
range from January 2000 to July 2001. Accordingly, after July 2001, the
Company's portfolio will not include any Initial Mortgage Assets issued by NB
Finance.
Mortgage Loans
Percentage of current portfolio: 0%. While no Mortgage Loans
are included in the Initial Mortgage Assets issued by NB Finance and while the
Company has no current intention to acquire Mortgage Loans, the Company may from
time to time acquire individual residential Mortgage Loans or pools of
residential Mortgage Loans from the Bank or other NHA-Approved Lenders. All
Mortgage Loans will consist of CMHC-insured residential first mortgages and,
accordingly, the credit risk associated therewith should be considerably
mitigated. The properties underlying such Mortgage Loans are expected to be
located in Canada.
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See "--Description of the Initial Mortgage Loans." Potentially, up to 10% of the
Company's portfolio could be comprised of Mortgage Loans.
When a CMHC-insured residential first mortgage is in arrears
for more than 90 days or when information has been obtained by the Bank
indicating that the global financial soundness of the borrower has declined,
such mortgage may be transferred to the Bank's collection department. Once
transferred, the Bank can foreclose on the property, legally sell the property
or initiate a personal lawsuit against the borrower. In the event of a
foreclosure proceeding, the property securing such mortgage is offered for sale
for 90 days. If during the 90 day period the property is not sold, the CMHC will
purchase the property for the amount of the Company's claims against such
property. If the property is sold during the 90 day period at an amount less
than the Company's claim against such property, a claim is made to CMHC for the
amount of the deficiency. The Company's claim against any such property, and
therefore, the amount recoverable from CMHC, includes interest for a period of
twelve months at the loan rate and for six additional months at the loan rate
minus two percent which should offset any claim processing delays in collection
from CMHC. The Company may make a supplementary claim for expenses and interest
thereon within 90 days of the original claim.
Residential Mortgage Loans
Percentage of current portfolio: 0%. While no residential
mortgages are included in the Initial Mortgage Assets issued by NB Finance and
while the Company has no current intention to acquire residential mortgages, the
Company may from time to time acquire individual residential mortgages other
than Mortgage Loans ("Residential Mortgage Loans"). These Residential Mortgage
Loans are expected to meet the requirements for sale to governmental or private
mortgage conduit programs or other investors in the secondary mortgage market
(i.e., such Residential Mortgages must be rated "A" (or better) by at least one
major rating agency (a Canadian rating agency for Canadian-based mortgages or a
U.S. rating agency for U.S.-based mortgages) or include some form of credit
enhancement (such as over-collateralization, letter of credit or accumulated
cash)).
While Mortgage Loans benefit from CMHC insurance, there can be
no assurance that any Residential Mortgage Loans acquired by the Company will be
similarly protected. Some Residential Mortgage Loans are, however, insured by
Mortgage Insurance Company of Canada (now part of GE Capital), therefore
considerably mitigating any credit risk relating to those mortgages. Moreover,
large (i.e., more than four housing units) residential uninsured mortgage loans
sold to the Company must have, as of the time of a sale, a "credit score" of the
Bank of five or better. The Bank has an internal credit scoring system whereby
the risk of large residential loans is ranked from one (the least risk) to ten
(the most risk) according to different factors such as the cash flow derived
from the mortgaged property. Potentially, up to 10% of the Company's portfolio
could be comprised of Residential Mortgage Loans.
Mortgage Insurance Company of Canada is a private insurer
owned by GE Capital Canada. The insurance premium is paid by the borrower and
may be added to the principal of the mortgage loan. The premium rates vary in
accordance with the principal amount of the loan. Generally, the greater the
loan to value ratio, the greater the premium rate.
Mortgage-Backed Securities
Percentage of current portfolio: 0%. While no Mortgage-Backed
Securities are included in the Initial Mortgage Assets issued by NB Finance and
while the Company has no current intention to acquire Mortgage-Backed
Securities, the Company may from time to time acquire fixed-rate or
variable-rate Mortgage-Backed Securities representing interests in pools of
mortgage loans such as a NHA Mortgage-Backed Security ("NHA MBS") that evidences
an undivided interest in a pool of first mortgages originated by certain
approved financial institutions in Canada and insured by CMHC. There are four
different types of NHA MBS pools. The "exclusive homeowner" pools are classified
as prepayable because the borrowers within this type of
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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.
Commercial Mortgage Loans
Percentage of current portfolio: 0%. While no Commercial
Mortgage Loans are included in the Initial Mortgage Assets issued by NB Finance
and while the Company has no current intention to acquire any Commercial
Mortgage Loans, the Company may from time to time acquire Commercial Mortgage
Loans secured by industrial and warehouse properties, recreational facilities,
office buildings, retail space and shopping malls, hotels and motels, nursing
homes or senior living centers. The Company's current policy is not to acquire
any interest in a Commercial Mortgage Loan if Commercial Mortgage Loans would
constitute more than 5% of the total book value of the Company's Mortgage Assets
immediately following such acquisition. Also, Commercial Mortgage Loans sold to
the Company must have a Bank (as of the time of the sale) credit score of five
or better. See "-- Residential Mortgage Loans." Unlike Mortgage Loans and
Residential Mortgage Loans, Commercial Mortgage Loans generally lack
standardized terms. Commercial Mortgage Loans may also not be fully amortizing,
meaning that they may have a significant principal balance or "balloon" payment
due on maturity. Moreover, commercial properties, particularly industrial and
warehouse properties, are generally subject to relatively greater environmental
risks than non-commercial properties, generally giving rise to increased costs
of compliance with environmental laws and regulations. There is no requirement
regarding the percentage of any commercial real estate property that must be
leased at the time the Company
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acquires a Commercial Mortgage Loan secured by such commercial real estate
property, and there is no requirement that Commercial Mortgage Loans have third
party guarantees.
Commercial Mortgage Loans will not be CMHC insured and the
credit quality of a Commercial Mortgage Loan may depend on, among other factors,
the existence and structure of underlying leases, the physical condition of the
property (including whether any maintenance has been deferred), the
creditworthiness of tenants, the historical and anticipated level of vacancies
and rents on the property and on other comparable properties located in the same
region, potential or existing environmental risks, the availability of credit to
refinance Commercial Mortgage Loans at or prior to maturity and the local and
regional economic climate in general. Foreclosures of defaulted Commercial
Mortgage Loans are generally subject to a number of complicating factors,
including environmental considerations, which are generally not present in
foreclosures of Residential Mortgage Loans. Potentially, up to 5% of the
Company's portfolio could be comprised of Commercial Mortgage Loans.
Partnership Interests
Percentage of current portfolio: 0%. While no partnership
interests are included in the Initial Mortgage Assets issued by NB Finance and
while the Company has no current intention to acquire any partnership interests,
the Company may from time to time acquire limited partnership interests in
partnerships the only activities of which are the purchase and ownership of
Mortgage Loans ("Partnership Interests") that are comparable to the Initial
Mortgage Loans (i.e., government insured residential first mortgages). The
ability to invest in Partnership Interests allows the Company to acquire
Partnership Interests that in effect function as conduits for Mortgage Loans, as
an alternative to acquiring a direct interest in such Mortgage Loans. Any
Partnership Interests would be economically comparable to an investment in
Mortgage Loans. The limitations imposed by the REIT rules on the ownership of
Partnership Interests are the same as those imposed on the ownership of Mortgage
Loans. Potentially, up to 10% of the Company's portfolio could be comprised of
Partnership Interests.
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 NB Finance's Investment Policy
Pursuant to the OSFI Order, NB Finance is not permitted to
engage in any activity other than ownership of Mortgage Loans and activities
incidental thereto. NB Finance does not have a formal investment policy.
Description of the Company's Management Policies
General
In administering the Company's Mortgage Assets, the Bank, as
advisor pursuant to the Advisory Agreement, 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
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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 issued by NB Finance and obligations which are
comparable to the Initial Mortgage Assets issued by NB Finance. The Company may,
however, invest in other assets eligible to be held by REITs. See "--
Description of the Company's Investment Policy." The Company's current policy
prohibits the acquisition of an interest in any Mortgage Loan (other than an
interest resulting from the acquisition of Mortgage-Backed Securities or a
Partnership Interest) which is delinquent in the payment of principal or
interest at the time of proposed acquisition.
Capital and Leverage Policies
To the extent that the Board of Directors determines that
additional funding is required, the Company may raise such funds through
additional equity offerings, or retention of cash flow (after consideration of
the provisions of the Code requiring the distribution by a REIT of a certain
percentage of its income annually and taking into account taxes that would be
imposed on the Company's undistributed taxable income), or a combination of
these methods. The Company will have no debt outstanding following consummation
of the Exchange Offer and has no intention of incurring any indebtedness in the
future.
In order to qualify as a REIT, the capital stock of the
Company must be held by at least 100 holders during approximately 90% or more of
the taxable year beginning in the Company's second taxable year and in each
subsequent taxable year. See "United States Federal Income Tax Considerations --
Stock Ownership Tests." The Company has issued the Senior Preferred Shares with
an aggregate liquidation preference of up to US$450,000 and limited
transferability to ensure that it meets, and will continue to meet, the 100
person ownership requirement for REIT status without having to constantly
monitor the number of
45
<PAGE>
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 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.
46
<PAGE>
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 NB Finance's Management Policies
General
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. 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.
Asset Acquisition and Disposition Policies
NB Finance may, from time to time, use amounts remitted to NB
Finance by the Company, or contributions of additional capital by the Bank, to
purchase additional Mortgage Loans. NB Finance has acquired all or substantially
all of such Mortgage Loans from the Bank and/or affiliates of the Bank on terms
comparable to those that could be obtained by NB Finance if such Mortgage Loans
were purchased from unrelated third parties. As of the date of this Prospectus,
NB Finance has not entered into any agreements with any third parties with
respect to the purchase of Mortgage Loans.
47
<PAGE>
Capital and Leverage Policies
To the extent the Board of Directors determines additional
funding is required, the Bank will contribute such additional funding to NB
Finance. NB Finance is not permitted to incur any indebtedness.
Credit Management Policies
NB Finance intends that each Mortgage Loan acquired from the
Bank or an affiliate of the Bank 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.
NB Finance intends to distribute to stockholders annual
reports containing financial statements prepared in accordance with generally
accepted accounting principles and certified by NB Finance's independent public
accountants.
NB Finance 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.
Description of the Initial Mortgage Assets
The Initial Mortgage Assets issued by NB Finance are comprised
of sixteen hypothecation loans issued by NB Finance to the Company. As of
December 31, 1997, the principal amount of the Initial Mortgage Assets was
approximately US$456 million. Each of the sixteen hypothecation loans comprising
the Initial Mortgage Assets issued by NB Finance is secured by a pool of
Mortgage Loans. As of December 31, 1997, the Initial Mortgage Loans were
comprised of, in the aggregate, 11,701 Mortgage Loans in an aggregate amount of
approximately C$793 million (US$ million). The value of each pool of Mortgage
Loans comprising the Initial Mortgage Loans exceeds the principal amount of the
hypothecation loan that it secures. Accordingly, the Initial Mortgage Assets
issued by NB Finance are overcollateralized by the Initial Mortgage Loans. The
aggregate amount of the overcollateralization is, as of December 31, 1997 US$ .
The Company acquired the Initial Mortgage Assets issued by NB Finance pursuant
to the terms of a loan agreement with NB Finance.
Each Initial Mortgage Asset issued by NB Finance is recourse
only to the Initial Mortgage Loans securing such Initial Mortgage Asset. Each
pool of Initial Mortgage Loan is comprised of between 130 and 2,495 CMHC-insured
residential first mortgages. See "Description of the Initial Mortgage Loans."
Each Initial Mortgage Asset issued by NB Finance is further secured by the
residential real properties underlying such CMHC-insured first mortgages. Such
residential real properties are located primarily in Quebec, Ontario and New
Brunswick. The Initial Mortgage Loans are insured by CMHC. Accordingly, there
can be no loss of principal or interest. However, CMHC insurance does not
guarantee timely payment of interest and principal. See "Risk Factors--Limited
Recourse Nature of Certain Mortgage Assets; Limitation on CMHC Insurance." The
Initial Mortgage Assets have maturities ranging from January 2000 to July 2001.
The Initial Mortgage Assets pay interest at rates ranging from 6.90% to 9.77%,
with an average rate of approximately 8.40% per annum.
The following table summarizes the Initial Mortgage Assets:
<TABLE>
<CAPTION>
Initial Mortgage Assets
Outstanding Maturity Interest Monthly
Amount Date Rate* Interest Payments
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C> <C>
US$ 22,971,484 Jan. 2000 6.895% US$ 136,954
48
<PAGE>
22,127,264 Jan. 2000 7.471% 142,550
46,022,201 Jan. 2000 8.047% 318,171
15,147,402 Jan. 2000 8.622% 115,524
42,353,437 July 2000 6.895% 248,660
28,780,803 July 2000 7.471% 182,178
6,988,033 July 2000 8.622% 51,156
9,056,588 July 2000 8.047% 62,737
31,830,449 Jan. 2001 9.198% 250,531
44,641,787 Jan. 2001 9.774% 374,309
4,999,372 Jan. 2001 8.047% 34,679
6,100,814 Jan. 2001 8.622% 44,773
21,278,095 July 2001 8.047% 146,079
101,518,193 July 2001 8.622% 740,026
21,767,957 July 2001 9.198% 173,070
30,635,309 July 2001 9.774% 258,853
US$ 456,219,188 8.404% US$ 3,280,250
</TABLE>
* All rates quoted on a 30/360 semiannual basis
Payments of interest are made monthly out of payments on the
Initial Mortgage Loans. Pursuant to an agreement between the Company and NB
Finance (the "Mortgage Loan Assignment Agreement"), dated September 3, 1997, the
Company receives all scheduled payments made on the Initial Mortgage Loans,
retains a portion of any such payments equal to the amount due and payable on
the Initial Mortgage Assets 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 Initial Mortgage Loans equal to the proportion of
such prepayments that the outstanding principal amount of the Initial Mortgage
Loans bears to the outstanding principal amount of the Initial Mortgage Assets
issued by NB Finance, which amount would be applied to reduce the outstanding
principal amount of the Initial Mortgage Assets issued by NB Finance. Repayment
of the Initial Mortgage Assets issued by NB Finance is secured by an assignment
of the Initial Mortgage Loans to the Company pursuant to the Mortgage Loan
Assignment Agreement, which is governed by the laws of Bermuda. The assignment
of the Initial Mortgage Loans by NB Finance to the Company is without recourse.
The Company has a security interest in the real property securing the Initial
Mortgage Loans and, subject to fulfilling certain procedural requirements under
applicable Canadian law, is entitled to enforce payment on the Initial Mortgage
Loans in its own name if a mortgagor should default thereon. In the event of
such a default, the Company has the same rights as NB Finance to force a sale of
the mortgaged property and satisfy the obligations of NB Finance out of the
proceeds. In the event of a default in respect of an Initial Mortgage Loan, the
amount of the Initial Mortgage Assets issued by NB Finance will be reduced by an
amount equal to the portion thereof allocable to defaulting mortgage. The
Initial Mortgage Loans are administered by the Bank, as servicer pursuant to the
Servicing Agreement, and the Company has the right to perfect its security
interest in the Initial Mortgage Loans by notice and registration. Following
repayment of the Initial Mortgage Assets issued by NB Finance, the Company will
reassign any outstanding Initial Mortgage Loans (without recourse) and deliver
them to, or as directed by, NB Finance. All payments in respect of the Initial
Mortgage Loans are made in Canadian dollars. The amounts due on the Initial
Mortgage Assets issued by NB Finance are retained by the Company free and clear
of and without withholding or deduction for or on account of any present or
future taxes imposed by or on behalf of Bermuda or any political subdivision
thereof or therein.
With respect to its underwriting policies, the Bank will not
make any residential mortgage loans that exceed a loan to value ratio of 75%
unless such loan is insured by CMHC. If the residential
49
<PAGE>
mortgage loan is CMHC-insured (i) a cash down payment of between 5% and 24.9% is
required, (ii) the monthly payment for capital, interest, taxes and heating must
not exceed 32% of the gross monthly revenue of the borrower and (iii) the
monthly payment for capital, interest, taxes, heating and all other monthly
payments (including, without limitation, personal loans, lease payments and
credit card debt service) must not exceed 40% of the net monthly revenue of the
borrower, Additionally, for all mortgage loans, an external credit check must be
positive. If the loan is privately insured through Mortgage Insurance Company of
Canada, an additional amount may be added to the principal amount of the
mortgage loan representing the premium related thereto. The premium rates vary
in accordance with the principal amount of the loan. Generally, the greater the
loan to value ratio, the greater the premium rate.
From 1992 through 1997, the Bank's annual loss experience for
residential mortgage loans ranged from a low of approximately C$208,000 on a
loan volume of approximately C$2.325 billion, or 0.0089%, in 1992 to a high of
approximately C$1.425 million on a loan volume of approximately C$6.415 billion,
or 0.0222%, in 1995, with an average annual loss during that period of
approximately C$689,000 on an average annual loan volume of approximately
C$5.171 billion, or 0.0133%.
On the last day of the Bank's fiscal year in each of 1993
through 1997, the Bank's delinquency experience for CMHC-insured residential
mortgage loans ranged from, in the 30 to 59 day category, 727 (0.97%) to 1,641
(1.72%) loans with a principal and interest delinquent amount of approximately
C$46.3 million (1.01%) to approximately C$126.4 million (1.95%), respectively,
in the 60 to 89 day category, 283 (0.38%) to 607 (0.65%) loans with a principal
and interest delinquent amount of approximately C$19.5 million (0.43%) to
approximately C$43.7 million (0.72%), respectively, and in the 90 day or more
category, 736 (0.98%) to 1,594 (1.71%) loans with a principal and interest
delinquent amount of approximately C$59.7 million (1.31%) to approximately
C$125.8 million (2.08%), respectively. Percentages are based upon total
CMHC-insured residential mortgage loans originated by the Bank and total
principal and interest due thereon.
Description of the Initial Mortgage Loans
Information with respect to the Initial Mortgage Loans is
presented as of August 8, 1997.
The detailed information set forth in this Prospectus with
respect to the Initial Mortgage Loans applies only to the mortgages purchased by
NB Finance.
The Initial Mortgage Loans consist of sixteen pools of
residential first mortgages originated by the Bank or acquired by the Bank from
other CMHC approved lenders. Each pool consists of between 130 and 2,495
CMHC-insured residential first mortgages and is secured by the underlying
residential real properties located in Canada, primarily in Quebec, Ontario and
New Brunswick. Approximately 95% of such properties are located in the provinces
of Quebec and New Brunswick. The remaining 5% of such property is located
throughout the remaining Canadian provinces. See "Risk Factors--All of the Real
Property Securing the Initial Mortgage Assets is Located Outside of the United
States." As of December 31, 1997, 11,701 CMHC-insured residential first
mortgages comprise the sixteen pools. Generally, the CMHC-insured residential
first mortgages comprising any individual pool are less than C$100,000.
Accordingly, no individual CMHC-insured residential first mortgage is material
to the Company, its operation or its business.
Payments on the Initial Mortgage Loans are due monthly in
arrears on the 1st day of each month through July 2001 or such earlier date on
which payment in full of the Initial Mortgage Loans is made (the "Final Payment
Date") or, if the 1st day of a month is not a business day, on the first
business day following the 1st day of such month (a "Monthly Payment Date").
Payments of interest and principal on the Initial Mortgage Loans are made in
Canadian dollars.
50
<PAGE>
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.
51
<PAGE>
The following tables summarize the Initial Mortgage Loans as
of December 31, 1997:
<TABLE>
<CAPTION>
Initial Mortgage Loans
(as of December 31, 1997)
Pool Smallest Largest
Number Outstanding Amount* Loan Loan Origination Date
------ ------------------ ------------- --------------- -------------------------------------
Earliest Latest
-------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 39,915,715 $ 8,723.66 $ 674,130.25 Jun-1986 Jan-1997
2 38,446,796 14,457.89 1,118,189.58 Jun-1984 Jan-1997
3 79,892,171 13,249.13 352,320.10 Aug-1983 Jan-1997
4 26,322,977 9,708.22 314,697.46 Sep-1983 Dec-1996
5 73,598,039 5,604.36 688,957.68 Apr-1986 Jul-1997
6 50,007,728 4,907.53 612,452.46 May-1985 Jul-1997
7 12,142,282 11,936.51 889,759.33 Mar-1985 Jul-1997
8 15,669,136 6,931.20 323,940.67 Apr-1984 Jul-1997
9 8,731,105 15,874.92 182,474.82 Feb-1985 Aug-1997
10 10,494,468 7,844.42 208,616.64 Feb-1985 Jul-1997
11 55,030,457 6,368.53 455,474.11 Jun-1987 May-1997
12 78,190,020 5,201.57 580.003.32 Oct-1984 Jul-1997
13 36,904,741 6,825.40 236,868.62 Apr-1986 Jul-1997
14 176,229,308 5,856.08 2,270,054.60 Feb-1986 Jul-1997
15 37,770,870 10,045.36 729,680.17 May-1985 Jun-1997
16 53,233,913 4,938.29 344,466.58 May-1986 Jun-1997
$792,579,726
</TABLE>
Maturity Min. Max. Avg. Min. Max. Avg.
- ---------- ---------- --------- ----------- ---------- ----------- -------
Interest rate** Remaining Term (months)
Jan-2000 6.000% 6.499% 6.223% 20.00 25.00 24.12
Jan-2000 6.500% 6.999% 6.765% 20.00 25.00 23.68
Jan-2000 7.000% 7.499% 7.165% 20.00 25.00 23.34
Jan-2000 7.500% 7.999% 7.785% 20.00 25.00 21.29
Jul-2000 6.000% 6.499% 6.197% 26.00 31.00 28.85
Jul-2000 6.500% 6.999% 6.632% 26.00 31.00 29.35
Jul-2000 7.500% 7.999% 7.606% 26.00 31.00 28.00
Jul-2000 7.000% 7.499% 7.189% 26.00 31.00 26.88
Jan-2001 7.000% 7.499% 7.231% 32.00 37.00 35.46
Jan-2001 7.500% 7.999% 7.804% 32.00 37.00 35.34
Jan-2001 8.000% 8.499% 8.262% 32.00 37.00 34.68
Jan-2001 8.500% 8.999% 8.707% 32.00 37.00 34.08
Jul-2001 7.000% 7.499% 7.304% 38.00 43.00 40.82
Jul-2001 7.500% 7.999% 7.759% 38.00 43.00 40.85
Jul-2001 8.000% 8.499% 8.199% 38.00 43.00 41.15
Jul-2001 8.500% 8.999% 8.530% 38.00 43.00 41.85
7.309% 7.808% 7.520% 30.36 35.36 33.30
- --------------------------------
* All amounts quoted in Canadian $
** All rates quoted on a 30/360 semiannual basis
52
<PAGE>
Remaining Amortization
(as of December 31, 1997)
<TABLE>
<CAPTION>
Weighted Avg.
Remaining
Pool Number of Weighted Avg. Weighted Avg. Amoritization
Number Loans Interest Adj. Date Maturity Date (in months)
<S> <C> <C> <C> <C> <C>
1 622 December 3, 1996 December 4, 1999 212.07
2 527 October 26, 1996 November 11, 1999 225.02
3 1,277 August 16, 1996 November 11, 1999 214.04
4 385 March 16, 1996 September 9, 1999 237.58
5 1,052 April 26, 1997 April 26, 2000 241.59
6 832 May 12, 1997 May 12, 2000 227.22
7 160 May 19, 1996 April 4, 2000 235.98
8 241 December 19, 1996 February 26, 2000 213.41
9 124 November 14, 1996 November 14, 2000 216.16
10 130 April 19, 1996 November 11, 2000 243.45
11 668 November 17, 1995 October 21, 2000 251.10
12 1,224 October 10, 1995 October 3, 2000 245.53
13 407 May 22, 1996 April 25, 2001 261.98
14 2,495 April 16, 1996 April 27, 2001 256.25
15 520 May 14, 1996 May 5, 2001 230.78
16 1,037 May 24, 1996 May 27, 2001 215.87
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Location of Real Property
Securing the Initial Mortgage Loans
(as of December 31, 1997)
Quebec Ontario New Brunswick All Other
Pool No. of Prin. No. of Prin. No. of Prin. No. of Prin.
Number Loans Amt. Loans Amt. Loans Amt. Loans Amt.
------ ------- ------ ------- ------ ------- ------ ------- ------
(%) (%) (%) (%) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 95.83 94.64 2.57 3.43 0.64 0.45 0.96 1.48
2 89.56 87.02 7.59 10.58 1.52 0.83 1.33 1.57
3 89.97 88.76 6.19 7.80 2.66 2.01 1.18 1.43
4 91.16 89.57 3.64 4.66 3.38 3.24 1.82 2.53
5 93.72 92.72 3.61 4.69 1.43 1.16 1.24 1.43
6 95.68 93.82 2.04 3.80 1.44 1.19 0.84 1.19
7 88.73 87.96 6.88 9.18 3.13 1.81 1.26 1.05
8 90.84 85.92 5.00 8.18 1.25 1.13 2.91 4.77
9 85.48 78.99 11.29 14.77 - - 3.23 6.24
10 74.61 66.28 20.00 26.59 0.77 0.36 4.62 6.77
11 70.66 64.96 19.01 24.97 4.04 3.45 6.29 6.67
12 82.97 82.39 6.96 9.20 6.06 4.37 4.01 4.04
13 71.91 64.85 21.67 27.30 0.74 0.74 5.68 7.11
14 91.13 88.87 5.90 8.09 1.81 1.40 1.16 1.64
15 82.28 77.52 13.10 17.55 2.31 2.54 2.31 2.39
16 90.63 90.09 3.76 4.56 4.15 3.46 1.46 1.89
</TABLE>
Loan Type
------------------------
Multi-
Homeowner Family
(%) (%)
93.87 6.13
93.75 6.25
98.60 1.40
95.28 4.72
95.95 4.05
97.72 2.28
88.75 11.25
95.12 4.88
100.0 -
96.75 3.25
93.98 6.02
92.90 7.10
97.26 2.74
95.50 4.50
92.68 7.32
97.36 2.64
54
<PAGE>
<TABLE>
<CAPTION>
Principal Value Remaining
(as of December 31, 1997)
(US $)
Remaining Amortization of Principal in Months
Pool 0 to 29 30 to 59 60 to 89 90 to 119 120 to 149
Number 181 to 209 210 to 239 240 to 269 270 to 299 300 to 329
<S> <C> <C> <C> <C> <C> <C>
1 - 631,930 1,672,703 2,771,923 3,153,772
3,752,863 6,838,055 6,624,655 9,977,591 -
2 - 259,109 565,608 1,490,435 2,013,597
3,971,170 9,416,253 9,454,801 7,464,555 88,685
3 - 434,196 2,013,850 4,884,167 6,301,187
10,477,023 14,730,624 19,004,858 13,933,591 -
4 - 110,015 348,583 880,554 1,313,403
1,948,738 2,782,027 9,120,828 7,842,293 -
5 - 376,848 1,734,931 2,578,558 2,812,552
3,964,751 14,367,793 11,551,338 30,456,725 141,659
6 - 272,330 1,334,394 2,536,406 2,140,481
4,649,554 9,140,080 11,922,459 12,664,779 151,660
7 - 60,572 271,308 286,340 123,814
1,782,446 1,599,468 2,945,385 4,180,692 -
8 - 19,965 269,259 629,144 1,289,057
2,670,569 1,366,954 4,869,906 2,460,578 -
9 - 17,745 372,976 437,730 529,526
1,099,181 1,290,694 1,635,740 2,305,886 64,588
10 - 79,971 126,143 265,152 23,117
863,581 1,758,575 1,115,102 5,548,122 -
11 - 240,066 520,117 467,927 1,001,484
2,204,331 6,921,736 5,999,939 34,638,585 62,872
12 - 422,355 974,831 1,430,224 991,305
3,040,496 12,562,700 5,987,812 47,725,834 58,892
</TABLE>
150 to 179
330 and over Total
4,411,464
80,757 39,915,715
3,558,123
164,460 38,446,796
8,058,138
54,536 79,892,171
1,783,533
193,005 26,322,977
5,404,868
208,015 73,598,039
5,151,045
44,539 50,007,728
892,258
- 12,142,282
1,931,345
115,423 15,669,136
977,038
- 8,731,105
714,705
- 10,494,468
2,686,445
286,955 55,030,457
4,547,878
447,694 78,190,020
55
<PAGE>
<TABLE>
<CAPTION>
Principal Value Remaining
(as of December 31, 1997)
(US $)
Remaining Amortization of Principal in Months
Pool 0 to 29 30 to 59 60 to 89 90 to 119 120 to 149
Number 181 to 209 210 to 239 240 to 269 270 to 299 300 to 329
<S> <C> <C> <C> <C> <C> <C>
13 - 105,548 188,573 218,670 362,288
1,815,498 3,935,949 1,970,023 27,254,041 -
14 - 788,148 1,515,702 1,871,316 3,355,079
10,412,734 18,838,740 13,188,423 118,400,709 60,487
15 - 318,237 708,731 2,195,136 1,856,813
2,773,732 6,999,300 1,814,888 17,810,161 -
16 - 1,112,658 1,940,766 4,285,235 3,326,033
3,153,246 9,116,099 2,032,036 22,052,474 -
</TABLE>
150 to 179
330 and over Total
1,054,151
- 36,904,741
7,188,016
609,956 176,229,308
2,965,522
328,350 37,770,870
6,215,365
- 53,233,913
56
<PAGE>
All of the Initial Mortgage Loans were originated in
accordance with underwriting policies customarily employed by the Bank, or with
underwriting policies acceptable to the Bank. As is generally the case in the
Canadian residential mortgage business, the Bank's underwriting policies are
derived from CMHC approved underwriting criteria, and they focus on the
borrower's ability to repay the mortgage loan and the adequacy of the proposed
security.
As a CMHC approved lender, the Bank has access to the National
Housing Act (NHA) mortgage insurance program. All of the Initial Mortgage Loans
are insured by CMHC pursuant to that program. The bulk of those loans were
insured at origination. Whether a loan is insured at origination or through the
CMHC portfolio insurance program, the insurance is valid until the expiration of
the loan.
All of the Initial Mortgage Loans are balloon mortgages.
Accordingly, the Initial Mortgage Loans do not provide for the amortization of
the principal balance thereof over their term to maturity and a principal
payment equal to the original balance less any prepayment will be due on each
Initial Mortgage Loan at maturity. Mortgage Loans that require a balloon payment
typically involve a greater degree of risk than fully amortizing loans. See
"Risk Factors--Balloon Payments." Balloon mortgages are the most prevalent type
of mortgage offered by Canadian mortgage lenders. At the expiration of the term,
the mortgage is generally renewed, based on then current market conditions, for
a new term. Although the Bank offers terms varying from 3 months to 10 years,
terms exceeding 5 years are relatively rare. Moreover, although the Bank offers
monthly, semi-monthly and weekly pay mortgages, all of the Initial Mortgage
Loans are monthly pay mortgages. In general, loans are amortized over a period
not exceeding 25 years.
The Initial Mortgage Loans provide for limited prepayment
rights. For example, typically up to 10% of the original principal amount of an
Initial Mortgage Loan may be prepaid without penalty. Moreover, an Initial
Mortgage Loan may also be prepaid without penalty if the mortgaged property is
sold and the mortgagor enters into a new mortgage with the same terms and
conditions as the Initial Mortgage Loan. In most other circumstances,
prepayments or renegotiations of either the interest rate or the term of an
Initial Mortgage Loan will be subjected to prepayment penalties. During the
first three years following the most recent interest adjustment date, such
penalties are tantamount to a yield maintenance clause. After three years, such
penalties will be limited to three months of interest.
On the date of purchase, the Initial Mortgage Loans had an
aggregate principal amount of approximately C$828 million (US$596 million) and a
fair market value of approximately C$848 million (US$610 million). The Initial
Mortgage Loans mature monthly beginning in 2000, with an average maturity of
approximately September 2000.
The Company intends and has the ability to hold the Mortgage
Loans to maturity unless there is a prepayment by the customer or a Mortgage
Loan is impaired. Therefore the Mortgage Loans will be recorded as a long-term
investment in the balance sheet of the Company.
Effect of Interest Rate Fluctuation on Assets and Earnings
It is anticipated that the Company's income will consist
principally of interest payments from the Initial Mortgage Assets issued by NB
Finance and obligations that are comparable to the Initial Mortgage Assets
issued by NB Finance. Interest and principal amounts generated by the Initial
Mortgage Loans and other assets acquired pursuant to the Company's investment
policy enable full payment with respect to the Initial Mortgage Assets by NB
Finance. The Initial Mortgage Assets by NB Finance and the Initial Mortgage
Loans mature between January 2000 and July 2001.
If there is a significant decline in interest rates at a time
when the Company must reinvest payments of interest and principal in respect of
its Mortgage Assets or Mortgage Loans, the Company may find it difficult to
purchase additional Mortgage Assets or Mortgage Loans which generate sufficient
income to
57
<PAGE>
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 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
58
<PAGE>
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 and NB Finance have six and four employees,
respectively. Information regarding the executive officers of the Company and NB
Finance is provided below under "Management--Directors and Executive
Officers--The Company" and "--NB Finance." Neither the Company nor NB Finance
anticipates that it will require any additional employees because (i) the
Company retains the Bank to perform certain functions pursuant to the Advisory
Agreement as described below under "Management--The Bank" and (ii) pursuant to
the OSFI Order, NB Finance is not permitted to engage in any business activities
other than the ownership of Mortgage Loans and activities incidental thereto.
Each employee of the Company and NB Finance is currently also an officer and/or
director of the Bank and/or affiliates of the Bank. The Company and NB Finance
maintain 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.
NB Finance does not engage in the business of originating
Mortgage Loans. While NB Finance may purchase additional Mortgage Loans, it
anticipates that such Mortgage Loans will be purchased from the Bank and/or
affiliates of the Bank. Accordingly, NB Finance does not compete with savings
and loan associations, banks, thrift and loan associations, finance companies,
mortgage bankers or insurance companies in acquiring Mortgage Loans.
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
59
<PAGE>
of the Bank for such mortgages in Quebec is approximately 18% compared with a
significantly greater market share for Caisses Populaires Desjardins.
Legal Proceedings
Neither the Company nor NB Finance is the subject of any material litigation.
None of the Company, NB Finance nor any other affiliate of the Bank is currently
involved in nor, to the Company's knowledge, currently threatened with any
material litigation with respect to the Initial Mortgage Assets issued by NB
Finance or the Initial Mortgage Loans, other than routine litigation arising in
the ordinary course of business, most of which is expected to be covered by
liability insurance.
MANAGEMENT
Directors and Executive Officers--The Company
The Board of Directors of the Company 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 theo Common Stock in determining whether any proposed action
requiring their approval is in the best interests of the Company. The Company
currently has six employees and does not anticipate that it will require
additional employees. See "Business and Strategy--Employees."
As of January 30, 1998, the persons who are directors and
executive officers of the Company are as follows:
Name Position and Offices Held
- ---- -------------------------
Michael Hanley Director
Alain Michel Director
John Richter Director; Chairman of the Board;
Chief Executive Officer; President
Tom Doss Director; Chief Financial Officer;
Treasurer
Pierrette Lacroix Director; Vice President
Francois Bourassa (Vice President--Legal; Secretary), Andree
Grimard (Assistant Secretary) and Martin Ouellet (Vice President) are the only
other employees of the Company. The following is a summary of the experience of
the executive officers and current directors of the Company:
Mr. Hanley has been Vice President and Chief Financial Officer
of Gaz Metropolitain since June 1997. Prior to that he was Vice President,
Finance of St. Laurent Paperboard Inc. since November 1995 and Corporate
Controller since June 1994. Prior to that, Mr. Hanley was Manager, Financial
Analysis, at Avenor Inc. since May 1993 and Internal Auditor since September
1990. Prior to that, he was Senior Advisor for Arthur Andersen & Co., an
international firm of accountants and management consultants.
Mr. Michel has been Senior Vice President and Chief Financial
Officer of Le Groupe Videotron Ltee since September 1994. Prior to that, he was
Vice President Finance and Treasurer of Videotron since July 1992. Mr. Michel is
a member of the Board of Directors of Group Goyette Inc., a public
transportation company, and is Vice-Chairman of the Board and Chairman of the
Audit Committee of Optel Inc., its U.S. division.
Ms. Pierrette Lacroix joined the Montreal Head Office of
National Bank of Canada in 1975. As senior officer, she has been involved in
various functions related to the Treasury area of the Bank and has, over the
years, participated in several task forces within the Bank. She came to the
United States in May of
60
<PAGE>
1993 to assume the position of Senior Vice President and Treasurer of the USA
Division. As such, she is responsible for the management of all Treasury related
activities for the USA, including asset/liability management. She is also a
member of the USA Division's Management Committee.
Mr. Doss joined the Bank in 1981 and has served as Chairman,
Credit Committee (United States) since 1981. He was elected Vice President,
Credit (U.S.) in 1988. He is an officer of several of the Bank's U.S.
subsidiaries and is a director of National Canada Finance Corp. and NB Finance.
He is also a member of the Board of Trustees for Soundview Preparatory School.
Mr. Richter has been Vice President - Eastern United States of
the Bank since 1988. In this position he functions as the Bank's senior lender
officer in the United States. Mr. Richter is President of National Canada
Finance Corp., a United States subsidiary of the Bank. He is also a member of
the Bank's management committee in the United States. Mr. Richter has been
Chairman of the Board; Chief Executive Officer; President of the Company since
January 30, 1998.
Directors and Executive Officers--NB Finance
The Board of Directors of NB Finance consists of the
individuals set forth below. Messrs. Cooke and Trollope are Independent
Directors. NB Finances currently has four employees and does not anticipate that
it will require additional employees. See "Business and Strategy--Employees."
As of January 30, 1998, the persons who are directors and
executive officers of the Company are as follows:
Name Position and Office Held
- ---- ------------------------
David W. P. Cooke Director
Nicolas G. Trollope Director
Tom Doss Director
John Richter Director
Martin Ouellet Director; President
Francois Bourassa Director; Secretary
Pierrette Lacroix Director; Vice President
Wayne Morgan (Assistant Secretary) is the only other employee
of NB Finance. The following is a summary of the experience of the executive
officers and current directors of NB Finance other than those provided under
"Directors and Executive Officers--The Company" above.
Mr. David W.P. Cooke has been a corporate attorney in the
Bermuda law firm of Conyers Dill & Pearman since 1994. He was called to the Bar
in England and Wales in 1987 and to the Bar in Bermuda in 1989. Prior to joining
Conyers Dill & Pearman, Mr. Cooke was engaged in the practice of law with other
law firms in both Bermuda and London, England.
Mr. Nicolas G. Trollope has been a partner in the Bermuda law
firm of Conyers Dill & Pearman since 1991. He was called to the Bar in England
and Wales in 1982 and to the Bar in Bermuda in 1983. Mr. Trollope is also a
member of the Institute of Chartered Secretaries.
Mr. Martin Ouellet has been employed by the Bank for more than
17 years in the Treasury division. Since 1989, he has been Vice-President,
Treasury and Financial Markets. In the three years previous thereto, he served
as Vice-President of the Treasury operations of the London, England branch.
61
<PAGE>
Mr. Francois Bourassa has been Senior Advisor, Legal Affairs
of the Bank since 1989. Prior to joining the Bank, Mr. Bourassa was engaged in
the practice of law in Montreal.
Compensation of Executive Officers
The respective officers, employees and directors of the
Company and NB Finance, other than Independent Directors, did not receive any
form of compensation from the Company and NB Finance, respectively, for the
fiscal year ended December 31, 1997. The compensation of the officers, employees
and directors other than the Independent Directors of the Company is paid
directly by the Bank and charged-back to the Company for services provided
thereto pursuant to the terms of the Advisory Agreement. See "-- The Bank as
Advisor." The following table summarizes compensation information for the fiscal
year ended December 31, 1997 for (i) Roger Smock, President of the Company, who
resigned from his positions with the Bank and the Company in January 1998 and
(ii) Martin Ouellet, President of NB Finance:
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
------------
Annual Compensation Awards
------------------------------------------------------ -------------
Securities
Other Underlying
Name and Principal Annual Options/ All Other
Position Year Salary Bonus Compensation SARs(#) Compensation
- ------------------------- ----------- --------------- -------------- --------------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Roger Smock, 1997 US$183,287 0 US$14,555(2) US$18,000 0
President - NB
Capital Corporation(1)
Martin Ouellet 1997 C$123,500 C$295,000 C$742(3) C$8,000 0
President -
NB Finance, Ltd.(1)
</TABLE>
---------------
(1 Compensation disclosed in this table for Mr. Smock and Mr. Ouellet was paid
in consideration for all services to the Bank and its subsidiaries. Only a
portion of such compensation is attributable to Mr. Smock's services to the
Company, which portion was charged-back to the Company by the Bank pursuant
to the terms of the Advisory Agreement. See "--The Bank as Advisor." No
executive officer of the Company or NB Finance was paid more than $100,000
of compensation for the fiscal year ended December 31, 1997 that would be
attributable to services performed for the Company or NB Finance and thus
are not included in this table.
(2) Consists of a US$10,000 annual education allowance and a US$4,555 annual
car allowance.
(3) Consists of a taxable benefit on a reduced interest loan.
62
<PAGE>
SAR Grants in Last Fiscal Year
The following table provides information about stock
appreciation rights ("SARs") awarded to Mr. Ouellet during the fiscal year ended
December 31, 1997:
SAR Grants in the Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants(1) for SAR Term(2)
---------------------------------------------------------------------- -----------------------------
Number of % of Total
Securities SARs
Underlying Granted to
SARs Employees Base
Granted in Fiscal Price Expiration
Name (#) Year (C$/Sh) Date 5% (C$) 10% (C$)
- --------------------------- ---------------- ---------------- -------------------------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Martin Ouellet 8,000 0.7% C$24.50 12/31/2007 C$123,280 C$312,560
President -
NB Finance, Ltd.
</TABLE>
(1) The SARs granted to Mr. Ouellet vest in four equal annual installments
commencing on the first anniversary of their date of grant.
(2) Potential gains on SARs are net of base price, but before taxes associated
with exercise.
Options Exercised and Year-End Option/SAR Holdings
The following table provides information about stock option
exercises during 1997 and stock options/SARs held at fiscal year-end:
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End (C$) (2)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized (C$)(1) Unexercisable Unexercisable
---- --------------- ---------------------- ------------- -------------
<S> <C> <C> <C> <C>
Roger Smock
President - NB
Capital Corporation 22,000 C$99,994 0/45,000 C$0/C$535,250
Martin Ouellet
President - NB
Finance, Ltd. 9,400 C$66,330 17,275/22,425 C$214,301/C$164,364
</TABLE>
63
<PAGE>
- ---------------
(1) Market value of the underlying Bank common stock less the exercise or
base price.
(2) Market value of Bank common stock underlying in-the-money options/SARs
at the end of 1997, minus the aggregate exercise price of the
options/SARs.
Pension Plan
<TABLE>
<CAPTION>
Pension Plan Table
Canadian dollars Years of Service
---------------------------------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ ------------------- ------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
C$100,000 C$26,334 C$34,945 C$43,556 C$52,414 C$61,348
125,000 31,751 40,369 48,973 57,830 66,764
150,000 37,168 45,779 54,390 63,247 72,181
175,000 42,584 51,195 59,806 68,664 77,598
200,000 48,001 56,612 65,223 74,080 83,014
225,000 53,418 62,029 70,640 79,497 88,431
250,000 58,834 67,445 76,056 84,914 93,848
300,000 58,834 67,445 76,056 84,914 93,848
</TABLE>
The above table illustrates the estimated annual retirement
benefit payable on a straight line annuity basis to participating employees at
normal retirement age (generally age 60), in the earnings and years of service
classifications indicated, under the defined benefit pension plan sponsored by
the Bank (the "Bank Pension Plan") and an excess benefit plan which covers
certain employees of the Bank and its subsidiaries. For each year of service
credited to a participant in the Bank Pension Plan, a participant will be
entitled to 2% of his or her annual eligible earnings, less the amount earned
under the Canada or Quebec pension plans while participating in the Bank Pension
Plan. Annual eligible earnings is defined as a participant's average earnings
for such participant's 60 highest-paid consecutive months, based on salary and
25% of bonus. Mr. Smock had accrued 16.4 years of credited service under the
Bank Pension Plan as of his resignation. Mr. Ouellet had accrued 17.5 years of
credited service under the Bank Pension Plan as of December 31, 1997.
In addition to the Bank Pension Plan, certain employees of the
Bank and its subsidiaries, including those of the Company, may also participate
in an excess benefit plan for participants in the Bank Pension Plan whose
benefits are reduced pursuant to limitations on pensions imposed by the Income
Tax Act (Canada). Employees covered by the excess benefit plan receive a benefit
equal to the amount of benefit disallowed under the Pension Plan due to such
limitations.
Independent Directors
The terms of the New Preferred Shares require that, as long as
any New Preferred Shares are outstanding, certain actions by the Company must be
approved by a majority of the Independent Directors. See "Description of New
Preferred Shares--Independent Director Approval." Mr. Hanley and Mr. Michel are
Independent Directors. As long as there are only two Independent Directors, any
action that requires the approval of a majority of Independent Directors must be
approved by both the Independent Directors.
If at any time the Company fails to declare and pay a
quarterly dividend on the New Preferred Shares, the number of directors then
constituting the Board of Directors will be increased by at least two at the
Company's next annual meeting and the holders of the New Preferred Shares,
voting together as a single class with the holders of any other outstanding
series of Preferred Stock entitled to vote on the matter, including the Senior
Preferred Shares, will be entitled to elect two additional directors to serve on
the Board of Directors.
64
<PAGE>
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 of the Company 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. .
The Bye-laws of NB Finance provide the Board of Directors with
the authority to establish committees. As of the date of this Prospectus, no
such committees have been established by the Board of Directors.
Compensation of Directors and Officers
The Company pays its Independent Directors fees for their
services as directors. Each Independent Director receives 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.
NB Finance does not directly pay its Independent Directors any
fees for their services as directors. Codan Services Limited has been engaged by
NB Finance to provide administrative services to NB Finance, including the
services of NB Finance's Independent Directors. Codan Services receives an
annual fee of US$4,000 for such services.
Limitation of Liability and Indemnification of Directors and Officers
The MGCL permits a Maryland corporation to include in its
charter a provision limiting the liability of the corporation's directors and
officers to the corporation and its stockholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty established
by a final judgment as being material to the cause of action. The Charter
contains such a provision which eliminates such liability to the maximum extent
permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of the Company. The Bylaws of the
Company (the "Bylaws") obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor
65
<PAGE>
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 Bye-laws of NB Finance provide that the directors,
secretary and other officers (such term to include, for the purposes of
indemnification, any person appointed to a committee by the Board of Directors),
for the time each was acting on behalf of NB Finance, shall be indemnified from
and against all actions, costs, charges, losses, damages and expenses which they
or any of them, their heirs, executors of administrators, shall incur as a
result of any actions or omissions in the execution of their duties. The
foregoing indemnity does not apply to acts of fraud or dishonesty. Pursuant to a
letter dated February 27, 1998, the Bank has undertaken to indemnify the
Independent Directors of NB Finance for any liability incurred in connection
with the good faith performance of their duties as directors, which liability
arises as a result of a material mistatement or omission in the registration
statements filed with the Commission in connection with the Offering and the
Exchange Offer.
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. As of the date of this Prospectus, the
Bank has not subcontracted any of its obligations under the Advisory Agreement.
The Bank and its affiliates have substantial experience in
mortgage finance and in the administration of Mortgage Assets. 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.
The Advisory Agreement has an initial term of one year, and
may be renewed for additional one-year periods. The Advisory Agreement may be
terminated by the Company at any time upon 60 days' prior written notice. As
long as any of the New Preferred Shares remain outstanding, any decision by the
Company to renew, terminate or modify the Advisory Agreement must be approved by
a majority of the Board of Directors, as well as by a majority of the
Independent Directors. The Bank is entitled to receive an advisory fee equal to
US$25,000 payable in equal quarterly installments with respect to the advisory
and management
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services provided by it to the Company. Payment of such fees is subordinated to
payments of dividends on the New Preferred Shares.
As a result of the relationship between the Bank and the
Company, certain conflicts of interest may arise. See "Risk
Factors--Relationship with the Bank and its Affiliates; Conflicts of Interest."
In addition, under certain circumstances, The Independent Fiduciary will
exercise the discretionary authority reserved to the Company with respect to
transactions involving both the Company and the Bank or any Bank affiliate. See
"ERISA Considerations."
DESCRIPTION OF NEW PREFERRED SHARES
The following summary of the material terms and provisions of
the New Preferred Shares does not purport to be complete and is qualified in its
entirety by reference to Maryland law and to the terms and provisions of the
Charter establishing the New Preferred Shares and the other provisions of the
Charter, a copy of which is available from the Company upon request. See
"Description of Capital Stock."
General
The New Preferred Shares form a series of Preferred Stock,
which Preferred Stock may be issued from time to time in one or more series with
such designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption as are determined by the Board of
Directors. The Board of Directors has authorized the Company to issue the New
Preferred Shares.
When issued, the New Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the New Preferred Shares will have
no preemptive rights with respect to any shares of the stock of the Company or
any other securities of the Company convertible into or carrying rights or
options to purchase any such shares. The New Preferred Shares are perpetual and
will not be convertible into shares of Common Stock or any other class or series
of stock of the Company and will not be subject to any sinking fund or other
obligation of the Company for their repurchase or retirement. The New Preferred
Shares will be exchanged automatically on a one-for-one basis for the Bank
Preferred Shares upon the occurrence of an Exchange Event.
The transfer agent, registrar and dividend disbursement agent
for the New Preferred Shares will be The Bank of Nova Scotia Trust Company of
New York. The registrar for shares of New Preferred 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
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they appear at the close of business on the stock register of the Company on
such record dates, not exceeding 45 calendar days nor less than 10 calendar days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors. Dividends payable on the New Preferred Shares for any dividend period
greater or less than a full dividend period shall be computed on the basis of
twelve 30-day months, a 360-day year and the actual number of days elapsed in
the period; provided, however, that in the event of the Automatic Exchange, any
accrued and unpaid dividends on the New Preferred Shares as of the Time of
Exchange (as defined) shall be deemed to be accrued and unpaid dividends on the
Bank Preferred Shares.
The right of holders of the New Preferred Shares to receive
dividends is noncumulative. Accordingly, if the Board of Directors fails to
authorize or declare a dividend on the New Preferred Shares for a quarterly
dividend period, then holders of the New Preferred Shares will have no right to
receive a dividend for that period, and the Company will have no obligation to
pay a dividend for that period, whether or not dividends are authorized and
declared and paid for any future period with respect to either the Preferred
Stock or the Common Stock authorized. If the Company fails to pay or authorize
and set aside for payment a quarterly dividend on the New Preferred Shares,
holders of Preferred Stock, including the New Preferred Shares and the Senior
Preferred Shares, will be entitled to elect two directors. See "--Voting
Rights."
If full dividends on the New Preferred Shares for any dividend
period shall not have been authorized, declared and paid, or authorized,
declared and a sum sufficient for the payment thereof set apart for such
payments, no dividends shall be authorized, declared or paid or set aside for
payment with respect to the Common Stock or any other stock of the Company
ranking junior to or on a parity with the New Preferred Shares as to dividends
or amounts upon liquidation, nor shall any Common Stock or any other capital
stock of the Company ranking junior to or on a parity with the New Preferred
Shares as to dividends or amounts upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any monies to be paid to or made
available for a sinking fund for the redemption of any such stock) by the
Company (except by conversion into or exchange for other stock of the Company
ranking junior to the New Preferred Shares as to dividends and amounts upon
liquidation), until such time as dividends on all outstanding New Preferred
Shares have been (i) authorized, declared and paid for three consecutive
dividend periods and (ii) authorized, declared and paid or authorized, declared
and a sum sufficient for the payment thereof has been set apart for payment for
the fourth consecutive dividend period.
When dividends are not paid in full (or a sum sufficient for
such full payment is not set apart) upon the New Preferred Shares and the shares
of any other series of stock ranking on a parity as to dividends with the New
Preferred Shares, all dividends authorized and declared upon the New Preferred
Shares and any other series of stock ranking on a parity as to dividends with
the New Preferred Shares shall be authorized and 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
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that the Bank has a Tier 1 risk-based capital ratio of less than 4.0% or a total
risk-based capital ratio of less than 8.0%, (iii) in the event that the
Superintendent takes control of the Bank pursuant to the Bank Act or proceedings
are commenced for the winding-up of the Bank pursuant to the Winding-up and
Restructuring Act (Canada), or (iv) in the event that the Superintendent, by
order, directs the Bank to act pursuant to subsection 485(3) of the Bank Act and
the Bank elects to cause the exchange. Upon an Exchange Event, each holder of
the New Preferred Shares shall be unconditionally obligated to surrender to the
Bank the certificates representing each New Preferred Share held by such holder,
and the Bank shall be unconditionally obligated to issue to such holder in
exchange for each such New Preferred Share a certificate representing one Bank
Preferred Share. Any New Preferred Shares purchased or redeemed by the Company
prior to the Time of Exchange (as defined below) shall be deemed not to be
outstanding and shall not be subject to the Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern
Time on the date for such exchange set forth in the requirements of the
Superintendent or, if such date is not set forth in such requirements as of 8:00
a.m. on the earliest possible date such exchange could occur consistent with
such requirements (the "Time of Exchange"), as evidenced by the issuance by the
Bank of a press release prior to such time. As of the Time of Exchange, all of
the New Preferred Shares will be deemed cancelled without any further action by
the Company, all rights of the holders of the New Preferred Shares as
stockholders of the Company will cease, and such persons shall thereupon and
thereafter be deemed to be and shall be for all purposes holders of Bank
Preferred Shares. The Company will mail notice of the occurrence of an Exchange
Event to each holder of the New Preferred Shares within 30 days of such event,
and the Bank will deliver to each such holder certificates for the Bank
Preferred Shares upon surrender of such holder's certificates for the New
Preferred Shares. The Charter provides that, immediately after the delivery of
such notice, the existence of the Company shall terminate and the Company will
be liquidated and its affairs wound up in accordance with the procedures of the
MGCL relating to forfeiture of the charter of a corporation and expiration of
corporate existence. Until such replacement stock certificates are delivered (or
in the event such replacement certificates are not delivered), certificates
previously representing the New Preferred Shares shall be deemed for all
purposes to represent the Bank Preferred Shares. All corporate action necessary
for the Bank to issue the Bank Preferred Shares has been taken by the Bank.
Accordingly, once an Exchange Event occurs, no action will be required to be
taken by holders of the New Preferred Shares, by the Bank or by the Company in
order to effect the Automatic Exchange as of the Time of Exchange.
Holders of the New Preferred Shares, by purchasing such New
Preferred Shares, will be deemed to have agreed to be bound by the unconditional
obligation to exchange such New Preferred Shares for the Bank Preferred Shares
upon the occurrence of an Exchange Event. The obligation of the holders of the
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
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Preferred Shares would be non-cumulative and payable at the rate of 8.45% per
annum of the liquidation preference, if, when and as declared by the Board of
Directors of the Bank. The Bank does not intend to apply for listing of the Bank
Preferred Shares on any national securities exchange or for quotation of the
Bank Preferred Shares through the National Association of Securities Dealers
Automated Quotation System. Absent the occurrence of an Exchange Event, however,
the Bank will not issue any Bank Preferred Shares, although the Bank will be
able to issue First Preferred Shares in series other than that of the Bank
Preferred Shares. There can be no assurance as to the liquidity of the trading
markets for the Bank Preferred Shares, if issued, or that an active public
market for the Bank Preferred Shares would develop or be maintained.
Holders of the New Preferred Shares cannot exchange the New
Preferred Shares for the Bank Preferred Shares voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of the New Preferred Shares
will have no dividend, voting, liquidation preference or other rights with
respect to the Bank or any security of the Bank.
Ranking
The New Preferred Shares will rank prior to the Common Stock
and to all other classes and series of equity securities of the Company now or
hereafter issued, other than the Senior Preferred Shares or any other series of
equity securities of the Company expressly designated as being on a parity with
("Parity Stock") or senior to the New Preferred Shares as to dividend rights and
rights upon liquidation, winding up or dissolution. The Company has the power to
create and issue additional Preferred Stock or other classes of stock ranking on
a parity with the New Preferred Shares, or ranking junior to the New Preferred
Shares, without any approval or consent of the holders of New Preferred Shares.
So long as any New Preferred Shares remain outstanding, additional shares of
Senior Stock may not be issued without the approval of the holders of at least
two-thirds of the New Preferred Shares. See "--Voting Rights." So long as any
New Preferred Shares remain outstanding, additional shares of Parity Stock may
not be issued without the approval of a majority of the Board of Directors and a
majority of the Independent Directors. See "--Independent Director Approval."
Voting Rights
Except as indicated below, the holders of the New Preferred
Shares will not be entitled to vote. In the event the holders of the New
Preferred Shares are entitled to vote as indicated below, each New Preferred
Share will be entitled to one vote on matters on which holders of the New
Preferred Shares are entitled to vote.
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
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holders of the outstanding New Preferred Shares and Parity Stock entitled to
vote, voting together as a single class with the holders of all other series of
Preferred Stock entitled to vote on the matter, at the same meeting at which
such removal shall be voted.
The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of each series of Preferred Stock,
including the New Preferred Shares, will be required (a) to create any class or
series of stock (other than the Senior Preferred Stock) which shall, as to
dividends or distribution of assets, rank prior to or on a parity with any
outstanding series of Preferred Stock other than a series which shall not have
any right to object to such creation or (b) alter or change the provisions of
the Charter (including the terms of the New Preferred Shares) so as to adversely
affect the voting powers, preferences or special rights of the holders of a
series of Preferred Stock to any material extent; provided that if such
amendment shall not adversely affect all series of Preferred Stock, such
amendment need only be approved by at least two-thirds of the holders of shares
of all series of Preferred Stock adversely affected thereby.
Redemption
The New Preferred Shares are not redeemable prior to September
3, 2007 (except upon the occurrence of a Tax Event on or after September 3,
2002). On or after such date, the New Preferred Shares may be redeemed at the
option of the Company, or its successor or any acquiring or resulting entity
with respect to the Company (including by any parent or subsidiary of the
Company, any such successor, or any such acquiring or resulting entity), as
applicable, in whole or in part, at any time or from time to time on not less
than 30 nor more than 60 days' notice by mail, at the following redemption
prices (expressed as a percentage of the US$1,000 per share liquidation
preference), if redeemed during the 12-month period beginning September 3 of the
years indicated below, plus the quarterly accrued and unpaid dividend to the
date of redemption, if any, thereon:
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
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and paid or authorized and declared and a sum sufficient for the payment thereof
set apart for payment for the then-current dividend period, no New Preferred
Shares shall be redeemed unless all outstanding New Preferred Shares are
redeemed and the Company shall not purchase or otherwise acquire any New
Preferred Shares; provided, however, that the Company may purchase or acquire
New Preferred Shares pursuant to a purchase or exchange offer made on the same
terms to holders of all outstanding New Preferred Shares.
Furthermore, the Company may, at its option, on or after
September 3, 2002 and prior to September 3, 2007, redeem the New Preferred
Shares, in whole but not in part, at any time upon a Tax Event, at a redemption
price per share equal to the sum of (i) the quarterly accrued and unpaid
dividend to the date of redemption plus (ii) the Make-Whole Amount (as defined
herein).
"Adjusted Treasury Rate" means, with respect to any redemption
date, the rate per annum equal to the semi-annual equivalent yield to maturity
of the Comparable Treasury Issue (as defined herein), assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price (as defined herein) for such prepayment
date plus 0.50%.
"Comparable Treasury Issue" means the United States Treasury
security selected by the Quotation Agent as having a maturity comparable to the
Make-Whole Term that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Make-Whole Term.
"Comparable Treasury Price" means, with respect to any
redemption date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third business day preceding such redemption date, as set forth in the
daily statistical release published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotation for U.S. Government Securities" (or
any successor release) or (ii) if such release is not published or does not
contain such prices on such business day, (a) the average of the Reference
Treasury Dealer Quotations for such redemption date, after excluding the highest
and lowest such Reference Treasury Dealer Quotations, or (b) if the Company
obtains fewer than three such Reference Treasury Dealer Quotations, the average
of all such Quotations.
"Make-Whole Amount" means, with respect to a New Preferred
Share, the greater of (i) 100% of the Maturity Amount of such New Preferred
Share and (ii) the sum of the present values of the remaining scheduled payments
of dividends on such New Preferred Share to September 3, 2007, plus the present
value of the Maturity Amount at September 3, 2007, discounted to the date fixed
for redemption of such New Preferred Share (the "redemption date") on a
quarterly basis (assuming a 360-day year consisting of 30-day months), computed
using a discount rate equal to the Adjusted Treasury Rate.
"Make-Whole Term" means the period from the redemption date to
September 3, 2007.
"Maturity Amount" means the liquidation preference of the New
Preferred Shares.
"Quotation Agent" means the Reference Treasury Dealer (as
defined herein) appointed by the Company.
"Reference Treasury Dealer" means (i) Merrill Lynch Government
Securities, Inc. and their respective successors; provided, however, that if the
foregoing shall cease to be a primary U.S. Government securities dealer in New
York City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer
selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to
each Reference Treasury Dealer and any redemption date, the average, as
determined by the Company, of the bid and asked prices for
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the Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Company by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third business day preceding
such redemption date.
"Tax Event" means the receipt by the Company of an opinion of
a nationally recognized law firm experienced in such matters to the effect that,
as a result of (i) any amendment to, clarification of, or change (including any
announced prospective change) in, the laws or treaties (or any regulations
thereunder) of the United States or Canada, or any political subdivision or
taxing authority thereof or therein, affecting taxation, (ii) any judicial
decision, official administrative pronouncement, published or private ruling,
regulatory procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or regulations) ("Administrative
Action") or (iii) any amendment to, clarification of, or change in the official
position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification or change
is effective or such pronouncement or decision is announced on or after the date
of this Prospectus, there is more than an insubstantial risk that (a) dividends
paid or to be paid by the Company with respect to the stock of the Company are
not, or will not be, fully deductible by the Company for United States federal
income tax purposes or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges and shall
include an assessment by the Internal Revenue Service that (a) dividends paid or
to be paid by the Company with respect to the stock of the Company are not, or
will not be, fully deductible by the Company for United States federal income
tax purposes or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.
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.
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Independent Director Approval
The terms of the New Preferred Shares require that, as long as
any New Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors. Mr. Hanley and Mr. Michel
are the Independent Directors. See "Management--Independent Directors." As long
as there are only two Independent Directors, any action that requires the
approval of a majority of the Independent Directors must be approved by both
Independent Directors. In order to be considered "independent," a director must
not be a current officer or employee of the Company or a current director,
officer or employee of the Bank or any other affiliate of the Bank. In addition,
any members of the Board of Directors elected by holders of Preferred Stock,
including the New Preferred Shares, will be deemed to be Independent Directors
for purposes of approving actions requiring the approval of a majority of the
Independent Directors. The actions which require approval of a majority of the
Independent Directors include (i) the issuance of additional Preferred Stock
ranking on a parity with the New Preferred Shares, (ii) the modification of the
Company's general distribution policy or the authorization of any distribution
in respect of the Common Stock for any year if, after taking into account any
such proposed distribution, total distributions on the New Preferred Shares and
the Common Stock would exceed an amount equal to the sum of 105% of the
Company's "REIT taxable income" (excluding capital gains) for such year plus net
capital gains of the Company for that year, (iii) the acquisition of Mortgage
Assets other than obligations which are comparable to the Initial Mortgage
Assets issued by NB Finance, Mortgage Loans, interests in Mortgage Loans and
Partnership Interests, (iv) the redemption of any shares of Common Stock, (v)
the renewal, termination or modification of the Advisory Agreement or the
Servicing Agreement or the subcontracting of any duties thereunder to third
parties unaffiliated with the Bank, and (vi) the determination to revoke the
Company's REIT status. The Charter requires that, in determining whether any
proposed action requiring their approval is in the best interests of the
Company, the Independent Directors will consider the interests of holders of
both the Common Stock and the Preferred Stock, including, without limitation,
holders of the New Preferred Shares.
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
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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 their 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
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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 have amended or supplemented such prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such holder (or Participating Broker-Dealer, as the
case may be) or the Company has given notice that the sale of the Old Preferred
Shares may be resumed, as the case may be.
If the Company shall give such notice to suspend the sale of
the Old Preferred Shares, it shall extend the relevant period referred to above
during which the Company is required to keep effective the Shelf Registration
Statement (or the period during which Participating Broker-Dealers are entitled
to use this Prospectus in connection with the resale of New Preferred Shares) by
the number of days during the period from and including the date of the giving
of such notice to and including the date when holders shall have received copies
of the supplemented or amended prospectus necessary to permit resales of the Old
Preferred Shares or to and including the date on which the Company has given
notice that the sale of Old Preferred Shares may be resumed, as the case may be.
If the Company fails to comply with the Registration Rights
Agreement or if the Registration Statement or the Shelf Registration Statement
fails to become effective, then, an additional amount ("Liquidated Damages")
shall become payable in respect of the Old Preferred Shares as follows:
(i) if (A) neither the Registration Statement nor a Shelf
Registration Statement is filed with the Commission on or prior to the 150th day
after the Issue Date or (B) notwithstanding that the 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
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in any 360-day period following the day such Shelf Registration Statement ceases
to be available in the case of (B) above;
provided, however, that the Liquidated Damages rate on the liquidation
preference of the Old Preferred Shares may not exceed in the aggregate 0.25% per
annum; provided further, however, that (1) upon the filing of the Registration
Statement or a Shelf Registration Statement (in the case of clause (i) above),
(2) upon the effectiveness of the Registration Statement or a Shelf Registration
Statement (in the case of clause (ii) above), or (3) upon the exchange of New
Preferred Shares for all Old Preferred Shares tendered (in the case of clause
(iii) (A) above), or upon the availability of the Shelf Registration Statement
which had ceased to be available (in the case of clause (iii) (B) above),
Liquidated Damages as a result of such clause (or the relevant subclause
thereof) shall cease to accrue.
Any amounts of Liquidated Damages due pursuant to clause (i),
(ii) or (iii) above will be payable in cash quarterly on the 30th day of March,
June, September and December of each year to the Holders of record on the
immediately preceding 15th day of such month.
The Company has agreed 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 and NB Finance do not purport to be complete and are qualified in
its entirety by reference to (i) Maryland law and to the Charter and By-laws of
the Company, and (ii) Bermuda law and the Memorandum of Association (the
"Memorandum") and By-laws of NB Finance, copies of which are available upon
request to the Company and NB Finance, respectively.
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)
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authorized, declared and paid for three consecutive dividend periods or (ii)
authorized, declared and a sum sufficient for the payment thereof set apart for
payment for the fourth consecutive dividend period.
Voting Rights. Subject to the rights, if any, of the holders
of any class or series of Preferred Stock, including Senior Preferred Stock and
New Preferred Shares, all voting rights are vested in the Common Stock. The
holders of the Common Stock are entitled to one vote per share. All of the
issued and outstanding shares of the Common Stock are currently held by the
Bank.
As the holder of all of the outstanding shares of the Common
Stock, the Bank will be able, subject to the terms of the New Preferred Shares
and of any other class or series of stock subsequently issued by the Company, to
elect and remove directors, amend the Charter and approve other actions
requiring stockholder approval under the MCGL or otherwise.
Rights upon Liquidation. In the event of the liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary,
after there have been paid or set aside for the holders of all series of
Preferred Stock the full preferential amounts to which such holders are
entitled, the holders of the Common Stock will be entitled to share equally and
ratably in any assets remaining after the payment of all debts and liabilities.
Preferred Stock
The Company is authorized by the Charter to issue up to
10,000,000 shares of Preferred Stock. Assuming exchange of all 238,400 Old
Preferred Shares and the resale of all 61,600 Old Preferred Shares currently
held by the Initial Purchaser, 300,000 shares of New Preferred Shares will be
outstanding. Subject to limitations prescribed by Maryland law and the Charter,
the Board of Directors or, if then constituted, a duly authorized committee
thereof, is authorized to issue, from the authorized but unissued shares of
stock of the Company, Preferred Stock in such classes or series as the Board of
Directors may determine and to establish, from time to time, the number of
shares of Preferred Stock to be included in any such class or 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.
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Senior Preferred Stock. The shares of the Senior Preferred
Stock are validly issued, fully paid and nonassessable and will entitle the
holders thereof to cumulative, quarterly dividends. The shares of the Senior
Preferred Stock are redeemable, at any time in whole, but not in part, at the
option of the Company at a price equal to the liquidation preference thereof
plus accrued and unpaid dividends thereon through the redemption date. On the
December 30th following each ten year anniversary of the issuance of the Senior
Preferred Stock, each holder of Senior Preferred Stock may require the Company
to purchase such holder's Senior Preferred Stock at the liquidation preference
thereof plus accrued and unpaid dividends thereon through the date of
redemption. The Senior Preferred Stock rank senior to the Common Stock and the
New Preferred Shares as to dividend rights and rights upon liquidation, winding
up or dissolution. Except as provided below, holders of the Senior Preferred
Stock have no voting rights. If at any time the Company shall have failed to pay
all accrued and unpaid dividends on the Senior Preferred Stock when due, the
Company may not pay dividends on, or make certain other payments with respect
to, the New Preferred Shares or the Common Stock or any other series of stock
ranking junior to the Senior Preferred Stock. If, at the time of any annual
meeting of the Company's stockholders for the election of directors, the Company
has failed to pay or failed to authorize and declare and set aside for payment a
quarterly dividend on any series of Preferred Stock, including the Senior
Preferred Shares, the number of directors then constituting the Board of
Directors will be increased by at least two (if not already increased by two due
to a default in preference dividends), and the holders of the Senior Preferred
Shares, voting together with the holders of all other series of Preferred Stock
as a single class, will be entitled to elect such two additional directors to
serve on the Board of Directors at each such annual meeting.
Power to Issue Additional Shares of Common Stock and Preferred Stock
The Company believes that the power of the Board of Directors
to issue additional authorized but unissued shares of Common Stock or Preferred
Stock and to classify or reclassify unissued shares of Common Stock or Preferred
Stock and thereafter to cause the Company to use such classified or reclassified
shares of stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. Except as set forth under "Description of New Preferred
Shares--Voting Rights," the additional shares of stock will be available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded.
Restrictions on Ownership and Transfer
The Charter contains certain restrictions on the number of
shares of Preferred Stock that individual stockholders may directly or
beneficially own. For the Company to qualify, and to continue to qualify, as a
REIT under the Code, no more than 50% of the value of its outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer individuals
(defined by the Code to include certain entities) during the last half of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year (the "Five or Fewer Test"). The Five or Fewer Test is
applied using certain consecutive ownership rules. The stock of the Company must
also be beneficially owned by 100 or more persons during at least 335 days of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year (the "One Hundred Persons Test"). Absent the restrictions
on the number of shares of Preferred Stock that individual stockholders may
acquire and own (directly or indirectly), there would be a possibility that the
Company might fail the Five or Fewer Test. The Company issued the Senior
Preferred Stock in order to ensure continued compliance with the One Hundred
Persons Test without constant monitoring. 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
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and outstanding class or series of Preferred Stock. The Board of Directors may
(but in no event will be required to), upon receipt of a ruling from the IRS or
an opinion of counsel satisfactory to it, raise or waive the Ownership Limit
with respect to a holder if such holder's ownership will not then or in the
future jeopardize the Company's status as a REIT.
The Charter provides that shares of any class or series of
Preferred Stock owned, or deemed to be owned, by, or transferred to, a
stockholder in violation of the Ownership Limit, or which would otherwise cause
the Company to fail to qualify as a REIT (the "Excess Shares"), will
automatically be transferred, by operation of law, to a trustee in trust for the
exclusive benefit of a charity to be named by the Company as of the day prior to
the day the prohibited transfer took place. Any distributions paid with respect
to such Excess Shares prior to the discovery of the prohibited transfer or
ownership are to be repaid by the original transferee to the Company and by the
Company to the trustee; subject to applicable law, any vote of the Excess Shares
while the Excess Shares were held by the original transferee prior to the
Company's discovery of the prohibited transfer shall be void and the original
transferee shall be deemed to have given its proxy to the trustee. In
liquidation, the original transferee's ratable share of the Company's assets
would be limited to the price paid by the original transferee for the Excess
Shares or, if no value was given, the price per share equal to the closing
market price on the date of the purported transfer. The trustee of the trust
shall promptly sell the Excess Shares to any person whose ownership thereof is
not prohibited, whereupon the interest of the trust shall terminate. Proceeds of
such sale shall be paid to the original transferee up to its purchase price (or,
if the original transferee did not purchase the shares, the value on the date of
the purported transfer) and any remaining proceeds shall be paid to the
beneficiary of the trust.
The constructive ownership rules of the Code are complex and
may cause Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by a
particular individual or entity. As a result, the acquisition or ownership of
less than 5% of a class or series of issued and outstanding Preferred Stock (or
the acquisition or ownership of an interest in an entity that owns shares of
such series of Preferred Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively in
excess of 5% of such class or series of Preferred Stock, and thus subject such
stock to the applicable Ownership Limit. Direct or constructive ownership in
excess of the Ownership Limit would cause ownership of the shares in excess of
the limit to be transferred to the trustee.
The Ownership Limit will not be automatically removed even if
the REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration limitation
is increased. The foregoing restrictions on transferability and ownership will
not apply, however, if the Board of Directors determines that it is no longer in
the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT.
The Charter requires that any person who beneficially owns
0.5% (or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred Stock
must provide certain information to the Company within 30 days of June 30 and
December 31 of each year. In addition, each such stockholder shall upon demand
be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limit.
Supermajority Director Approval
The Charter requires approval by two-thirds of the Board of
Directors in order for the Company to file a voluntary petition of bankruptcy.
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Business Combinations
Under MGCL, certain "business combinations" (including a merger, consolidation,
share exchange, or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and any
person who beneficially owns, directly or indirectly, 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at any
time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate of
such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be (i) approved by
the board of directors of such corporation and (ii) approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding voting shares of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting shares other than voting shares held by
the Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the statute)
for their shares and the consideration is received in cash or in the same form
as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. The Bank
beneficially owns more than 10% of the Company's voting shares and would,
therefore, together with its affiliates, be subject to the business combination
provision of the MGCL. However, pursuant to the statute, the Company has
exempted any business combinations involving the Bank and any present or future
affiliate thereof and, consequently, the five-year prohibition and the
super-majority vote requirements will not apply to business combinations between
any of them and the Company. As a result, the Bank and any present or future
affiliate thereof may be able to enter into business combinations with the
Company that may not be in the best interest of its stockholders without
compliance by the Company with the super-majority vote requirements and the
other provisions of the statute.
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.
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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.
NB Finance
General. NB Finance is authorized by the Memorandum to issue
up to 12,000 shares of common stock, par value US$1.00 per share. NB Finance has
outstanding 12,000 shares of common stock, all of which are held by the Bank. NB
Finance is not authorized to issue any share of preferred stock.
Dividends. Holders of common stock of NB Finance are entitled
to receive dividends if, when, and as authorized and declared by the Board of
Directors of NB Finance in proportion to the number of shares held by them.
Voting Rights. Holders of common stock of NB Finance are
entitled to one vote per share.
Rights upon or Dissolution. In the event of a
winding-up or dissolution of NB Finance, whether voluntary or involuntary or for
purposes of reorganization, or otherwise or upon any distribution of capital,
the holders of common stock of NB Finance are entitled to the surplus assets of
NB Finance.
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
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Global Certificate will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global Certificate).
Investors in the Global Certificate may hold their interests
therein directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system. All
interests in the Global Certificate may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in certificated form of securities that they own.
Consequently, the ability to transfer beneficial interests in the Global
Certificate to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in the Global Certificate to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the New Preferred Shares, see "Certificated New Preferred Shares."
Except as described below, owners of interests in the Global
Certificate will not have New Preferred Shares registered in their name, will
not receive physical delivery of New Preferred Shares in certificated form and
will not be considered the registered owners or holders thereof for any purpose.
Payments in respect of the Global Certificate registered in
the name of DTC or its nominee will be payable to DTC in its capacity as the
registered holder. The transfer agent will treat the persons in whose names the
New Preferred Shares, including the Global Certificate, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the transfer agent nor any
agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Certificate, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Certificate or (ii) any other
matter relating to the actions and practices of DTC or any of its Participants
or Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the New Preferred
Shares, is to credit the accounts of the relevant Participants with the payment
on the payment date, in amounts proportionate to their respective holdings in
liquidation preference of beneficial interests in the relevant security as shown
on the records of DTC unless DTC has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of New Preferred Shares will be governed
by standing 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.
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The information in this section concerning DTC and its
book-entry systems has been obtained from sources that the Company believes to
be reliable, but the Company does not take responsibility for the accuracy
thereof.
Although DTC has agreed to the foregoing procedures to
facilitate transfers of interest in the Global Certificates among participants
in DTC, they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the transfer agent will have any responsibility for the performance
by DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated New Preferred Shares
The Global Certificate is exchangeable for New Preferred
Shares in registered certificated form if (i) DTC (x) notifies the Company that
it is unwilling or unable to continue as Depositary for the Global Certificate
and the Company thereupon fails to appoint a successor Depositary within 90 days
or (y) has ceased to be a clearing agency registered under the Exchange Act or
(ii) the Company in its sole discretion elects to cause the issuance of the New
Preferred Shares in certificated form. In all cases, certificated New Preferred
Shares delivered in exchange for the Global Certificate or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depositary (in accordance with
its customary procedures).
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States federal
income tax considerations with respect to the Exchange Offer is for general
information only and is not tax advice. The discussion set forth below, to the
extent that it constitutes a summary of legal matters or legal conclusions, has
been reviewed by Shearman & Sterling, and it is such firm's opinion that such
discussion is accurate in all material respects. In rendering such opinion,
Shearman & Sterling has relied on Desjardins Ducharme Stein Monast, with respect
to certain matters of Quebec law, Osler Hoskin & Harcourt, with respect to
certain matters of Ontario law, and Conyers Dill & Pearman, with respect to
certain matters of Bermuda law. The discussion below is based on the Code,
existing and proposed Treasury Regulations issued thereunder, and administrative
and judicial interpretations thereof, all as of the date hereof and all of which
are subject to change, possibly with retroactive effect. The discussion below
does not address all aspects of taxation that may be relevant in the particular
circumstances of each stockholder or to certain types of stockholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, persons that hold stock in the Company other than as a capital
asset, foreign corporations and persons who are not citizens or residents of the
United States, except to the extent discussed) subject to special treatment
under the United States federal income tax laws.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO THEM, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER NON-FEDERAL TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER NON-FEDERAL TAX LAWS.
Tax Impact of the Exchange Offer
The Exchange Offer will not have a United States federal
income tax impact.
Qualification of the Company as a REIT
General. The Company will elect to be taxable as a REIT under
sections 856 through 860 of the Code and the applicable Treasury Regulations
(the "REIT Requirements" or the "REIT Provisions"), commencing with its taxable
year ended December 31, 1997. The Company believes that, commencing with its
taxable year ended December 31, 1997, it will be owned and organized and will
operate in such a manner as to qualify for taxation as a REIT. While the Company
intends to continue to operate in such a manner, no assurance can be given that
it will operate in a manner so as to qualify or remain qualified as a REIT.
The REIT Requirements are technical and complex. The following
discussion sets forth only the material aspects of those requirements. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Shearman & Sterling, commencing with the
Company's taxable year ended December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. However, no transaction closely
comparable to that contemplated herein has been the subject of any
administrative pronouncement or judicial decision and this opinion is based on
certain factual assumptions relating to the organization and operation of the
Company and is conditioned upon certain representations made by the Company as
to factual matters, such as the organization and expected manner of operation of
the Company. In addition, this opinion is based upon the factual representations
of the Company concerning its business and Mortgage Assets set forth in this
Offering Memorandum and certain legal opinions provided by Canadian and
Bermudian counsel to the Bank. Such qualification and taxation as a REIT,
moreover, depends upon the Company's ability to meet, through actual annual
operating results, distribution
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levels, diversity of stock ownership and the REIT Requirements discussed below,
the satisfaction of which will not be reviewed by Shearman & Sterling on a
continuing basis. No assurance can be given that the actual results of the
Company's operation for any one taxable year will satisfy such requirements. See
"Tax Risks Adverse Consequences of Failure to Qualify as a REIT."
There can be no assurance that the Company will continue to
qualify as a REIT in any particular taxable year, given the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in the circumstances of
the Company. If the Company were not to qualify as a REIT in any particular
year, it would be subject to United States federal income tax as a regular,
domestic corporation and its stockholders would be subject to tax in the same
manner as stockholders of such a corporation. In this event, the Company would
likely be subject to a substantial United States federal income tax liability in
respect of each taxable year that it fails to qualify as a REIT and the income
available for distribution to the holders of the New Preferred Shares could be
significantly reduced or eliminated.
The following is a brief summary of certain of the technical
requirements that the Company must meet on an ongoing basis in order to qualify,
and remain qualified, as a REIT under the Code:
Stock Ownership Tests
The capital stock of the Company must be held by at least 100
persons during approximately 90% or more of the taxable year and no more than
50% of the value of such capital stock may be owned, directly or indirectly, by
five or fewer individuals at all times during the last half of the taxable year.
Under the Code, certain tax-exempt entities, such as private foundations and
certain unemployment compensation trusts, are treated as individuals for
purposes of the latter test. These stock ownership requirements must be
satisfied in the Company's second taxable year and in each subsequent taxable
year. The Charter provides restrictions regarding the transfer of the Company's
shares in order to aid in meeting the stock ownership requirements. See
"Description of Capital Stock Restrictions on Ownership and Transfer." The
Company has also issued shares of Senior Preferred Stock to ensure continued
compliance with the 100 person ownership requirement for REIT status without
constant monitoring.
Asset Tests
The Company must generally meet the following asset tests (the
"REIT Asset Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, Government securities, cash,
and cash items (the "75% Asset Test"); and
(b) not more than 25% of the Company's total assets may
consist of securities other than those taken into account for purposes of the
75% Asset Test and, of those securities, (i) the value of the securities of any
one issuer (other than another REIT) may not exceed 5% of the value of the
Company's total assets and, (ii) the Company may not own more than 10% of the
outstanding voting securities of any such issuer.
The Company expects that the Initial Mortgage Assets issued by
NB Finance will be a Qualified REIT Real Estate Asset. In addition, the Company
does not expect that the value of any security (other than a Qualified REIT Real
Estate Asset) of any one entity would ever exceed 5% of the Company's total
assets, and the Company does not expect to own more than 10% of any one issuer's
voting securities.
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Gross Income Tests
The Company must generally meet the following gross income
tests (the "REIT Gross Income Tests") for each taxable year:
(a) at least 75% of the Company's gross income must be derived from certain
specified sources including interest on obligations secured by mortgages on
real property, gain from the disposition of Qualified REIT Real Estate
Assets or "qualified temporary investment income" (i.e., income derived
from "new capital" within one year of the receipt of such capital) (the
"75% Gross Income Test"); and
(b) at least 95% of the Company's gross income must consist of income
qualifying for the 75% Gross Income Test, dividends, interest, and gains
from the sale of stock or other securities (including certain interest rate
swap and cap agreements entered into to hedge variable rate debt incurred
to acquire Qualified REIT Real Estate Assets) not held for sale in the
ordinary course of business (the "95% Gross Income Test").
The Company intends to maintain its REIT status by carefully
monitoring its income, including income from sales of Mortgage Assets, to comply
with the REIT Gross Income Tests. Under certain circumstances, such as an
unanticipated decrease in the qualifying income of the Company, which may result
in the Company's nonqualifying income exceeding 5% of its gross income, the
Company may be unable to comply with certain of the REIT Gross Income Tests. See
"Taxation of the Company" for a discussion of the tax consequences of a failure
to comply with the REIT Gross Income Tests.
Distribution Requirement
The Company must generally distribute dividends (other than
capital gain dividends) to its stockholders in an amount at least equal to (A)
the sum of (i) 95% of the Company's REIT taxable income (which is defined
generally as the taxable income of the Company computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular dividend payment after such declaration.
The Company intends to monitor on an ongoing basis its
compliance with the REIT requirements described above. In order to maintain its
REIT status, the Company will be required to limit the types of assets that it
might otherwise acquire, or hold certain assets at times when it might otherwise
have determined that the sale or other disposition of such assets would be
desirable.
Taxation of the Company
In any year in which the Company qualifies as a REIT, the
Company will generally not be subject to United States federal income tax on
that portion of its REIT taxable income or capital gain which is distributed to
its stockholders. The Company will, however, be subject to United States federal
income tax at normal corporate income tax rates upon any undistributed REIT
taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may
be subject to tax in certain circumstances. If the Company fails to satisfy
either the 75% Gross Income Test or the 95% Gross Income Test, but nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will generally be subject to a 100% tax on the greater of the amount by
which the Company fails either the 75% Gross Income Test or the 95% Gross Income
Test (multiplied by a fraction intended to reflect the Company's
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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 Disqualified Person with respect
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to a Plan by virtue of such investment. ERISA also imposes certain duties on
persons who are fiduciaries of Plans subject to ERISA, and ERISA and the Code
prohibit certain transactions between a Plan and Parties-in-Interest or
Disqualified Persons with respect to such Plan.
Status Under Plan Asset Regulations
The Department of Labor has issued a regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulation"). The Plan Asset Regulation provides that,
as a general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan purchases an
equity interest will be deemed for purposes of ERISA and Section 4975 of the
Code to be assets of the investing Plan unless certain exceptions apply. Under
one such exception, the assets of such an entity are not considered to be Plan
assets where a Plan makes an investment in an equity interest that is a
"publicly-offered security." As described in more detail below, the Company
anticipates that the New Preferred Shares will, following the consummation of
the Exchange Offer or the effectiveness of a Shelf Registration Statement be
"publicly-offered securities" for purposes of the Plan Asset Regulation. Prior
to the consummation of the Exchange Offer or (if no Exchange Offer is
consummated) the effectiveness of a Shelf Registration Statement, however, the
New Preferred Shares will not be "publicly-offered securities" and, accordingly,
the assets of the Company may be treated as assets of a Plan that purchases the
New Preferred Shares.
Under the terms of the Plan Asset Regulation, if the Company
were deemed to hold plan assets by reason of a Plan's investment in the New
Preferred Shares, such plan assets would include an undivided interest in the
assets held by the Company including the Mortgage Assets. In such event, the
persons providing services, or exercising any discretionary authority or
control, with respect to the assets of the Company may become
Parties-in-Interest or Disqualified Persons with respect to such an investing
Plan and may be subject to the fiduciary responsibility provisions of Title I of
ERISA (including the general prohibition against maintaining the indicia of
ownership of Plan assets outside the jurisdiction of the U.S. district courts)
and the prohibited transaction provisions of ERISA and Section 4975 of the Code
with respect to transactions involving such assets. In this regard, if the
person or persons with discretionary responsibilities with respect to the
Mortgage Assets were affiliated with the Company, any such discretionary actions
taken with respect to such Mortgage Assets could be deemed to constitute a
prohibited transaction under ERISA or the Code (e.g., the use of such fiduciary
authority or responsibility in circumstances under which such persons have
interests that may conflict with the interests of the Plans for which they act
and affect the exercise of their best judgment as fiduciaries). In order to
avoid such prohibited transactions or other breaches of fiduciary duty, and to
delineate fiduciary responsibility appropriately, each investing Plan, by
purchasing the New Preferred Shares, will be deemed to have (i) directed the
Company to invest in the Initial Mortgage Assets issued by NB Finance (as well
as the other assets held by the Company and identified at the time of purchase)
and (ii) in the event that the New Preferred Shares are not treated as
"publicly-offered securities" as of the date on which the Exchange Offer is
consummated or a Shelf Registration Statement is declared effective, then during
the period commencing on such date and ending on the date on which the New
Preferred Shares become "publicly-offered securities," appointed the Independent
Fiduciary (an entity unaffiliated with and independent of the Bank and the
Company) as a fiduciary of such Plan to exercise any discretionary authority
reserved to the Company, to the extent that the duties of such entity involve
discretionary authority or control respecting transactions with the Bank or the
Bank's affiliates. The Independent Fiduciary will be identified by the Company
prior to any such transaction and will be subject to removal and replacement by
a majority of the holders of the New Preferred Shares.
The Company may from time to time invest the proceeds received
in connection with the repayment or disposition of the Initial Mortgage Assets
issued by NB Finance, the issuance of additional shares of Preferred Stock or
additional capital contributions with respect to the Common Stock. To the extent
that the investment of such proceeds occurs prior to the consummation of the
Exchange Offer or the effectiveness of a Shelf Registration Statement, such
proceeds will be invested in Canadian or U.S. government guaranteed,
mortgage-backed certificates and other Canadian or U.S. government obligations,
which will be purchased on
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the open market or 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 new Section 401(c) of
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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 financial statements of the Company and the financial
statements of NB Finance, each as of December 31, 1997, included in this
Prospectus have been audited by Deloitte & Touche, a general partnership,
independent auditors as set forth in their report thereon included therein.
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GLOSSARY
Adjusted Treasury Rate: With respect to any redemption date,
the rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such prepayment date plus 0.50%.
Administrative Action: Any judicial decision, official
administrative pronouncement, published or private ruling, regulatory procedure,
notice or announcement (including any notice or announcement of intent to adopt
such procedures or regulations).
Advisory Agreement: The Advisory Agreement dated as of
September 3, 1997 between the Company and the Bank.
Automatic Exchange: The automatic exchange of each New
Preferred Share for one Bank Preferred Share upon the occurrence of an Exchange
Event.
Bank: National Bank of Canada.
Bank Act: The Bank Act (Canada), as amended.
Bank Preferred Shares: The 8.45% Noncumulative First Preferred
Shares, Series Z of the Bank.
BHCA: The Bank Holding Company Act of 1956.
Board of Directors: The Board of Directors of the Company.
Branch: The Bank's only United States branch located in New
York and licensed by the New York Superintendent under the NYBL.
business day: Any day other than Saturday, Sunday or a date on
which banking institutions are required or authorized by New York State law to
be closed.
Bylaws: The bylaws of the Company.
C$ or $: Canadian dollars.
Capital Guidelines: Guidelines issued by the Superintendent
with respect to the maintenance of adequate capital by Canadian banking
institutions.
Charter: The Company's charter.
CMHC: Canada Mortgage and Housing Corporation.
Code: The Internal Revenue Code of 1986, as amended.
Commission: The U.S. Securities and Exchange Commission.
Common Stock: The Company's common stock, par value US$.01 per
share.
Company: NB Capital Corporation.
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Comparable Treasury Issue: The United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the
Make-Whole Term that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Make-Whole Term.
Comparable Treasury Price: With respect to any redemption
date, (i) the average of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) on the
third Business Day preceding such redemption date, as set forth in the daily
statistical release published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotation for U.S. Government Securities" (or
any successor release) or (ii) if such release is not published or does not
contain such prices on such Business Day, (a) the average of the Reference
Treasury Dealer Quotations for such redemption date, after excluding the highest
and lowest such Reference Treasury Dealer Quotations, or (b) if the Company
obtains fewer than three such Reference Treasury Dealer Quotations, the average
of all such Quotations.
Depositor: Any person having tendered Old Preferred Shares in
exchange for New Preferred Shares in the Exchange Offer.
Disqualified Persons: Under the Code, persons and entities who
have certain specified relationships to Plans.
DTC: The Depository Trust Company.
Eligible Institution: A bank, broker, dealer, credit union,
savings association, clearing agency or other institution that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act.
ERISA: The Employee Retirement Income Security Act of 1974, as
amended.
Excess Shares: Shares of any class or series of Preferred
Stock owned, or deemed to be owned, by, or transferred to, a stockholder in
violation of the Ownership Limit, or which would otherwise cause the Company to
fail to qualify as a REIT, which have been automatically transferred, by
operation of law, to a trustee in trust for the exclusive benefit of a charity
to be named by the Company as of the day prior to the day the prohibited
transfer took place.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Agent: The Bank of Nova Scotia Trust Company of New
York.
Exchange Event: An Exchange Event shall occur (i) immediately
prior to such time, if any, at which the Bank fails to declare and pay or set
aside for payment when due any dividend on any issue of its cumulative First
Preferred Shares or the Bank fails to pay or set aside for payment when due any
declared dividend on any of its non-cumulative First Preferred Shares, (ii) in
the event that the Bank has a Tier 1 risk-based capital ratio of less than 4.0%
or a total risk-based capital ratio of less than 8.0%, (iii) in the event that
the Superintendent takes control of the Bank pursuant to the Bank Act (Canada),
as amended (the "Bank Act"), or proceedings are commenced for the winding-up of
the Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in
the event that the Superintendent, by order, directs the Bank to act pursuant to
subsection 485(3) of the Bank Act and the Bank elects to cause the exchange.
Exchange Offer: The offering by the Company to exchange up to 238,400 shares of
its New Preferred Shares for up to 238,400 Old Preferred Shares outstanding at
the rate of one New Preferred Share for each Old Preferred Share tendered.
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Expiration Date: The expiration date of the Exchange Offer
which shall be 5:00 p.m. New York City time on ________, 1998, unless the
Company, in its sole discretion, extends the period of time during which the
Exchange Offer is open.
FBSEA: The Foreign Bank Supervision Enhancement Act of 1991.
Final Payment Date: The date on which payment in full of the
Initial Mortgage Loans is made.
Five or Fewer Test: For a company to qualify, and to continue
to qualify, as a REIT under the Code, no more than 50% of the value of its
outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals (defined by the Code to include certain entities)
during the last half of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year.
General Account Regulations: Regulations issued by the
Department of Labor in proposed form on December 22, 1997 with respect to
insurance policies issued on or before December 31, 1998 that are supported by
an issuer's general account.
Global Certificate: Any global certificate representing the
New Preferred Shares registered in the name of Cede & Co.
Income Tax Act: The Income Tax Act (Canada).
Independent Director: A director who is not a current officer
or employee of the Company or a current director, officer or employee of the
Bank or any affiliate of the Bank.
Independent Fiduciary: An independent fiduciary which will be
identified by the Company to exercise any discretionary authority with respect
to transactions involving both the Company and the Bank or any Bank affiliate.
Indirect Participants: Any entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly.
Initial Mortgage Assets: Sixteen hypothecation loans issued to
the Company by NB Finance that are recourse only to the Initial Mortgage Loans.
Initial Mortgage Loans: Sixteen pools of, at December 31,
1997, 11,701 Mortgage Loans acquired by NB Finance from the Bank pursuant to the
Mortgage Loan Purchase Agreement dated as of September 3, 1998, between NB
Finance and the Bank.
Initial Purchaser: Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
Initial Purchaser's Discount: The $6,000,000 Initial
Purchaser's discount in connection with the purchase of the Old Preferred Shares
by the Initial Purchaser on August 22, 1997.
Interested Stockholder: Any person who beneficially owns,
directly or indirectly, 10% or more of the voting power of a corporation's
shares or an affiliate of such corporation who, at any time within the two-year
period prior to the date of a "business combination" under the MGCL, was the
beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of such corporation.
IRS: The Internal Revenue Service.
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Issue Date: September 3, 1997.
Make-Whole Amount: With respect to a New Preferred Share, the
greater of (i) 100% of the Maturity Amount of such New Preferred Share and (ii)
the sum of the present values of the remaining scheduled payments of dividends
on such New Preferred Share to September 3, 2007, plus the present value of the
Maturity Amount at September 3, 2007, discounted to the date fixed for
redemption of such New Preferred Share on a quarterly basis (assuming a 360- day
year consisting of 30-day months), computed using a discount rate equal to the
Adjusted Treasury Rate.
Make-Whole Term: The period from the redemption date to
September 3, 2007.
Maturity Amount: The liquidation preference of the New
Preferred Shares.
MGCL: The Maryland General Corporation Law.
Monthly Payment Date: The 1st day of each month through July
2001 or such earlier date on which payment in full of the Initial Mortgage Loans
is made or, if the 1st day of a month is not a business day, on the first
business day following the 1st day of such month.
Mortgage Assets: Assets consisting of obligations secured by
real property, as well as other qualifying REIT assets.
Mortgage Loan Assignment Agreement: The Mortgage Loan
Assignment Agreement dated September 3, 1997 between the Company and NB Finance.
Mortgage Loans: CMHC insured residential first mortgages that
are secured by real property located in Canada.
NB Finance: NB Finance, Ltd., a Bermuda corporation.
New Preferred Shares: 8.35% Noncumulative Exchangeable
Preferred Stock, Series A, par value US$.01 per share, of NB Capital Corporation
issued under the Registration Statement.
NHA: National Housing Act.
NHA-Approved Lender: A lender approved under the NHA.
NHA MBS: A NHA Mortgage-Backed Security.
95% Gross Income Test: At least 95% of the Company's gross
income must consist of income qualifying for the 75% Gross Income Test,
dividends, interest, and gains from the sale of stock or other securities
(including certain interest rate swap and cap agreements entered into to hedge
variable rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business.
Non-United States Holder: An exchanging stockholder that, for
United States federal income tax purposes, is not a "United States person."
Notice of Guaranteed Delivery: The notice of guaranteed
delivery available to holders of Old Preferred Shares in connection with the
Exchange Offer.
NYBL: The Banking laws of the State of New York.
100
<PAGE>
Offering: The offering of Old Preferred Shares by the Company
on the Issue Date.
Old Preferred Shares: 8.35% Noncumulative Exchangeable
Preferred Stock, Series A, par value US$.01 per share, of NB Capital Corporation
issued on the Issue Date.
One Hundred Persons Test: To qualify as a REIT under the Code
the stock of a company must be beneficially owned by 100 or more persons during
at least 335 days of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year.
Other Series of First Preferred Shares: Various series of
first preferred shares which the Bank currently has outstanding, and may in the
future issue.
Ownership Limit: Under the Charter, subject to certain
exceptions specified therein, any natural person or entity that is considered to
be an individual under Section 542(a)(2) of the Code is prohibited from owning
(including shares deemed to be owned by virtue of the relevant attribution
provisions of the Code) more than 5% of any issued and outstanding class or
series of Preferred Stock.
Parity Stock: Any series of equity securities of the Company
expressly designated as being on a parity with or senior to the New Preferred
Shares as to dividend rights and rights upon liquidation, winding up or
dissolution.
Participants: Securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations that hold
securities on behalf of DTC.
Participating Broker-Dealer: Any broker-dealer who acquired
the New Preferred Shares for its own account as a result of market-making or
other trading activities.
Parties-in-Interest: Under ERISA, persons and entities who
have certain specified relationships to Plans.
Partnership Interests: Limited partnership interests in
partnerships the only activities of which are to purchase and own Mortgage
Loans.
PFIC: Passive foreign investment company.
Plan Asset Regulations: U.S. Department of Labor regulations
(29 C.F.R. Section 2510.3-101) concerning the definition of what constitutes the
assets of a Plan.
Plans: Any (I) employee benefit plan (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) subject to Title I of ERISA, (II) plan (as defined in section
4975(e)(1) of the Code) or (III) entity whose underlying assets include "plan
assets" under Department of Labor Regulation 29 C.F.R. Section 2510.3-101.
Preferred Shares: The Old Preferred Shares, together with the
New Preferred Shares.
Preferred Stock: The Shares of preferred stock of the Company.
Primary Treasury Dealer: A primary U.S. Government securities
dealer in New York City.
Prospectus: This Prospectus dated February __, 1998 with
respect to the Exchange Offer.
PTCE: Prohibited Transaction Class Exemption.
101
<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 and the Bank on Amendment No. 4 to Form S-4/Amendment No. 3 to Form
F-9 dated February __, 1998.
REIT: Real estate investment trust.
REIT Asset Tests: The Company must generally meet the
following asset tests at the close of each quarter of each taxable year:
(a)at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, Government securities, cash,
and cash items (the "75% Asset Test"); and
(b)not more than 25% of the Company's total assets may consist
of securities other than those taken into account for purposes of the 75% Asset
Test and, of those securities, (i) the value of the securities of any one issuer
(other than another REIT) may not exceed 5% of the value of the Company's total
assets and, (ii) the Company may not own more than 10% of the outstanding voting
securities of any such issuer.
REIT Gross Income Tests: The Company must generally meet the
following gross income tests for each taxable year:
(a)at least 75% of the Company's gross income must be derived
from certain specified sources including interest on obligations secured by
mortgages on real property, gain from the disposition of Qualified REIT Real
Estate Assets or "qualified temporary investment income" (i.e., income derived
from "new capital" within one year of the receipt of such capital) (the "75%
Gross Income Test"); and
(b)at least 95% of the Company's gross income must consist of
income qualifying for the 75% Gross Income Test, dividends, interest, and gains
from the sale of stock or other securities (including certain interest rate swap
and cap agreements entered into to hedge variable rate debt 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.
102
<PAGE>
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.
Treaty: The Canada-United States Income Tax Convention (1980).
103
<PAGE>
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.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements
NB Capital Corporation
Independent Auditors' Report ...................F-2
Balance Sheet ..................................F-3
Statement of income ............................F-4
Statement of stockholders' equity ..............F-5
Statement of cash flows ........................F-6
Notes to the financial statements ..............F-7
NB Finance, Ltd.
Independent Auditors' Report ..................F-11
Balance Sheet .................................F-12
Statement of income ...........................F-13
Statement of cash flows .......................F-14
Notes to the financial statements .............F-15
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
December 31, 1997 and the statements of income, stockholders' equity and cash
flows for the period 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 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, these financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and the
results of its operations and its cash flows for the period August 20, 1997
(date of incorporation) to December 31, 1997, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE
Chartered Accountants
Montreal, Canada
February 10, 1998
F-2
<PAGE>
NB CAPITAL CORPORATION
Balance sheet
as of December 31, 1997
(in U.S. dollars)
- -----------------------------------------------------------------------------
Assets
Cash $ 20,003,943
Due from an affiliated company 4,504,564
Promissory notes (Note 3) 456,513,825
- -----------------------------------------------------------------------------
$481,022,332
- -----------------------------------------------------------------------------
Liabilities
Due to parent company $548,297
Accounts payable 257,560
Income taxes payable 80,000
- -----------------------------------------------------------------------------
885,857
- -----------------------------------------------------------------------------
Stockholders' equity
Preferred stock, US$0.01 par value per share;
10,000,000 shares authorized,
300,000 Series A, shares issued and paid 3,000
Common stock, US$0.01 par value per share;
1,000 shares authorized,
100 shares issued and paid 1
Additional paid-in capital 476,431,381
Retained earnings 3,702,093
- -----------------------------------------------------------------------------
480,136,475
- -----------------------------------------------------------------------------
$481,022,332
- -----------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
<PAGE>
NB CAPITAL CORPORATION
Statement of earnings
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- --------------------------------------------------------------------------
Revenue
Interest income
Short-term investment $ 133,403
Promissory notes 12,760,418
Bank interest 100,118
- --------------------------------------------------------------------------
12,993,939
- --------------------------------------------------------------------------
Expenses
Legal fees 226,144
Other professional fees 226,405
Service fees 539,964
Advisory fees 8,333
- --------------------------------------------------------------------------
1,000,846
- --------------------------------------------------------------------------
Income before income taxes 11,993,093
Income taxes 80,000
- --------------------------------------------------------------------------
Net income 11,913,093
- --------------------------------------------------------------------------
Preferred stock dividends 8,211,000
- --------------------------------------------------------------------------
Income available to common stockholders $ 3,702,093
- --------------------------------------------------------------------------
Weighted average number of common shares outstanding 100
- --------------------------------------------------------------------------
Earnings per common share--basic $ 37,021
- --------------------------------------------------------------------------
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
NB CAPITAL CORPORATION
Statement of stockholders' equity
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- ---------------------------------------------------------------------------------------------------------------------------------
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of preferred stock, net of
initial purchaser's discount of
$6,000,000 and other issuance
costs of $904,072 $3,000 -- $293,092,928 -- $293,095,928
Issuance of common stock -- $1 183,338,453 -- 183,338,454
Net income -- -- -- $11,820,254 11,913,093
Dividends paid on preferred stock -- -- -- (8,211,000) (8,211,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity as of
December 31, 1997 $3,000 $1 $476,431,381 $3,702,093 $480,136,475
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NB CAPITAL CORPORATION
Statement of cash flows
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- -----------------------------------------------------------------------------
Operating activities
Net earnings $ 11,913,093
Items not affecting cash resources (4,504,4564)
Due from an affiliated company
Due to parent company 548,297
Accounts payable and income taxes 337,560
- -----------------------------------------------------------------------------
Net cash provided by operating activities 8,294,386
- -----------------------------------------------------------------------------
Financing activities
Issue of common shares 183,338,454
Issue of preferred shares, net of discount and fees 293,095,928
Dividends on preferred stock (8,211,000)
- -----------------------------------------------------------------------------
Net cash provided by financing activities 468,223,382
- -----------------------------------------------------------------------------
Investing activities
Investment in promissory notes (476,588,453)
Repayments of promissory notes 20,074,628
- -----------------------------------------------------------------------------
Net cash used in investing activities (456,513,825)
- -----------------------------------------------------------------------------
Cash position, end of year $20,003,943
- -----------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
<PAGE>
NB CAPITAL CORPORATION
Notes to the Financial Statements
For the period August 20, 1997 (date of incorporation) to December 31, 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 the
National Bank of Canada.
2. Significant accounting policies
Financial statements
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America.
Income taxes
The Company upon filing its initial tax return will elect to be taxable
as a Real Estate Investment Trust (a "REIT") under the Internal Revenue
Code of 1986, as amended, and accordingly 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, maintains its
qualification as a REIT and complies with certain other requirements
(see Note 6).
Per share data
Basic earnings per share with respect to the Company for the four-month
period ended December 31, 1997 are computed based upon the weighted
average number of common shares outstanding during the period. In
February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 "Earnings Per
Share". This pronouncement specifies the computation, presentation and
disclosure requirements for earnings per share. The Company has no
outstanding securities which are dilutive under this pronouncement.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted 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 period.
Actual results could differ from those estimates.
F-7
<PAGE>
NB CAPITAL CORPORATION
Notes to the Financial Statements
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
3. Promissory notes
On September 3, 1997, the Company entered into loan agreements
evidenced by promissory notes of 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 consist of 16 notes with maturities ranging from
January 2000 to July 2001, at rates ranging from 6.90% to 9.77%, with
an average rate of approximately 8.40% 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.
Promissory notes as of September 3, 1997 $476,588,453
Principal repayments 20,074,628
- --------------------------------------------------------------------------------
Promissory notes as of December 31, 1997 $456,513,825
- --------------------------------------------------------------------------------
F-8
<PAGE>
NB CAPITAL CORPORATION
Notes to the Financial Statements
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
The scheduled principal repayments are as follows:
1998 $39,347,000
1999 92,192,175
2000 182,467,610
2001 142,507,040
4. Transactions with an affiliated company
During the four-month period, the Company earned interest from NB
Finance, Ltd., in an amount of $12,760,418 (see Note 3).
The amount of $4,504,564 due from an affiliated company as of December
31, 1997 represents interest and principal repayments due on the
promissory notes.
5. Transactions with the parent company
In September 1997, the Company entered into agreements with the
National Bank of Canada in relation to the administration of the
Company's operations. The agreements are as follows:
Advisory agreement
In exchange of 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. During the four-month period, fees of $8,333 were
charged to 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. For the four-month period, the
average outstanding balance of the collateralized mortgage loans
amounts to $581,350,000. During the four-month period, fees of $539,964
were charged to the Company.
Custodian agreement
National Bank of Canada will hold all documents relating to the
collateralized mortgage loans. During the four-month period, no fee was
charged to the Company.
F-9
<PAGE>
NB CAPITAL CORPORATION
Notes to the Financial Statements
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
6. Income tax
For the four-month period ended December 31, 1997, the Company was
subject to a 4% 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:
300,000 shares classified as 8.35% Noncumulative 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.
1,000 shares classified as Adjustable Rate Cumulative Senior
Preferred Shares, non-voting, ranked senior to the common
stock and to the 8.35% Noncumulative 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.
F-10
<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
Auditors' report
To the Shareholders of
NB Finance, Ltd.
We have audited the balance sheet of NB Finance, Ltd. as at December 31, 1997
and the statements of income and retained earnings and changes in financial
position for the four-month period then ended. 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 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 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1997 and the
results of its operations and the changes in its financial position for the
four-month period ended December 31, 1997 in accordance with generally accepted
accounting principles.
Chartered Accountants
Montreal, Canada
February 10, 1998
F-11
<PAGE>
NB FINANCE, LTD.
Balance sheet
as of December 31, 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
Assets
Cash $ 7,682,495
Mortgage loans (Note 3) 554,486,383
Premium paid on mortgage loans (Note 4) 11,121,452
Interest receivable 3,762,160
Assets related to derivative financial instruments 16,479,940
- --------------------------------------------------------------------------------
$593,532,430
- --------------------------------------------------------------------------------
Liabilities
Promissory notes (Note 5) $456,513,825
Due to an affiliated company - 4,504,564
Accounts payable 10,750
- --------------------------------------------------------------------------------
461,029,139
- --------------------------------------------------------------------------------
Shareholders' equity
Capital stock (Note 7) 12,000
Contributed surplus 132,335,558
Retained earnings 155,733
- --------------------------------------------------------------------------------
132,503,291
- --------------------------------------------------------------------------------
$593,532,430
- --------------------------------------------------------------------------------
F-12
<PAGE>
NB FINANCE, LTD.
Statement of income
For the period September 3, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- ------------------------------------------------------------------------------
Revenue
Interest - mortgage loans $14,313,021
Interest - bank 51,659
- ------------------------------------------------------------------------------
14,364,680
- ------------------------------------------------------------------------------
Expenses
Interest - promissory notes 12,760,418
Amortization of the premium paid on mortgage loans 1,430,688
Professional fees 10,750
Other 7,091
- ------------------------------------------------------------------------------
14,208,947
- ------------------------------------------------------------------------------
Net income and retained earnings at end of period 155,733
- ------------------------------------------------------------------------------
F-13
<PAGE>
NB FINANCE, LTD.
Statement of cash flows
For the period September 3, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
Operating activities
Net income $ 155,733
Item not affecting cash resources
Amortization of the premium paid on mortgage loans 1,430,688
Changes in non-cash operating working capital items
Interest receivable (3,762,160)
Due to an affiliated company 4,504,564
Accounts payable 10,750
- --------------------------------------------------------------------------------
2,339,575
- --------------------------------------------------------------------------------
Financing activities
Issue of common shares 132,347,558
Issue of promissory notes 476,588,453
Reimbursements of promissory notes (20,074,628)
- --------------------------------------------------------------------------------
588,861,383
- --------------------------------------------------------------------------------
Investing activities
Mortgage loans (595,735,566)
Repayments of mortgage loans 25,093,285
Premium paid on mortgage loans (12,876,182)
- --------------------------------------------------------------------------------
(583,518,463)
- --------------------------------------------------------------------------------
Cash position, end of year $7,682,495
- --------------------------------------------------------------------------------
F-14
<PAGE>
NB FINANCE, LTD.
Notes to the Financial Statements
For the period September 3, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
1. Incorporation and nature of operations
NB Finance, Ltd. (the "Company") is a wholly-owned subsidiary of the
National Bank of Canada and was incorporated in Bermuda on September
3, 1997. The Company's principal activity is holding mortgage loans.
2. Summary of significant accounting policies
Financial statements
The financial statements are prepared in accordance with generally
accepted accounting principles in Canada and are expressed in U.S.
dollars.
Mortgage loans
Mortgage loans are recorded at their principal amounts less allowances
for credit losses.
Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based
on management's best knowledge of current events and actions that the
Company may undertake in the future, actual results could differ from
the estimates.
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at year-end rates of exchange. Revenue and
expense items are translated at rates prevailing at the transaction
dates. Gains and losses resulting from translation are reflected in the
statement of income.
Derivative financial instruments
The Company used cross currency swaps to manage the currency risk
exposure of the mortgage loans. The gains and losses resulting from the
valuation of these instruments are deferred and amortized to income
over the life of the hedged assets.
Income taxes
The Company does not pay any income taxes on the Bermuda income.
F-15
<PAGE>
NB FINANCE, LTD.
Notes to the Financial Statements
For the period September 3, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- -------------------------------------------------------------------------------
Premium paid on mortgage loans
The premium paid on mortgage loans is amortized on a straight-line
basis over a three-year period.
3. Mortgage loans
In September 1997, the Company acquired mortgage loans expressed in
Canadian dollars from National Bank of Canada. The mortgage loans are
secured by residential first mortgages and insured by the Canada
Mortgage and Housing Corporation.
The mortgage loans have maturity dates varying form January 2000 to
July 2001. These loans bear interest at rates ranging from
approximately 6.0% to 8.99% with an average rate of 7.35% per annum.
Cross currency swaps with the parent company convert the Canadian
dollars exposure of the mortgage loans to U.S. dollars. The maturity
dates of the cross currency swaps agree with the maturity dates of the
mortgage loans.
Mortgage loans as at September 3, 1997 $595,735,566
Principal repayments (25,093,285)
Foreign exchanges difference (16,155,898)
- -------------------------------------------------------------------------------
Mortgage loans as at December 31, 1997 554,486,383
- -------------------------------------------------------------------------------
The scheduled principal repayments are as follows:
1998 $ 47,791,271
1999 111,977,563
2000 221,627,034
2001 173,090,515
The mortgage loans are insured by the Canada Mortgage and Housing
Corporation so tat the credit risk is negligible. Moreover, based on
the current financial structure, the exposure to interest rate risk is
minimal.
4. Premium paid on mortgage loans
The purchase price of the mortgage loans was $12,876,182 over the book
value with National Bank of Canada. This premium is amortized on a
straight-line basis over a three-year period. The amortization amounts
to $1,430,688 in 1997. The foreign exchange difference amounts to
$324,042 as at December 31, 1997.
F-16
<PAGE>
NB FINANCE LTD.
Notes to the Financial Statements
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- --------------------------------------------------------------------------------
5. Promissory notes
The promissory notes are issued to NB Capital Corporation,
a wholly-owned subsidiary of the parent company.
Promissory notes, interest rate ranging between
6.90% and 9.77%, repayable by monthly variable
instalments until July 2001 456,513,825
- -----------------------------------------------------------------------------
The scheduled principal repayments for the next four years are as
follows:
1998 $ 39,347,000
1999 92,192,175
2000 182,467,610
2001 142,507,040
6. Transactions with an affiliated company
During the four-month period, the Company incurred interest from NB
Capital Corporation in an amount of $12,760,418.
The amount of $4,504,564 due to an affiliated company as at December
31, 1997 represents interest and principal reimbursements due on the
promissory notes.
7. Capital stock
Authorized
12,000 common shares, $1 par value
Issued and fully paid
12,000 common shares $12,000
- -------------------------------------------------------------------------------
During the four-month period, the Company issued 12,000 common shares
for a consideration of $132,347,558. An amount of $132,335,558 was
recorded as contributed surplus.
F-17
<PAGE>
NB CAPITAL CORPORATION
Notes to the Financial Statements
For the period August 20, 1997 (date of incorporation) to December 31, 1997
(in U.S. dollars)
- -------------------------------------------------------------------------------
8. Reconciliation of Canadian and United States generally accepted
accounting principles
The financial statements of the Company are prepared in accordance with
Canadian generally accepted accounting principles. There are no
material differences between Canadian and United States generally
accepted accounting principles.
F-18
<PAGE>
AMENDMENT NO. 3 TO
FORM F-9
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR
PURCHASERS
<PAGE>
New Issue
U.S.$300,000,000
[logo]
NATIONAL BANK OF CANADA
(300,000 Shares)
8.45% Noncumulative First Preferred Shares, Series Z
The 8.45% Noncumulative First Preferred Shares, Series Z (the
"Series Z Preferred Shares") of National Bank of Canada ("National Bank" or the
"Bank"), will be issued only upon the automatic exchange (see "Automatic
Exchange") of the 8.35% Noncumulative Exchangeable Preferred Stock, Series A
(the "Old Preferred Shares") of NB Capital Corporation, a U.S. subsidiary of the
Bank, and/or of the 8.35% Noncumulative Exchangeable Preferred Stock, Series A
(the "New Preferred Shares") of NB Capital Corporation into which the Old
Preferred Shares are exchangeable (see "Exchange Offer") upon the occurrence of
certain events.
Dividends on the Series Z Preferred Shares will be payable at
a rate of 8.45% per annum if, when and as declared by the Board of Directors of
the Bank. For a description of the terms of the Series Z Preferred Shares, see
"Description of the Series Z Preferred Shares" herein.
The Bank currently has outstanding, and may in the future
issue, various other series of first preferred shares (the "Other Series of
First Preferred Shares"). See "Capitalization". The Series Z Preferred Shares
will constitute a new series of first preferred shares of the Bank and will rank
pari passu in terms of cash dividend payment and liquidation preference with the
Other Series of First Preferred Shares (the Series Z Preferred Shares and the
Other Series of First Preferred Shares collectively, the "Preferred Shares").
The Preferred Shares rank, in priority of payment of dividends and rights upon
the voluntary or involuntary dissolution, liquidation or winding-up of the Bank,
junior to all claims of the Bank's creditors, including the claims of the Bank's
depositors and holders of the Bank's outstanding subordinated debentures. The
Preferred Shares rank superior and prior to the issued and outstanding Common
Shares of the Bank with respect to dividend rights and rights upon voluntary or
involuntary dissolution, liquidation or winding up of the Bank, and to all other
classes and series of shares of the Bank hereafter issued, other than any class
or series expressly designated as being on parity with or senior to the
Preferred Shares. The Common Shares of the Bank constitute the only class of
shares currently outstanding other than the Preferred Shares.
In the event the Old Preferred Shares and/or New Preferred
Shares are exchanged into Series Z Preferred Shares, the Bank does not intend to
apply for the listing of the Series Z Preferred Shares on any national
securities exchange in Canada or the United States or for quotation through the
National Association of Securities Dealers Automated Quotation System.
- --------------------------------------------------------------------------------
The Old Preferred Shares and/or New Preferred Shares are
exchangeable, if ever, at the rate of one Series Z Preferred Share for each Old
Preferred Share or New Preferred Share tendered.
- --------------------------------------------------------------------------------
The Bank is a Canadian issuer that is permitted, under a
multijurisdictional disclosure system adopted by the United States, to prepare
this short form prospectus in accordance with the disclosure requirements of its
home country. Prospective investors should be aware that such requirements are
different from those of the United States. The consolidated financial statements
included or incorporated by reference herein have been prepared in accordance
with Canadian generally accepted accounting principles, and thus may not be
comparable to financial statements of United States companies, and are subject
to Canadian auditing and auditor independence standards which differ from
standards in the United States.
1
<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 March __, 1998.
2
<PAGE>
ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS
National Bank of Canada is a Canadian bank; all of the
directors and executive officers of the Bank and certain of the Bank's advisers
named in this short form prospectus are residents of countries other than the
United States of America ("U.S."); and all or a substantial portion of the
assets of such non-U.S. residents are located outside the U.S. As a result, it
may not be possible for investors to effect service of process within the U.S.
upon such persons or to enforce against them in the U.S. judgments of U.S.
Courts predicated upon the civil liability provisions of the federal securities
laws of the U.S. The Bank will expressly accept the jurisdiction of the Supreme
Court of the State of New York or the U.S. District Court for the Southern
District of New York, in either case in the Borough of Manhattan, The City of
New York, for the purpose of any suit, action or proceeding arising out of the
Series Z Preferred Shares offered hereby, and has appointed NB Capital
Corporation, a subsidiary of the Bank, as its agent in The City of New York to
accept service of process in any such action. The Bank has been advised by
Desjardins Ducharme Stein Monast, Canadian counsel to the Bank, that there is
doubt as to the enforceability in the Province of Quebec, in original actions or
in actions for enforcement of judgments of U.S. Courts, of liabilities
predicated solely upon the federal securities laws of the U.S.
TRANSLATION OF FOREIGN CURRENCY
In this short form prospectus, unless otherwise specified, all
dollar amounts are expressed in Canadian dollars ("C$" or "$"). Solely for
convenience, this short form prospectus contains translations of certain
Canadian dollar amounts into U.S. dollar amounts. Unless otherwise specified,
those amounts presented in U.S. dollars ("U.S.$" or "U.S. dollars") are
translated from the Canadian dollar amounts at the rate of 1.4084 Canadian
dollar per U.S. dollar, the Bank of Canada closing rate for U.S. dollars as at
October 31, 1997.
3
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, filed with the Quebec Securities
Commission, form an integral part of this short form prospectus:
(a) Annual Information Form of the Bank dated December
19, 1996 and contained in the Bank's Annual Report
for the year ended October 31, 1996;
(b) Management's Discussion and Analysis of Operating
Results and Financial Condition of the Bank dated
December 19, 1996, and contained in the Bank's Annual
Report for the year ended October 31, 1996;
(c) Audited Consolidated Financial Statements of the Bank
for the year ended October 31, 1997, together with
the Auditors' Report thereon, which include
comparative audited consolidated financial statements
for the year ended October 31, 1996; and
(d) Management Circular dated January 16, 1997 in
connection with the Bank's annual meeting of
shareholders held on March 12, 1997.
Copies of the documents incorporated herein by reference may
be obtained on request without charge from the Corporate Secretary of the Bank
at National Bank Tower, 600 de La Gauchetiere Street West, Montreal, Quebec, H3B
4L2, telephone (514) 394-6080.
The Bank is required to file with the U.S. Securities and
Exchange Commission (the "Commission") all documents that it is required to send
to its shareholders, including its Annual Report, notices of Shareholders'
Meetings and Management Proxy Circulars. Such documents may be inspected and
copied at the Public Reference Section of the Commission, 455 Fifth Street,
N.W., Washington, DC 20549.
Any documents of the type referred to in the preceding
paragraph and any material change report (excluding confidential material change
reports) filed by the Bank with the Quebec Securities Commission, after the date
of this short form prospectus and prior to the termination of the offering, will
be deemed to be incorporated by reference into this short form prospectus.
Any statement contained in a document incorporated or deemed
to be incorporated by reference into this short form prospectus will be deemed
to be modified or superseded, for purposes of this short form prospectus, to the
extent that a statement contained in this short form prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference into this short form prospectus modifies or supersedes such statement.
Any statement so modified or superseded will not be deemed, except as so
modified or superseded, to constitute a part of this short form prospectus.
The financial information incorporated in this short form
prospectus has been prepared in accordance with Canadian generally accepted
accounting principles including the accounting requirements of the
Superintendent of Financial Institutions Canada.
4
<PAGE>
SHORT FORM PROSPECTUS SUMMARY
This short form prospectus summary does not purport to be
complete and is qualified in its entirety by the more detailed information and
financial statements and notes hereto appearing elsewhere in this short form
prospectus and in the documents incorporated by reference herein. Capitalized
terms used in the summary and not defined herein have the meanings ascribed to
such terms elsewhere in this short form prospectus or in the documents
incorporated by reference herein.
INCORPORATION AND HEAD OFFICE OF THE BANK
The Bank was formed through a series of amalgamations and its
roots date back to 1859 with the founding of Banque Nationale in Quebec City,
Quebec, Canada. The Bank is chartered under the Bank Act (Canada) (the "Bank
Act").
The head office and executive offices of the Bank are at the
National Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, Canada H3B
4L2.
BUSINESS OF THE BANK
The Bank, which ranks sixth among Canadian banks in terms of
total assets, is present in each of Canada's provinces. It delivers an extensive
range of financial services to individuals, commercial enterprises, financial
institutions and governments both in Canada and abroad.
The Bank's main sectors and divisions are the following:
Banking, which consists of Retail Banking, Commercial Banking and International;
Trust Services; Insurance; Treasury, Brokerage and Corporate Banking; and Human
Resources and Administration.
BANKING
Retail Banking
Through its network of 637 branches at October 31, 1997,
Retail Banking provides services to individuals and serves as support to the
commercial banking centres and the Corporate Banking, International Commercial
Operations and Treasury divisions.
In addition to personal and mortgage loans, the Bank offers a
broad range of transaction accounts and investment vehicles, such as term
deposits and investment certificates, mutual funds (managed by the Bank or by
third parties) and registered retirement savings plans and income funds, as well
as credit card and travelers cheque services. In response to clients' growing
demand for financial advisory services, the Bank embarked on a new phase in 1996
when it integrated more than 50 accredited financial planners into its branches.
Clients can access their accounts at any of the Bank's 738
banking machines as well as at the more than 303,426 banking machines in North
America and Europe which belong to the Cirrus, Interac and MasterCard ATM
networks. Furthermore, through the Interac Direct Payment network, debit card
holders can pay for their purchases without using cash at any of the Bank's
28,337 point-of-sale terminals.
The Bank continues to assume a leadership role in customer
service by offering its customers non-traditional services such as TelNat for
banking by phone and Personal CompuTeller for banking by computer. The first
service of its kind in Canada, Personal CompuTeller gives customers direct
access to their transaction accounts via their personal computer.
5
<PAGE>
To meet the new reality of consumer demand for fast, easy
access to banking services, the Bank developed another delivery concept in the
form of specially designed service units in supermarkets, open seven days a
week.
Commercial Banking
The Commercial Banking division administers loans to
independent businesses and offers them an array of complementary services. Of
the 38 commercial banking centres in operation as at October 31, 1997, 20 were
in Quebec, 9 in Ontario and 9 in Atlantic Canada. The centres are staffed by
account managers, each of whom services a small number of business clients, and
by experts in special financing methods. In addition to the specialized services
offered by Treasury and International Commercial Operations, businesses can
obtain a full range of services such as bankers' acceptances, operating loans
and fixed or variable-rate term loans, as well as computerized payroll
processing, bank reconciliation with cheques in consignment and pre-authorized
payments.
The Bank also serves mid-market companies through offices in
20 U.S. cities, including its own representative offices and the offices of its
subsidiary National Canada Finance Corp.
International
The International division is responsible for all the services
offered to the Bank's Canadian clients who are involved in foreign transactions.
Available through centres in Moncton, Quebec City, Montreal, Toronto and
Vancouver, as well as the branch network, these services include guarantees and
letters of credit, foreign exchange transactions, foreign payments and
documentary collections. In addition to these transaction services, the Bank
offers financing adapted to the needs of exporters, such as discounted foreign
receivables, identification of foreign partners or clients, as well as advisory
services for establishing foreign trade or an international strategy.
The International division has also made its presence felt
abroad through its representative offices in New York, the Caribbean, Mexico,
Santiago, London, Paris, Hong Kong, Seoul, Singapore, Taiwan and Shanghai;
cooperation agreements with seven European financial institutions and a Mexican
bank; and via a vast network of some 2,800 banking correspondents spanning 120
countries.
Through this presence abroad, the International division can
serve its clientele which includes Canadian clients, foreign companies,
international banks which obtain traditional services such as correspondent
banking, and immigrant investors to whom the Bank provides private banking
services as well as other products designed specifically to meet their needs.
The Bank has also developed partnerships with private
enterprise and all three levels of public administration. Partnerships created
in 1996 include the Action Asia Group, Montreal International, the Canada-Poland
Development Fund and a France-Quebec network for independent businesses, as well
as the agreement to accommodate Quebec trade delegates in the Bank's offices in
Boston, Los Angeles, Chicago and Atlanta.
Through its International division, the Bank is able to offer
international products and services adapted to the increasingly sophisticated
needs of its clients, including guarantees and letters of credit, foreign
exchange transactions, foreign payments and management of foreign accounts.
6
<PAGE>
TRUST SERVICES
With its investment services, personal trust services and
branches now integrated into the Bank's network, General Trust offers wealth
management services for high net worth households. Its corporate trust services
are geared to the needs of independent businesses and large corporations in
Quebec.
General Trust and National Bank Securities Inc., another Bank
subsidiary, provide active fund management on behalf of their clients. National
Bank Securities Inc. also offers its clients a wide selection of mutual funds
and discount brokerage services.
INSURANCE
National Bank Life Insurance Company administers credit
insurance plans for loans granted by the Bank and markets various general
insurance products. Personal and group insurance products are delivered through
National Bank Financial Services, a joint company formed by the Bank and
Metropolitan Life.
BROKERAGE AND CORPORATE BANKING
The Corporate Banking division, with the support of
specialized teams based in Montreal and Toronto, offers a broad range of
services customized to clients' needs. In addition to providing traditional
operating credit and term financing, these teams structure financing for
acquisitions or recapitalizations and arrange high-yield financing, often
through loan syndicates involving other institutions. They also offer advisory
services for restructuring, mergers and acquisitions and for hybrid financings
combining debt and equity. Together with the Treasury division, Corporate
Banking offers financial risk management instruments for hedging interest rates,
foreign exchange and import-export transactions. The division's specialists in
banking operations can suggest a vast range of electronic products, such as
point-of-sale debit and electronic data interchange (EDI), and tailor them to
each client's requirements.
The securities brokerage subsidiary Levesque Beaubien
Geoffrion Inc. provides services to business clients and individuals, in
addition to playing an important role in securing financing for various levels
of government. This subsidiary is active on all the major markets through its
network of 65 offices.
Another subsidiary, Natcan Investment Management Inc.,
specializes in portfolio management for institutional clients and identifies
investment opportunities in Canada the United States and abroad. Pension funds,
insurance companies, mutual funds, foundations and religious orders are among
the many clients for which this subsidiary manages assets in excess of $8.8
billion.
7
<PAGE>
THE OFFERING
Securities Offered: 300,000 Series Z Preferred Shares.
The Exchange Offer: Simultaneously with the filing of this short
form prospectus by the Bank, NB Capital
Corporation, a 100% controlled subsidiary of
the Bank, is offering to exchange (the
"Exchangeable Offer") up to 300,000 shares
of its 8.35% Noncumulative Exchangeable
Preferred Stock, Series A (the "New
Preferred Shares") for up to all of its
outstanding 8.35% Noncumulative Exchangeable
Preferred Stock, Series A (the "Old
Preferred Shares") at the rate of one New
Preferred Share for each Old Preferred Share
tendered. The issuance of the New Preferred
Shares is intended to satisfy certain
obligations of NB Capital Corporation
contained in the Registration Rights
Agreement (as defined). See "The Exchange
Offer".
Registration Rights
Agreement: The Old Preferred Shares were sold by the
Company on September 3, 1997 to Merrill
Lynch, Pierce, Fenner & Smith Incorporated
as initial purchaser (the "Initial
Purchaser") pursuant to the purchase
agreement among the Company, the Bank and
the Initial Purchaser (the "Purchase
Agreement"). Pursuant to the Purchase
Agreement, the Company and the Initial
Purchaser entered into the Registration
Rights Agreement on September 3, 1997.
Pursuant to the Registration Rights
Agreement, the Bank and the Company agreed
to each file a registration statement within
a certain time period and to use their best
efforts to cause such registration
statements to become effective within an
additional time period with respect to the
Exchange Offer. The Exchange Offer is
intended to satisfy such rights under the
Registration Rights Agreement which
terminate upon the consummation of the
Exchange Offer. See "Registration Rights
Agreement".
Automatic Exchange: The Series Z Preferred Shares are to be
issued, if ever, in connection with the
automatic exchange of the Old Preferred
Shares and/or New Preferred Shares into
which the Old Preferred Shares are
exchangeable pursuant to the Exchange Offer.
See "Automatic Exchange" and "The Exchange
Offer".
Ranking: The Series Z Preferred Shares rank senior to
the Bank's common shares (the "Common
Shares") and all other classes and series of
shares of the Bank hereafter issued other
than those expressly designated as being on
a parity with or senior to the First
Preferred Shares of the Bank, pari passu
with the other First Preferred Shares of the
Bank with respect to cash dividend payments
and rights upon liquidation and junior to
all claims of the Bank's creditors,
including the claims of the Bank's
depositors and holders of the Bank's
outstanding subordinated debentures.
Preferred shares ranking senior to the
Series Z Preferred Shares may not be issued
without the approval of holders of at least
two-thirds of all series of First Preferred
Shares.
Dividends: Dividends on the Series Z Preferred Shares
are payable at the rate of 8.45% per annum
of the liquidation preference (being an
amount equal to U.S.$84.50 per share), if,
when and as declared by the Board of
Directors of the Bank. If declared,
dividends are payable quarterly in arrears
on the 30th day of March, June, September
and December in each year, or, if such day
is not a business day, on the next business
day. Dividends on the Series Z
8
<PAGE>
Preferred Shares are not cumulative and,
accordingly, if no dividend is declared on
the Series Z Preferred Shares by the Bank
for a quarterly dividend period, holders of
the Series Z Preferred Shares will have no
right to receive a dividend for that period,
and the Bank will have no obligation to pay
a dividend for that period, whether or not
dividends are declared and paid for any
future period. See "Description of the
Series Z Preferred Shares--Dividends". The
Bank's ability to pay cash dividends is
subject to regulatory and other restrictions
described herein.
Redemption: The Bank may not redeem the Series Z
Preferred Shares before September 3, 2007.
After such date, the Series Z Preferred
Shares may be redeemed for cash at the
option of the Bank, in whole or in part at
any time and from time to time, at the
redemption prices set forth herein, plus the
quarterly accrued and unpaid dividends, if
any, thereon for the then-current dividend
period to, but excluding, the date fixed for
redemption. Redemption of the Series Z
Preferred Shares will be subject to
compliance with applicable regulatory and
other restrictions, including the
requirement of the prior consent of the
Superintendent. See "Description of Series Z
Preferred Shares--Redemption".
Voting Rights: Holders of Series Z Preferred Shares
will not have any voting rights, except as
expressly provided herein. On any matter on
which holders of the Series Z Preferred
Shares may vote, each Series Z Preferred
Share will be entitled to one vote. See
"Description of Series Z Preferred
Shares--Voting Rights".
Use of Proceeds: The Series Z Preferred Shares will only be
issued, if ever, upon the automatic exchange
of the Old Preferred Shares and/or New
Preferred Shares resulting from the Exchange
Offer. The proceeds from the sale of the Old
Preferred Shares were used by NB Capital
Corporation to acquire a portfolio of
mortgage related assets. The automatic
exchange of the Old Preferred Shares and/or
New Preferred Shares into Series Z Preferred
Shares will produce no proceeds to the Bank.
See "Use of Proceeds".
Absence of a Public Market: There is currently no public market for the
Series Z Preferred Shares and such shares
will not be listed on any securities
exchange or for quotation through the
National Association of Securities Dealers
Automated Quotation System.
9
<PAGE>
CAPITALIZATION
The following table sets forth the actual capital of the Bank
at October 31, 1997 and as adjusted as of such date to give effect to the
automatic exchange of the Old Preferred Shares and/or New Preferred Shares into
Series Z Preferred Shares of the Bank. This table should be read in conjunction
with the Consolidated Financial Statements of the Bank and the notes thereto
included elsewhere in this Short Form Prospectus and in the documents
incorporated herein by reference.
<TABLE>
<CAPTION>
October 31, 1997
----------------
Actual As adjusted (1)
(in millions of Canadian dollars)
<S> <C> <C>
Liabilities
Deposits............................................................... $ 43,270 $ 43,270
Bankers acceptances.................................................... 2,273 2,273
Obligations related to securities sold short........................... 4,225 4,225
Securities sold under repurchase agreements............................ 9,038 9,038
Other liabilities...................................................... 3,134 3,134
----- -----
Non-controlling interest............................................... 61,940 61,940
----------- -----------
Bank debentures........................................................ 466 43
----------- -----------
Shareholders' equity 1,069 1,069
----------- -----------
First Preferred shares without par value:
Unlimited number of shares authorized, issued and outstanding:
286,610 Series 5 shares................................................ 29 29
422,633 Series 7 shares................................................ 10 10
789,638 Series 8 shares................................................ 20 20
3,680,000 Series 10 shares............................................. 92 92
4,000,000 Series 11 shares ............................................ 100 100
5,000,000 Series 12 shares............................................. 125 125
300,000 Series Z shares(2)............................................. -- 423
----------- -----------
Total ................................................................. 376 799
Common shares without par value:
Unlimited number of shares authorized .................................
170,461,483 shares issued and outstanding.............................. 1,309 1,309
Retained earnings ..................................................... 1,075 1,075
----------- -----------
2,760 3,183
----------- -----------
Total liabilities and shareholders' equity............................. 66,235 66,235
=========== ===========
Regulatory capital ratios
Assets to capital multiple............................................. 16.4 16.4
Tier 1 risk-based ..................................................... 8.1% 8.1%
Total risk-based ...................................................... 11.3% 11.3%
</TABLE>
(1) Adjusted to give effect to the automatic exchange of the Old Preferred
Shares and/or New Preferred Shares into Series Z Preferred Shares of
the Bank assuming that the limit on the amount of Preferred Shares
includable as core capital is applicable to the Series Z Preferred
Shares of the Bank.
(2) Exchange rate is 1.4084 Canadian dollars for 1 U.S. dollar.
10
<PAGE>
DESCRIPTION OF THE SERIES Z PREFERRED SHARES
The following is a summary of the rights, privileges,
restrictions and conditions of the First Preferred Shares as a class and of the
Series Z Preferred Shares as a series.
Certain Provisions of the First Preferred Shares as a Class
The authorized first preferred share capital of the Bank
consists of an unlimited number of First Preferred Shares, without par value,
which may be issued for a maximum aggregate consideration of $1,000,000,000 or
the equivalent thereof in foreign currencies. The Board of Directors of the Bank
may by resolution divide any unissued First Preferred Shares into series and fix
the number of shares in each series and determine the designation, rights,
privileges, restrictions and conditions thereof.
Priority
The First Preferred Shares of each series will rank on a
parity with First Preferred Shares of every other series and are entitled to
preference over the Common Shares, and any other shares of the Bank ranking
junior to the First Preferred Shares with respect to the payment of dividends
and upon any distribution of assets in the event of liquidation, dissolution or
winding-up of the Bank.
Restriction
The Bank will not, without the approval of the holders of the
First Preferred Shares, create or issue any shares ranking in priority to or
pari passu with the First Preferred Shares, nor create or issue any additional
series of First Preferred Shares, unless all cumulative dividends have been
declared and paid or set aside for payment and all declared and unpaid
non-cumulative dividends have been paid or set aside for payment.
Voting Rights
The Board of Directors is empowered to set voting rights for
each series. The holders of the First Preferred Shares are not entitled to any
voting rights as a class except as provided above or by law or with respect to
the right to vote on certain matters as specified under "Approval of the Holders
of the First Preferred Shares".
Approval of the Holders of the First Preferred Shares
The provisions with respect to First Preferred Shares will not
be deleted or modified except with a resolution carried by the affirmative vote
of not less than 66 2/3% of the votes cast at a meeting of holders of First
Preferred Shares at which a majority of the outstanding First Preferred Shares
is represented or, if no quorum is present at such meeting, at any adjourned
meeting at which no quorum requirements would apply.
Certain Provisions of the Series Z Preferred Shares as a Series
Issue Price
The Series Z Preferred Shares will have an issue price of
U.S.$1,000 per share.
11
<PAGE>
Dividends
Holders of Series Z Preferred Shares shall be entitled to
receive, if, when and as declared by the Board of Directors of the Bank out of
assets of the Bank legally available therefor, non-cumulative preferential cash
dividends at the rate of 8.45% per annum of the liquidation preference
(equivalent to U.S.$1,000 per share). If declared, dividends on the Series Z
Preferred Shares shall be payable quarterly in arrears on the 30th day of March,
June, September and December of each year, or, if such day is not a business
day, on the next business day. Each declared dividend shall be payable to
holders of record as they appear at the close of business on the share register
of the Bank on such record dates, not exceeding 45 days preceding the payment
dates thereof, as shall be fixed by the Board of Directors of the Bank.
If, within 21 days after the expiration of any financial year
of the Bank, the Board of Directors has not declared any dividend or part
thereof on the Series Z Preferred Shares for such year, then the right of the
holders of the Series Z Preferred Shares to such dividend or part thereof for
such year shall be extinguished.
Restrictions on Dividends and Retirement of Shares
As long as any of the Series Z Preferred Shares are
outstanding, the Bank shall not, without the prior approval of the holders of
such Series Z Preferred Shares given as specified below:
(a) declare or pay or set aside for payment any dividends
on any shares of any class of shares of the Bank
ranking junior to the Series Z Preferred Shares
(other than stock dividends ranking junior to the
Series Z Preferred Shares);
(b) call for redemption or redeem, call for purchase or
purchase, or otherwise retire or reduce or make any
return of capital in respect of shares of any class
of shares of the Bank ranking junior to the Series Z
Preferred Shares;
(c) call for redemption or redeem, call for purchase or
purchase, or otherwise retire or reduce or make any
return of capital in respect of part only of the
Series Z Preferred Shares; or
(d) call for redemption or redeem, call for purchase or
purchase, or otherwise retire or reduce or make any
return of capital in respect of any shares of any
class of shares of the Bank ranking pari passu with
the Series Z Preferred Shares, except in satisfaction
of an obligation to purchase or obligation in respect
of a sinking fund, of a right of retraction or of any
other mandatory redemption provision of any given
series of any preferred shares;
unless all dividends up to and including the dividend payment date for the last
completed period for which dividends shall be payable shall have been declared
and paid or set apart for payment in respect of each series of cumulative first
preferred shares then issued and outstanding and on all other cumulative shares
ranking on a parity with the First Preferred Shares and there shall have been
paid or set apart for payment all declared dividends in respect of each series
of non-cumulative First Preferred Shares (including the Series Z Preferred
Shares) then issued and outstanding and on all other non-cumulative shares
ranking on a parity with the First Preferred Shares.
12
<PAGE>
Redemption
The Series Z Preferred Shares will not be redeemable prior to
September 3, 2007. On or after such date, but subject to the provisions of the
Bank Act, including the requirements of the prior consent of the Superintendent,
the Series Z Preferred Shares will be redeemable at the option of the Bank, in
whole or in part, at any time or from time to time on not less than 30 nor more
than 60 days' notice by mail, at the following redemption prices (expressed as a
percentage of the $1,000 per share liquidation preference), if redeemed during
the 12-month period beginning September 3 of the years indicated below, plus the
quarterly accrued unpaid dividend to the date of redemption, if any, thereon:
Year Redemption Price
- ---- ----------------
2007.......................................... 104.2550%)
2008.......................................... 103.8025
2009.......................................... 103.3800
2010.......................................... 102.9575
2011.......................................... 102.5350
2012.......................................... 102.1125
2013.......................................... 101.6900
2014.......................................... 101.2675
2015.......................................... 100.8450
2016.......................................... 100.4225
and thereafter at a redemption price of $1,000 per share, plus the quarterly
accrued and unpaid dividend to the redemption date, if any, thereon.
If there are any accrued and unpaid dividends on any Series Z
Preferred Shares, no Series Z Preferred Shares shall be redeemed unless all
outstanding Series Z Preferred Shares are redeemed and the Bank shall not
purchase or otherwise acquire any Series Z Preferred Shares; provided, however,
that the Bank may purchase or acquire Series Z Preferred Shares pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
Series Z Preferred Shares.
In the event that fewer than all the outstanding Series Z
Preferred Shares are to be redeemed, the number of Series Z Preferred Shares to
be redeemed shall be determined by the Board of Directors, and the shares to be
redeemed shall be determined by lot or proportionately as may be determined by
the Board of Directors or by any other method as may be determined by the Board
of Directors in its sole discretion to be equitable.
Voting Rights
The holders of the Series Z Preferred Shares as such will not
be entitled to receive notice of or to attend or to vote at any meeting of the
shareholders of the Bank unless and until the first time at which the rights of
such holders to any undeclared dividends have become extinguished as described
under "Dividends".
In that event, the holders of the Series Z Preferred Shares
will be entitled to receive notice of, and to attend, meetings of shareholders
at which directors are elected and will be entitled to one vote for each share
held. The voting rights of the holders of the Series Z Preferred Shares shall
forthwith cease upon payment by the Bank of the first quarterly dividend on the
Series Z Preferred Shares to which the holders are entitled subsequent to the
time such voting rights first arose. At such time as the rights of such holders
to any undeclared dividends on the Series Z Preferred Shares have again become
extinguished, such voting rights shall become effective again and so on from
time to time.
13
<PAGE>
Rights Upon Liquidation
In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Bank, the holders of the Series Z Preferred
Shares at the time outstanding will be entitled to receive out of assets of the
Bank legally available for distribution to shareholders, under applicable law,
before any distribution of assets is made to holders of Common Shares or any
other class of shares ranking junior to the Series Z Preferred Shares upon
liquidation, and subject to the rights of the holders of any class or series of
equity securities having preference with respect to distribution upon
liquidation and the rights of the Bank's general creditors, an amount of $1,000
per share, plus the quarterly accrued and unpaid dividend thereon, if any, to,
but excluding, the date of liquidation.
After payment of the full amount of said amount to which they
are entitled, the holders of Series Z Preferred Shares will have no right or
claim to any of the remaining assets of the Bank. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding-up, the
available assets of the Bank are insufficient to pay the amount of the
liquidation distributions on all outstanding Series Z Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of share
capital of the Bank ranking on a parity with the Series Z Preferred Shares in
the distribution of assets upon any liquidation, dissolution or winding-up of
the affairs of the Bank, then the holders of the Series Z Preferred Shares and
such other classes or series of share capital shall share ratably in any such
distribution of assets in proportion to the full liquidation distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Bank
with or into any other entity, or the sale, lease or conveyance of all or
substantially all of the property or business of the Bank, shall not be deemed
to constitute liquidation, dissolution or winding-up of the Bank.
Taxation
To the extent that dividends on the Series Z Preferred Shares
are subject to Canadian non-resident withholding tax, the Bank will pay such
additional amounts as may be necessary in order that the net amounts received by
U.S. holders of the Series Z Preferred Shares shall equal the amounts which
would have been received thereon in the absence of such tax.
COMMON SHARES
The authorized Common Share capital of the Bank consists of an
unlimited number of Common Shares without par value, issuable for a maximum
aggregate consideration of $3 billion, of which 170,461,483 Common Shares were
outstanding as at October 31, 1997.
The holders of Common Shares are entitled to receive dividends
as and when declared by the Board of Directors of the Bank, subject to the
preference of holders of First Preferred Shares. Subject to the restrictions set
forth in "Restraints on Bank Shares under the Bank Act", a holder of Common
Shares is entitled to one vote for each share at all meetings of shareholders
except meetings at which only holders of a specified class or series are
entitled to vote. In the event of the liquidation, dissolution or winding-up of
the Bank, after payment of all outstanding debts and subject to the preference
of the holders of First Preferred Shares, the remaining assets of the Bank would
be distributed proportionately to the holders of Common Shares.
14
<PAGE>
USE OF PROCEEDS
The Series Z Preferred Shares are to be issued only, if ever,
in connection with the automatic exchange of the Old Preferred Shares and/or New
Preferred Shares into which the Old Preferred Shares are exchangeable pursuant
to the Exchange Offer. The proceeds from the sale of the Old Preferred Shares
were used by NB Capital Corporation to acquire a portfolio of mortgage related
assets. The automatic exchange of Old Preferred Shares and/or New Preferred
Shares into Series Z Preferred Shares will produce no proceeds to the Bank.
15
<PAGE>
THE EXCHANGE OFFER
Simultaneously with the filing of this short form prospectus
by the Bank, NB Capital Corporation, a 100% controlled subsidiary of the Bank,
is offering to exchange (the "Exchange Offer") up to 300,000 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A (the "New Preferred
Shares") for up to all of its outstanding 8.35% Noncumulative Exchangeable
Preferred Stock, Series A (the "Old Preferred Shares") at the rate of one New
Preferred Share for each Old Preferred Share tendered. The issuance of the New
Preferred Shares is intended to satisfy certain obligations of NB Capital
Corporation contained in the Registration Rights Agreement.
REGISTRATION RIGHTS AGREEMENT
The Old Preferred Shares were sold by NB Capital Corporation
on September 3, 1997 to Merrill Lynch, Pierce, Fenner & Smith Incorporated as
initial purchaser (the "Initial Purchaser") pursuant to the purchase agreement
among NB Capital Corporation, the Bank and the Initial Purchaser (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, NB Capital Corporation and the
Initial Purchaser entered into the Registration Rights Agreement on September 3,
1997. Pursuant to the Registration Rights Agreement, the Bank and NB Capital
Corporation agreed to each file a registration statement within a certain time
period and to use their best efforts to cause such registration statements to
become effective within an additional time period with respect to the Exchange
Offer. If certain events do not permit NB Capital Corporation to effect the
Exchange Offer on the terms set forth therein, the Bank and NB Capital
Corporation will use their best efforts to cause to become effective shelf
registration statements with respect to the resale of the Old Preferred Shares
and of the Series Z Preferred Shares and to keep the shelf registration
statements effective until two (2) years after the issue date of the Old
Preferred Shares or such shorter period ending when all of the Old Preferred
Shares have been sold thereunder.
AUTOMATIC EXCHANGE
The Series Z Preferred Shares are to be issued, if ever, in
connection with an automatic exchange of the Old Preferred Shares and/or New
Preferred Shares into which the Old Preferred Shares are exchangeable pursuant
to the Exchange Offer. The Old Preferred Shares and/or New Preferred Shares are
subject to an automatic exchange in whole and not in part, on a share-for-share
basis, into Series Z Preferred Shares (i) immediately prior to such time, if
any, at which the Bank fails to declare and pay or set aside for payment when
due any dividend on any issue of cumulative First Preferred Shares or the Bank
fails to pay or set aside for payment when due any declared dividend on any
non-cumulative First Preferred Shares, (ii) in the event that the Bank has a
Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital
ratio of less than 8.0%, (iii) in the event that the Superintendent takes
control of the Bank pursuant to the Bank Act, or proceedings are commenced for
the winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange.
BANK ACT RESTRICTIONS AND APPROVALS
Under the Bank Act, the Bank cannot redeem or purchase any of
its shares, including the Series Z Preferred Shares, unless the consent of the
Superintendent has been obtained. In addition, the Bank Act prohibits the
payment to purchase or redeem any shares or the payment of a dividend if there
are reasonable grounds for believing that the Bank is, or the payment would
cause the Bank to be, in contravention of the Bank Act requirement to maintain,
in relation to its operations, adequate capital and appropriate forms of
liquidity and to comply with any regulations or directions of the Superintendent
in relation thereto. Currently these limitations do not restrict the payment of
dividends on or the redemption or purchase of the Series Z Preferred Shares.
16
<PAGE>
RESTRAINTS ON BANK SHARES UNDER THE BANK ACT
The Bank Act contains restrictions on the issue, transfer,
acquisition, beneficial ownership and voting of all shares of a bank. By way of
summary, no person is permitted to have a significant interest in any class of
shares of a Schedule I bank, including the Bank. For purposes of the Bank Act, a
person has a significant interest in a class of shares of a bank where the
aggregate of any shares of that class beneficially owned by that person, by
entities controlled by that person and by any person associated or acting
jointly or in concert with that person (as contemplated by the Bank Act) exceeds
10% of all of the outstanding shares of that class of shares of the Bank.
In addition, these restrictions do not permit Schedule I
banks, including the Bank, to issue or transfer shares of any class to Her
Majesty in right of Canada or of a province, an agent of Her Majesty or a
foreign government or any agent of a foreign government.
Purchasers of the Series Z Preferred Shares may be required to
furnish declarations relative to certain of the foregoing matters in a form
prescribed by the Bank.
REGULATION
Canada
The Bank Act
The Bank is a Schedule 1 bank under the Bank Act, and the Bank
Act is its charter. See "The Canadian Banking Industry". In accordance with the
Bank Act, the Bank may engage in and carry on such business generally as
appertains to the business of banking. The Bank Act grants banks broad powers of
investment in the securities of other corporations and entities, but imposes
limits upon banks' substantial investments. A bank has a substantial investment
in a body corporate when (i) the voting shares beneficially owned by the Bank
and by entities controlled by the Bank exceed 10% of the outstanding voting
shares of the body corporate or (ii) the total of the shares of any class of the
body corporate that are beneficially owned by the Bank and entities controlled
by the Bank exceed 25% of the total shareholders' equity of the body corporate.
A bank is entitled to have a substantial investment in a body corporate that is
one of the following, provided that the Bank controls the body corporate and, in
certain cases, the Bank obtains the prior approval of the Minister of Finance of
Canada: a financial institution; a factoring corporation; a financial leasing
corporation; a specialized financing corporation; and a financial holding
corporation, provided that the financial holding corporation does not have a
substantial investment that the Bank may not have. In addition, a bank may have
a substantial investment which can, but need not be, a controlling interest in
the following types of corporations or in any corporation that engages in any
combination of the following: an information services corporation; an investment
counseling and portfolio management corporation; a mutual fund corporation; a
mutual fund distribution corporation; a real property brokerage corporation; a
real property corporation; a service corporation; and a body corporate whose
activities are ancillary to the business of the Bank or of a financial
institution that is a subsidiary of the Bank. Unlike under the former banking
legislation, the investments of Schedule 1 banks in foreign bodies corporate are
now generally subject to the same rules applicable to investments in Canadian
bodies corporate. A bank may not, without the prior approval of the
Superintendent, create a security interest in any of its property to secure an
obligation of the Bank.
Inspection
The Bank Act also contemplated the appointment of the
Superintendent who administers the Bank Act under the authority granted to him
by the Minister of Finance of Canada. Among other things, the Superintendent is
required under the Bank Act, at least once in each calendar year, to examine and
inquire into the business and affairs of each bank to the extent necessary or
17
<PAGE>
expedient to determine that the provisions of the 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.
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<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.
19
<PAGE>
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.
20
<PAGE>
THE CANADIAN BANKING INDUSTRY
Canadian banks are a vital force in Canada's economy,
facilitating the flow of a large part of the nation's savings into various
productive uses. As at September 30, 1997, there were 53 banks in Canada, of
which eleven were domestic banks and 42 were Canadian subsidiaries of
foreign-owned banks. The Banks as a group are the largest financial
intermediaries in Canada. As at September 30, 1997, Canadian banks had total
assets of some $1,205 billion, of which the largest six banks, including the
Bank, accounted for over 91%. Other important financial institutions include
investment dealers, property and casualty insurance companies, life insurance
companies, trust companies, pension funds and credit unions.
ASSET COVERAGE
As at October 31, 1997, after giving effect to the automatic
exchange and taking into account the items mentioned below, the adjusted net
tangible assets of the Bank available to cover all the outstanding First
Preferred Shares and debentures were as follows:
<TABLE>
<CAPTION>
As at
October 31, 1997
(unaudited)
(in millions of Canadian dollars)
<S> <C> <C>
Total Assets.................................................................... $ 66,235
Deduct: Deposit liabilities.................................................... $ 43,270
Other liabilities...................................................... 19,136
Deferred income taxes.................................................. 172
Goodwill .............................................................. 154 (62,732)
---------- ----------
Net Tangible Assets............................................................. 3,503
Add: Proceeds of the automatic exchange......................................... --
--
Adjusted net tangible assets before deduction of debentures..................... 3,503
Deduct: Debentures.............................................................. (1,069)
---------
Adjusted net tangible assets available for First Preferred Shares............... $ 2,434
=========
</TABLE>
The adjusted net tangible assets available for the outstanding
First Preferred Shares of the Bank amounted to approximately 3.1 times the
aggregate issue price for the outstanding First Preferred Shares (including the
proceeds of the automatic exchange in the case of the Series Z Preferred
Shares). The adjusted net tangible assets (before deduction of debentures)
amounted to 1.9 times the sum of the principal amount of such debentures and the
aggregate issue price of the First Preferred Shares.
DIVIDEND AND INTEREST COVERAGE
Based on an annual dividend rate on the Series Z Preferred
Shares of 8.45% and assuming an average prime rate of 5.75%, the annual dividend
requirement of the Series Z Preferred Shares, of the First Preferred Shares
Series 5 (286,610 shares), Series 7 (422,633 shares), Series 8 (789,638 shares),
Series 10 (3,680,000 shares), Series 11 (4,000,000 shares) and Series 12
(5,000,000 shares) outstanding of the Bank (collectively, the "First Preferred
Shares"), would amount to $62.3 million. The Bank's net income, after income
taxes and non-controlling interest, for the twelve months ended October 31, 1997
was $342 million. This amount is 5.5 times such annual dividend requirement.
The annual interest requirement on all debentures of the Bank
outstanding as at October 31, 1997 amounts to $76.5 million, assuming a six
month London interbank offered rate (LIBOR, of 5.8125% on floating rate
debentures and assuming the following exchange rates: Cdn. $1.4084 per US$1.00;
21
<PAGE>
Cdn. $0.0117 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.
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 [LOGO NBC]
Prospectus and, if given or made, such information NATIONAL BANK OF CANADA
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
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 Short Form Prospectus dated March __, 1998
Page
----
THE DATE OF THIS SHORT FORM
PROSPECTUS IS MARCH __, 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
- ---------------------------
</TABLE>
<PAGE>
AMENDMENT NO. 4 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).1 -- Articles of Incorporation and Articles of Amendment and
Restatement and Articles Supplementary of NB Capital
Corporation*
3(i).2 -- Memorandum of Association of NB Finance, Ltd.
3(ii) -- By-Laws of NB Capital Corporation*
3(ii).2 -- By-Laws of NB Finance Limited
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
8.2 -- Opinion letter of Desjardins Ducharme Stein Monast
8.3 -- Opinion letter of Conyers Dill & Pearman
8.4 -- Opinion letter of Osler, Hoskin & Harcourt
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 as of September 3, 1997
between National Bank of Canada and NB Finance, Ltd.
10.6 -- Mortgage Loan Assignment Agreement dated as of September 3,
1997, among NB Finance, Ltd., NB Capital Corporation and
National Bank of Canada
10.7 -- Promissory Notes representing the sixteen hypothecation
loans executed by NB Finance, Ltd. in favor of NB Capital
Corporation
10.8 -- Assignment of the Servicing Agreement dated as of September
3, 1997 among NB Finance, Ltd., NB Capital Corporation and
National Bank of Canada
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*
- -------------------------
* Previously filed.
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. 3 TO
FORM F-9
PART II
INFORMATION NOT REQUIRED
TO BE DELIVERED TO OFFEREES OR PURCHASERS
Indemnification of Directors and Officers
Under the Bank Act, the Bank may indemnify a present or former
director or officer or another person who acts or acted at the Bank's request as
a director or officer of another entity of which the Bank is or was a
shareholder or creditor, and his heirs or personal representatives, against all
costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by the person in respect of any civil,
criminal or administrative action or proceeding to which he is made a party by
reason of such person's position with the Bank or such other corporation, except
for actions or proceedings brought by or on behalf of the Bank or such entity,
to procure a judgment in its favour, and provided that the director or officer
acted honestly and in good faith with a view to the best interests of the Bank
and, in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, had reasonable grounds for believing that the
person's conduct was lawful. Such indemnification may be made in connection with
a derivative action only with court approval. Such a director or officer or
person is entitled to indemnification from the Bank as a matter of right if such
person was substantially successful on the merits and fulfilled the conditions
set forth above.
In accordance with the Bank Act, the by-laws of the Bank
provide that the Bank shall indemnify out of its funds a director or officer, a
former director or officer, or a person who acts or acted at the Bank's request
as a director or officer of an entity of which the Bank is or was a shareholder
or creditor and the assigns, heirs and personal representatives of such person,
from and against all costs, charges and expenses, including amounts paid to
settle an action or satisfy a judgment reasonably incurred by the person in
respect of any civil, criminal or administrative action or proceeding to which
the person is made a party by reason of being or having been director or officer
of the Bank or such entity, except for actions or proceedings brought by or on
behalf of the Bank or such entity, to procure a judgment in its favour, if the
person acted honestly and in good faith with a view to the best interest of the
Bank and in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for believing that
his conduct was lawful. Such indemnification may be made in connection with a
derivative action only with court approval. Such person is also entitled to
indemnification from the Bank for all of its costs, charges and expenses
reasonably incurred during or as a result of business as a director or officer
of the Bank or of the entity. No indemnification is available, however, for
costs, charges and expenses resulting from the person's own fault, negligence or
willful omission.
A policy of directors and officers' liability insurance is
maintained by the Bank which insures directors and officers of the Bank and its
subsidiaries for losses as a result of claims based upon the acts or omissions
as directors and officers of the Bank and also reimburses the Bank for payments
made pursuant to the indemnity provisions under the Bank Act.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Bank pursuant to the foregoing provisions, the Bank has been
informed that in the opinion of the U.S. Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
II-1
<PAGE>
Exhibits.
Exhibit
Number
- ------
4.1(i) Annual Report for the year ended October 31, 1996*
4.1(ii) Annual Report for the year ended October 31, 1997*
4.2(i) Annual Information Form dated December 19, 1996 (included in
Exhibit 4.1(i) hereto)*
4.2(ii) Annual Information Form dated December 23, 1997 (included in
Exhibit 4.1(ii) hereto)*
4.3(i) Management's Discussion and Analysis of Operating Results and Financial
Condition dated December 19, 1996 (included in Exhibit 4.1(i) hereto)*
4.3(ii) Management's Discussion and Analysis of Operating Results and Financial
Condition dated December 23, 1997 (included in Exhibit 4.1(ii)hereto)*
4.4 Audited Consolidated Financial Statements of the Bank for the year
ended October 31, 1997, together with the Auditors' Report thereon,
which include comparative audited consolidated financial statements for
the year ended October 31, 1996 (included in Exhibit 4.1(i) hereto)*
4.5(i) Management Circular dated January 16, 1997*
4.5(ii) Management Circular dated December 23, 1997*
5.1 Consent of Raymond, Chabot, Martin, Pare, a general partnership, Price
Waterhouse and Samson Belair / Deloitte & Touche, a general
partnership*
5.2 Consent of Desjardins Ducharme Stein Monast, a general partnership*
6.1 Power of Attorney (contained on the signature page of the Registration
Statement of Form F-9)*
99.1 Form F-X of National Bank of Canada*
- -------------------
* Previously filed
II-2
<PAGE>
AMENDMENT NO. 3 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.
II-1
<PAGE>
AMENDMENT NO.4 TO
FORM S-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on March 2, 1998.
NB CAPITAL CORPORATION
By:
/s/ Tom Doss
-----------------
Tom Doss
Chief Financial Officer;
Treasurer
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board; Chief Executive
- ------------------------------------
Officer; President and Director
John Richter (Principal Executive Officer)
/s/ Tom Doss Chief Financial Officer, March 2, 1998
- ------------------------------------
Tom Doss Treasurer and Director
(Principal Financial Officer
and Principal Accounting Officer)
/s/ Pierrette Lacroix Vice President and Director March 2, 1998
- ------------------------------------
Pierrette Lacroix
/s/ Michael Hanley Director March 2, 1998
- ------------------------------------
Michael Hanley
/s/ Alain Michel Director March 2, 1998
- ------------------------------------
Alain Michel
</TABLE>
<PAGE>
AMENDMENT NO.4 TO
FORM S-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Montreal, Country of Canada, on March 2, 1998.
NB FINANCE, LTD.
By:
/s/ Martin Ouellet
-------------------------------
Martin Ouellet
President
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Martin Ouellet President and Director March 2, 1998
- ------------------------------------
Martin Ouellet (Principal Executive Officer)
/s/ Pierrette Lacroix Vice President and Director March 2, 1998
- ------------------------------------
Pierrette Lacroix (Principal Financial Officer
and Principal Accounting Officer)
/s/ David W.P. Cooke Director March 2, 1998
- ------------------------------------
David W.P. Cooke
/s/ Nicolas G. Trollope Director March 2, 1998
- ------------------------------------
Nicolas G. Trollope
/s/ Tom Doss Director March 2, 1998
- ------------------------------------
Tom Doss
Director
- ------------------------------------
John Richter
/s/ Francois Bourassa Director March 2, 1998
- ------------------------------------
Francois Bourassa
</TABLE>
<PAGE>
Pursuant to the requirements of Section 6(a) of the Securities
Act of 1933, the undersigned has signed this Registration Statement, solely in
the capacity of the duly authorized representative of NB Finance, Ltd. in the
United States, in the City of New York, State of New York, on this 2nd day of
March, 1998.
By: NB Capital Corporation
Authorized Representative in the United States
125 West 55th Street
New York, New York 10019
By: /s/ Tom Doss
Name: John Richter -----------------------------------
Title: Chief Financial Officer;
Treasurer
<PAGE>
AMENDMENT NO. 3 TO
FORM F-9
SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of
1993 (the "Securities Act", as amended), the registrant certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form F-9 and has duly caused this registration statement and the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Montreal, Country of Canada, on March 2, 1998.
NATIONAL BANK OF CANADA
By: *
------------------------------------------
Name: Jean Turmel
Title: Senior Executive Vice President,
Treasury, Brokerage and
Corporate Banking
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board and Chief March 2, 1998
- ------------------------------------
Andre Berard Executive Officer and Director
(Principal Executive Officer)
* Director March 2, 1998
- ------------------------------------
Leon Courville
* Director March 2, 1998
- ------------------------------------
Maurice J. Closs
* Director March 2, 1998
- ------------------------------------
Gerard Coulombe
* Director March 2, 1998
- ------------------------------------
Shirley A. Dawe
<PAGE>
* Director March 2, 1998
- ------------------------------------
Jean Douville
* Director March 2, 1998
- ------------------------------------
Donald M. Green
* Director March 2, 1998
- ------------------------------------
Suzanne Leclair
* Director March 2, 1998
- ------------------------------------
Gaston Malette
* Director March 2, 1998
- ------------------------------------
Leonce Montambault
* Director March 2, 1998
- ------------------------------------
J.-Robert Ouimet
* Director March 2, 1998
- ------------------------------------
Robert Parizeau
Director March 2, 1998
Lino Saputo
* Senior Executive Vice-President, March 2, 1998
- ------------------------------------
Jean Turmel Treasury, Brokerage and
Corporate Banking
(Principal Financial Officer)
* Vice-President and Chief March 2, 1998
- ------------------------------------ Accounting Officer,
Jean Dagenais (Principal Accounting Officer)
</TABLE>
* 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 2nd day
of March, 1998.
By: NB Capital Corporation
Authorized Representative in the United States
125 West 55th Street
New York, New York 10019
By: /s/ Tom Doss
------------------------------------
Name: Tom Doss
Title: Chief Financial Officer
Treasurer
<PAGE>
AMENDMENT NO. 4 TO
FORM S-4
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
3(i).1 Articles of Incorporation and Articles of Amendment and Restatement
and Articles Supplementary of NB Capital Corporation*
3(ii).1 By-Laws of NB Capital Corporation*
3(i).2 Memorandum of Association of NB Finance, Ltd.
3(ii).2 By-laws of NB Finance, Ltd.
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
8.2 Opinion letter of Desjardins Ducharme Stein Monast
8.3 Opinion letter of Conyers Dill & Pearman
8.4 Opinion letter of Osler, Hoskin & Harcourt
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 as of September 3, 1997
between National Bank of Canada and NB Finance, Ltd.
10.6 Mortgage Loan Assignment Agreement dated as of September 3 1997, among
NB Finance, Ltd., NB Capital Corporation and National Bank of Canada
10.7 Promissory Notes representing the sixteen hypothecation loans executed by
NB Finance, Ltd. in favor of NB Capital Corporation
10.8 Assignment of the Servicing Agreement dated as of September 3, 1997 among
NB Finance, Ltd., NB Capital Corporation and National Bank of Canada
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*
- -----------------
* Previously filed.
<PAGE>
AMENDMENT NO. 3 TO
FORM F-9
EXHIBITS
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C>
4.1(i) Annual Report for the year ended October 31, 1996*
4.1(ii) Annual Report for the year ended October 31, 1997*
4.2(i) Annual Information Form dated December 19, 1996
(included in Exhibit 4.1(i) hereto)*
4.2(ii) Annual Information Form dated December 23, 1997
(included in Exhibit 4.1(ii) hereto)*
4.3(i) Management's Discussion and Analysis of Operating Results and
Financial Condition dated December 19, 1996
(included in Exhibit 4.1(i) hereto)*
4.3(ii) Management's Discussion and Analysis of Operating Results and Financial
Condition dated December 23, 1997(included in Exhibit 4.1(ii) hereto)*
4.4 Audited Consolidated Financial Statements of the Bank for the year
ended October 31, 1997, together with the Auditors' Report thereon,
which include comparative audited consolidated financial statements for
the year ended October 31, 1996 (included in Exhibit 4.1(i) hereto)*
4.5(i) Management Circular dated January 16, 1997* 4.5(ii) Management Circular
dated December 23, 1997*
5.1 Consent of Raymond, Chabot, Martin, Pare, a general partnership, Price
Waterhouse and Samson Belair / Deloitte & Touche, a general
partnership*
5.2 Consent of Desjardins Ducharme Stein Monast, a general partnership
6.1 Power of Attorney (contained on the signature page of the Registration
Statement of Form F-9)*
99.1 Form F-X of National Bank of Canada*
</TABLE>
- ----------------------
* Previously filed.
FORM NO. 2
BERMUDA
THE COMPANIES ACT 1981
MEMORANDUM OF ASSOCIATION OF
COMPANY LIMITED BY SHARES
(Section 7(1) and (2))
MEMORANDUM OF ASSOCIATION
OF
NB Finance, Ltd.
(hereinafter referred to as "the Company")
1. The liability of the members of the Company is limited to the amount
if any) for the time being unpaid on the shares respectively held by
them.
2. We, the undersigned, namely,
<TABLE>
<CAPTION>
BERMUDIAN NUMBER OF
STATUS SHARES
NAME ADDRESS (Yes/No) NATIONALITY SUBSCRIBED
<S> <C> <C> <C> <C>
Donald H. Malcolm Clarendon House No British One
2 Church Street
Hamilton, Bermuda
Anthony D. Whaley " Yes British One
John C.R. Collis " Yes British One
</TABLE>
do hereby respectively agree to take such number of shares of the Company as may
be allotted to as respectively by the provisional directors of the Company, not
exceeding the number of shares for which we have respectively subscribed, and to
satisfy such calls as may be made by the directors, provisional directors or
promoters of the Company in respect of the shares allotted to us respectively.
<PAGE>
2
3. The Company is to be an exempted Company as defined by the Companies
Act 1981.
4. The Company has power to hold land situated in Bermuda not exceeding in
all, including the following parcels;
N/A
5. The authorized share capital of the Company is US$12,000.00 divided
into shares of US$1.00 each. The minimum subscribed share capital of
the Company is US$12,000.00.
6. The objects for which the Company is formed and incorporated are-
1. as set out in paragraphs (b) to (n) and (p) to (u) inclusive
of the Second Schedule to the Companies Act 1981.
7. Powers of the Company
1. The Company shall, pursuant to the Section 42 of the Companies
Act 1981, have the power to issue preference shares which are,
at the option of the holder, liable to be redeemed.
<PAGE>
3
Signed by each subscriber in the presence of at least one witness attesting the
signature thereof-
______________________________________ ____________________________________
______________________________________ ____________________________________
______________________________________ ____________________________________
______________________________________ ____________________________________
(Subscribers) (Witnesses)
SUBSCRIBED this 25th day of August 1997.
<PAGE>
THE COMPANIES ACT 1981
FIRST SCHEDULE
A company limited by shares may exercise all or any of the following powers
subject to any provision of the law or its memorandum:
1. [Deleted]
2. to acquire or undertake the whole or any part of the business property
and liabilities of any person carrying on any business that the company
is authorised to carry on;
3. to apply for register, purchase, lease, acquire, hold, use, control,
licence, sell, assign or dispose of patents, patent rights, copyrights,
trade makers, formulae, licences, inventions, processes, distinctive
makers and similar rights;
4. to enter into partnership or into any arrangement for sharing or
profits, union of interests, cooperation, joint venture, reciprocal
concession or otherwise with any person carrying on or engaged in or
about to carry on or engage in any business or transaction that the
company is authorised to carry on or engage in or any business or
transaction capable of being conducted so as to benefit the company;
5 to take or otherwise acquire and hold securities in any other body
corporate having objects altogether or in part similar to those of the
company or carrying on any business capable of being conducted so as to
benefit the company;
6. subject to section 96 to lend money to any employee or to any person
having dealings with the company or with whom the company proposes to
have dealings or to any other body corporate any of those shares are
held by the company;
7. to apply for, secure or acquire by grant, legislative enactment,
assignment, transfer, purchase or otherwise and to exercise, carry out
and enjoy any charter, licence, power, authority, franchise,
concession, right or privilege, that any government or authority or any
body corporation or other public body may be empowered to grant, and to
pay for, aid in and contribute toward carrying it into effect and to
assume any liabilities or obligations incidental thereto;
8. to establish and support or aid in the establishment and support of
associations, institutions, funds or trusts for the benefit of
employees or former employees of the company or its predecessors, or
the dependents or connections of such employees or former employees,
and grant pensions and allowances, and make payments towards insurance
or for any object similar to those set forth in this paragraph, and to
<PAGE>
2
subscribe or guarantee money for charitable, benevolent, educational
and religious objects or for any exhibition or for any public, general
or useful objects;
9. to promote any company for the purpose of acquiring or taking over any
of the property and liabilities of the company or for any other purpose
that may benefit the company;
10. to purchase, lease, take in exchange, hire or otherwise acquire any
personal property and any rights or privileges that the company
considers necessary or convenient for the purposes of its business;
11. to construct, maintain, alter, renovate and demolish any buildings or
works necessary or convenient for its objects;
12. to take land in Bermuda by way of lease or leasing agreement for a term
not exceeding twenty-one years, being land "bona fide" required for the
purposes of the business of the company and with the consent of the
Minister granted in his discretion to take land in Bermuda by way of
lease or leasing agreement for a similar period in order to provide
accommodation or recreational facilities for its officers and employees
and when no longer necessary for any of the above purposes to terminate
or transfer the lease or letting agreement;
13. except to the extent, if any, as may be otherwise expressly provided in
its incorporating Act or memorandum and subject to the provisions of
this Act every company shall have power to invest the moneys of the
company by way of mortgage of real or personal property of every
description in Bermuda or elsewhere and to sell, exchange, vary, or
dispose of such mortgage as the company shall from time to time
determine;
14. to construct, improve, maintain, work, manage, carry out or control any
roads, ways, tramways, branches or sidings, bridges, reservoirs,
watercourses, wharves, factories, warehouses, electric works, shops,
stores and other works and conveniences that may advance the interests
of the company and contribute to, subsidise or otherwise assist or take
part in the construction, improvement, maintenance, working,
management, carrying out or control thereof;
15. to raise and assist in raising money for, and aid by way of bonus,
loan, promise, endorsement, guarantee or otherwise, any person and
guarantee the performance or fulfillment of nay contracts or
obligations of any person, and in particular guarantee the payment of
the principal of and interest on the debt obligations of any such
person;
<PAGE>
3
16. to borrow or raise or secure the payment of money in such manner as the
company may think fit;
17. to draw, make, accept, endorse, discount, execute and issue bills of
exchange, promissory notes, bills of lading, warrants and other
negotiable or transferable instruments;
18. when properly authorised to do so, to sell, lease, exchange or
otherwise dispose of the undertaking of the company or any part thereof
as an entirety or substantially as in entirety for such consideration
as the company thinks fit;
19. to sell, improve, manage, develop, exchange, lease, dispose of, turn to
account or otherwise deal with the property of the company in the
ordinary course of its business;
20. to adopt such means of making known the products of the company as may
seem expedient, and in particular by advertising, by purchase and
exhibition of works of art or interest, by publication of books and
periodicals and by granting prizes and rewards and making donations;
21. to cause the company to be registered and recognised in any foreign
jurisdiction, and designate persons therein according to the law of
that foreign jurisdiction or to represent the company and to accept
service for and on behalf of the company of any process or suit;
22. to allot and issue fully-paid shares of the company in payment or part
payment of any property, purchase or otherwise acquired by the company
or for any past services performed by the company;
23. to distribute among the members of the company in cash, kind, specie or
otherwise as may be resolved, by way of dividend, bonus or in any other
manner considered advisable, any property of the company, but not so as
to decrease the capital of the company unless the distribution is made
for the purpose of enabling the company to be dissolved or the
distribution, apart from this paragraph, would be otherwise lawful;
24. to establish agencies and branches;
25. to take or hold mortgages, hypotheces, liens and charges to secure
payment of the purchase price, or of any unpaid balance of the purchase
price, or any part of the property of the company of whatsoever kind
sold by the company, or for any money due to the company from
purchasers and others and to sell or otherwise dispose of any such
mortgage, hypothec, lien, or charge;
<PAGE>
4
26. to pay all costs and expenses of or incidental to the incorporation and
organisation of the company;
27. to invest and deal wit the moneys of the company not immediately
required for the objects of the company in such manner as may be
determined;
28. to do any of the things authorised by this subsection and all things
authorised by its memorandum as principals, agents, contractors,
trustees or otherwise, and either
alone or in conjunction with others;
29. to do all such other things as are incidental or conducive to the
attainment of the objects and the exercise of the powers of the
company.
Every company may exercise its powers beyond the boundaries of Bermuda
to the extent to which the laws in force where the powers are sought to
be exercised permit.
<PAGE>
THE COMPANIES ACT 1981
SECOND SCHEDULE
A company may by reference include in its memorandum any of the following
objects that is to say the business of:
(a) [reserved];
(b) packaging of goods of all kinds;
(c) buying, selling and dealing in goods of all kinds;
(d) designing and manufacturing of goods of all kinds;
(e) mining and quarrying and exploration for metals, minerals, fossil fuels
and precious stones of all kinds and their preparation for sale or use;
(f) exploring for, the drilling for, the moving, transporting and re-fining
petroleum and hydrocarbon products including oil and oil products;
(g) scientific research including the improvement, discovery and
development of processes, inventions, patents and designs and the
construction, maintenance and operation of laboratories and research
centres;
(h) land, sea and air undertakings including the land, ship and air
carriage of passengers, mails and goods of all kinds;
(i) ships and aircraft owners, managers, operators, agents, builders and
repairers;
(j) acquiring, owning, selling, chartering, repairing or dealing in ships
and aircraft;
(k) travel agents, freight contractors and forwarding agents;
(l) dock owners, wharfingers, warehousemen;
(m) ship chandlers and dealing in rope, canvas oil and ship stores of all
kinds;
(n) all forms of engineering;
(p) farmers, livestock breeders and keepers, graziers, butchers, tanners
and processors of and dealers in all kinds of live and dead stock,
wool, hides, tallow, grain, vegetables and other produce;
<PAGE>
2
(q) acquiring by purchase or otherwise and holding as an investment
inventions, patents, trademarks, trade names, trade secrets, designs
and the like;
(r) buying, selling, hiring, letting and dealing in conveyances of any
sort;
(s) employing, providing, hiring out and acting as agent for artists,
actors, entertainers of all sorts, authors, composers, producers,
engineers and exports or specialists of any kind;
(t) to acquire by purchase or otherwise hold, sell, dispose of and deal in
real property situated outside Bermuda and in personal property of all
kinds whatsoever situated; and
(u) to enter into any guarantee, contract of indemnity or suretyship and to
assure, support or secure with or without consideration or benefit the
performance of any obligations of any person or persons and to
guarantee the fidelity of individuals filling or about to fill
situations of trust or confidence.
BYE-LAWS
of
NB FINANCE, LTD.
<PAGE>
(i)
TABLE OF CONTENTS
Bye-Law Page
1. Interpretation.......................................................... 1
2. Board of Directors...................................................... 3
3. Management of the Company............................................... 3
4. Power to appoint managing director or chief executive officer........... 3
5. Power to appoint manager................................................ 3
6. Power to authorise specifications....................................... 4
7. Power to appoint attorney............................................... 4
8. Power to delegate to a committee........................................ 4
9. Power to appoint and dismiss employees.................................. 5
10. Power to borrow and charge property..................................... 5
11. Exercise of power to purchase shares of or discontinue the Company...... 5
12. Election of Directors................................................... 5
13. Defects in appointment of Directors..................................... 6
14. Alternate Directors..................................................... 6
15. Removal of Directors.................................................... 7
16. Vacancies on the Board.................................................. 7
17. Notice of meetings of the Board......................................... 8
18. Quorum at meetings of the Board......................................... 9
<PAGE>
(ii)
19. Meetings of the Board................................................... 9
20. Unanimous written resolutions........................................... 9
21. Contracts and disclosure of Director's interests........................ 9
22. Remuneration of Directors............................................... 10
23. Officers of the Company................................................. 11
24. Appointment of Officers................................................. 11
25. Remuneration of Officers................................................ 11
26. Duties of Officers...................................................... 11
27. Chairman of meetings.................................................... 12
28. Register of Directors and Officers...................................... 12
29. Obligations of Board to keep minutes.................................... 12
30. Indemnification of Directors and Officers of the Company................ 13
31. Waiver of claim by Member............................................... 14
32. Notice of annual general meeting........................................ 14
33. Noticed of special general meeting...................................... 14
34. Accidental omission of notice of general meeting........................ 15
35. Meeting called on requisition of Members................................ 15
36. Short notice............................................................ 15
37. Postponement of meetings................................................ 15
38. Quorum for general meeting.............................................. 16
39. Adjournment of meetings................................................. 16
<PAGE>
(iii)
40. Attendance at meetings.................................................. 16
41. Written resolutions..................................................... 17
42. Attendance of Directors................................................. 18
43. Voting at meetings...................................................... 18
44. Voting on show of hands................................................. 18
45. Decision of chairman.................................................... 19
46. Demand for a poll....................................................... 19
47. Seniority of joint holders voting....................................... 21
48. Instrument of proxy..................................................... 21
49. Representation of corporations at meetings.............................. 21
50. Rights of shares........................................................ 22
51. Power to issue shares................................................... 22
52. Variation of rights, alteration of share capital and purchase of shares
of the Company....................................................... 23
53. Registered holder of shares............................................. 24
54. Death of a joint holder................................................. 25
55. Share certificates...................................................... 25
56. Calls on shares......................................................... 26
57. Forfeiture of shares.................................................... 26
58. Contents of Register of Members......................................... 27
59. Inspection of Register of Members....................................... 27
60. Determination of record dates........................................... 28
<PAGE>
(iv)
61. Instrument of transfer.................................................. 28
62. Restriction on transfer................................................. 28
63. Transfers by joint holders.............................................. 29
64. Representative of deceased Member....................................... 29
65. Registration on death or bankruptcy..................................... 30
66. Declaration of dividends by the Board................................... 30
67. Other distributions..................................................... 31
68. Reserve fund............................................................ 31
69. Deduction of Amounts due to the Company................................. 31
70. Issue of bonus shares................................................... 31
71. Records of account...................................................... 32
72. Financial year end...................................................... 32
73. Financial statements.................................................... 32
74. Appointment of Auditor.................................................. 32
75. Remuneration of Auditor................................................. 33
76. Vacation of office of Auditor........................................... 33
77. Access to books of the Company.......................................... 33
78. Report of the Auditor................................................... 33
79. Notices to Members of the Company....................................... 34
80. Notices to joint Members................................................ 34
81. Service and delivery of notice.......................................... 34
<PAGE>
(v)
82. The Seal................................................................ 35
83. Manner in which seal is to be affixed................................... 35
83A. [no title].............................................................. 35
84. Winding-up/distribution by liquidator................................... 35
85. Alteration of Bye-laws.................................................. 36
<PAGE>
INTERPRETATION
1. Interpretation
(1) In these Bye-laws the following words and expressions shall, where
not inconsistent with the context, have the following meanings respectively:-
(a) "Act" means the Companies Act 1981 as amended from
time to time;
(b) "Alternate Director" means an alternate Director
appoint accordance with these Bye-laws;
(c) "Auditor" includes arty individual or partnership;
(d) "Board" means the Board of Directors appointed or
elected pursuant to these Bye-laws and acting by
resolution in accordance with the Act and these
Bye-laws or the Directors present at a meeting of
Directors at which there is a quorum;
(e) "Company" means the company for which these Bye-laws
are approved and confirmed;
(f) "Director" means a director of the Company and shall
include an Alternate Director;
(g) "Member" means the person registered in the Register
of Members as the holder of shares in the Company
and, when two or more persons are so registered as
joint holders of shares, means the person whose name
stands first in the Register of Members as one of
such joint holders or all of such persons as the
context so requires;
(h) "notice" means written notice as further defined in
these Bye-laws unless otherwise specifically stated;
(i) "Officer" means any person appointed by the Board to
hold an office in the Company;
(j) "Register of Directors and Officers" means the
Register of Directors and Officers referred to in
these Bye-laws;
(k) "Register of Members" means the Register of Members
referred to in these Bye-laws; and
<PAGE>
2
(l) "Resident Representative" means any person appointed
to act as resident representative and includes any
deputy or assistant resident representative.
(m) "Secretary" means the person appointed to perform any
or all the duties of secretary of the secretary of
the Company and includes any deputy or assistant
secretary.
(2) In these Bye-laws, where not inconsistent with the
context:-
(a) words denoting the plural number include the singular
number and vice versa;
(b) words denoting the masculine gender include the
feminine gender;
(c) words importing persons include companies,
associations or bodies of persons whether corporate
or not;
(d) the word:-
(i) "may" shall be construed as permissive;
(ii) "shall" shall be construed as imperative; and
(e) unless otherwise provided herein words or expressions
defined in the Act shall bear the same meaning in
these Bye-laws.
(3) Expressions referring to writing or written shall, unless the
contrary intention appears, include facsimile, printing, lithography,
photography and other modes of representing words in a visible form.
(4) Headings used in these Bye-laws are for convenience only and are
not to be used or relied upon in the construction hereof.
<PAGE>
3
BOARD OF DIRECTORS
2. Board of Directors
The business of the Company shall be managed and conducted by the
Board.
3. Management of the Company
(1) In managing the business of the Company, the Board may exercise all
such powers of the Company as are not, by statute or by these Bye-laws, required
to be exercised by the Company in general meeting subject, nevertheless, to
these Bye-laws, the provisions of any statute and to such directions as may be
prescribed by the Company in general meeting.
(2) No regulation or alteration to these Bye-laws made by the Company
in general meeting shall invalidate any prior act of the Board which would have
been valid if that regulation or alteration had not been made.
(3) The Board may procure that the Company pays all expenses incurred
in promoting and incorporating the Company.
4. Power to appoint managing director or chief executive officer
The Board may from time to time appoint one or more Directors to the
office of managing director or chief executive officer of the Company who shall,
subject to the control of the Board, supervise and administer all of the general
business and affairs of the Company.
5. Power to appoint manager
The Board may appoint a person to act as manager of the Company's day
to day business and may entrust to and confer upon such manager such powers and
duties as it deems appropriate for the transaction or conduct of such business.
<PAGE>
4
6. Power to authorise specifications
The Board may from time to time and at any time authorise any company,
firm, person or body of persons to act on behalf of the Company for any specific
purpose and in connection therewith to execute any agreement, document or
instrument on behalf of the Company.
7. Power to appoint attorney
The Board may from time to time and at any time by power of attorney
appoint any company, firm, person or body of persons, whether nominated directly
or indirectly by the Board, to be an attorney of the Company for such purposes
and with such powers, authorities and discretions (not exceeding those vested in
or exercisable by the Board) and for such period and subject to such conditions
as it may think fit and any such power of attorney may contain such provisions
for the protection and convenience of persons dealing with any such attorney as
the Board may think fit and may also authorize any such attorney to sub-delegate
all or any of the powers, authorities and discretions so vested in the attorney.
Such attorney may, if so authorised under the seal of the Company, execute any
deed or instrument under such attorney's personal seal with the same effect as
the affixation of the seal of the Company.
8. Power to delegate to a committee
The Board may delegate any of its powers to a committee appointed by
the Board which may consist partly or entirely of non-Directors and every such
committee shall conform to such directions as the Board shall impose on them.
<PAGE>
5
9. Power to appoint and dismiss employees
The Board may appoint, suspend or remove any manager, secretary, clerk,
agent or employee of the Company and may fix their remuneration and determine
their duties.
10. Power to borrow and charge property
The Board may exercise all the powers of the Company to borrow money
and to mortgage or charge its undertaking, property and uncalled capital, or any
part thereof and may issue debentures, debenture stock and other securities
whether outright or as security for any debt, liability or obligation of the
Company or any third party.
11. Exercise of power to purchase shares of or discontinue the Company
(1) The Board may exercise all the powers of the Company to purchase
all or any part of its own shares pursuant to Section 42A of the Act.
(2) The Board may exercise all the powers of the Company to discontinue
the Company to a named country or jurisdiction outside Bermuda pursuant to
Section 13G of the Act.
12. Election of Directors
The Board shall consist of not less than two Directors or such number
in excess thereof as the Members may from time to time determine who shall be
elected or appointed in the first place at the statutory meeting of the Company
and thereafter, except in the case of casual vacancy, at the annual general
meeting or at any special general meeting called for the purpose and who shall
hold office for such term as the Members may determine or in the absence of such
determination, until the next annual general meeting or until their successors
are elected or
<PAGE>
6
appointed or their office is otherwise vacated, and any general meeting may
authorise the Board to fill any vacancy in their number left unfilled at a
general meeting.
13. Defects in appointment of Directors
All acts done bona fide by any meeting of the Board or by a committee
of the Board or by any person acting as a Director shall, notwithstanding that
it be afterwards discovered that there was some defect in the appointment of any
Director or person acting as aforesaid, or that they or any of them were
disqualified, be as valid as if every such person had been duly appointed and
was qualified to be a Director.
14. Alternate Directors
(1) Any general meeting of the Company may elect a person or persons to
act as a Director in the alternative to any one or more of the Directors of the
Company or may authorise the Board to appoint such Alternate Directors. Unless
the Members otherwise resolve, any Director may appoint a person or persons to
act as a Director in the alternative to himself or herself by notice in writing
deposited with the Secretary. Any person so elected or appointed shall have all
the rights and powers of the Director or Directors for whom such person is
appointed in the alternative provided that such person shall not be counted more
than once in determining whether or not a quorum is present.
(2) An Alternate Director shall be entitled to receive notice of all
meetings of the Board and to attend and vote at any such meeting at which a
Director for whom such Alternate Director was appointed in the alternative is
not personally present and generally to perform at
<PAGE>
7
such meeting all the functions of such Director for whom such Alternative
Director was appointed.
(3) An Alternate Director shall cease to be such if the Director for
whom such Alternate Director was appointed ceases for any reason to be a
Director but may be re-appointed by the Board as alternate to the person
appointed to fill the vacancy in accordance with these Bye-laws.
15. Removal of Directors
(1) Subject to any provision to the contrary in these Bye-laws, the
Members may, at any special general meeting convened and held in accordance with
these Bye-laws, remove a Director provided that the notice of any such meeting
convened for the purpose of removing a Director shall contain a statement of the
intention so to do and be served on such Director not less than 14 days before
the meeting and at such meeting such Director shall be entitled to be heard on
the motion for such Director's removal.
(2) A vacancy on the Board created by the removal of a Director under
the provisions of subparagraph (1) of this Bye-law may be filled by the Members
at the meeting at which such Director is removed and, in the absence of such
election or appointment, the Board may fill the vacancy.
16. Vacancies on the Board
(1) The Board shall have the power from time to time and at any time to
appoint any person as a Director to fill a vacancy on the Board occurring as the
result of the death,
<PAGE>
8
disability, disqualification or resignation of any Director and to appoint an
Alternate Director to any Director so appointed.
(2) The Board may act notwithstanding any vacancy in its number but, if
and so long as its number is reduced below the number fixed by these Bye-laws as
the quorum necessary for the transaction of business at meetings of the Board,
the continuing Directors or Director may act for the purpose of (i) summoning a
general meeting of the Company or (ii) preserving the assets of the Company.
(3) The office of Director shall be vacated if the Director:-
(a) is removed from office pursuant to these Bye-laws or
is prohibited from being a Director by law;
(b) is or becomes bankrupt or makes any arrangement or
composition with his creditors generally;
(c) is or becomes of unsound mind or dies;
(d) resigns his or her office by notice in writing to the
Company.
17. Notice of meetings of the Board
(1) A Director may, and the Secretary on the requisition of a Director
shall, at any time summon a meeting of the Board.
(2) Notice of a meeting of the Board shall be deemed to be duly given
to a Director if it is given to such Director verbally in person or by telephone
or otherwise communicated or sent to such Director by post, cable, telex,
telecopier, facsimile or other mode of representing words in a legible and
non-transitory form at such Director's last known address or any other address
given by such Director to the Company for this purpose.
<PAGE>
9
18. Quorum at meetings of the Board
The quorum necessary for the transaction of business at a meeting of
the Board shall be two Directors.
19. Meetings of the Board
(1) The Board may meet for the transaction of business, adjourn and
otherwise regulate its meetings as it sees fit.
(2) Directors may participate in any meeting of the Board by means of
such telephone, electronic or other communication facilities as permit all
persons participating in the meeting to communicate with each other
simultaneously and instantaneously, and participation in such a meeting shall
constitute presence in person at such meeting.
(3) A resolution put to the vote at a meeting of the Board shall be
carried by the affirmative votes of a majority of the votes cast and in the case
of an equality of votes the resolution shall fail.
20. Unanimous written resolutions
A resolution in writing signed by all the Directors which may be in
counterparts, shall be as valid as if it had been passed at a meeting of the
Board duly called and constituted, such resolution to be effective on the date
on which the last Director signs the resolution. For the purposes of this
Bye-law only, "Director" shall not include an Alternate Director.
21. Contracts and disclosure of Director's interests
(1) Any Director, or any Director's firm, partner or any company with
whom any Director is associated, may act in a professional capacity for the
Company and such Director
<PAGE>
10
or such Director's firm, partner or such company shall be entitled to
remuneration for professional services as if such Director were not a Director,
provided that nothing herein contained shall authorise a Director or Director's
firm, partner or such company to act as Auditor of the Company.
(2) A Director who is directly or indirectly interested in a contract
or proposed contract or Arrangement with the Company shall declare the nature of
such interest as required by the Act.
(3) Following a declaration being made pursuant to this Bye-law, and
unless disqualified by the chairman of the relevant Board meeting, a Director
may vote in respect of any contract or proposed contract or arrangement in which
such Director is interested and may be counted in the quorum at such meeting.
22. Remuneration of Directors
The remuneration (if any) of the Directors shall be determined by the
Company in general meeting and shall be deemed to accrue from day to day. The
Directors may also be paid all travel, hotel and other expenses properly
incurred by them in attending and returning from meetings of the Board, any
committee appointed by the Board, general meetings of the Company, or in
connection with the business of the Company or their duties as Directors
generally.
<PAGE>
11
OFFICERS
23. Officers of the Company
The Officers of the Company shall consist of a President and a Vice
President or a Chairman and a Deputy Chairman, a Secretary and such additional
Officers as the Board may from time to time determine all of whom shall be
deemed to be Officers for the purposes of these Bye-laws.
24. Appointment of Officers
(1) The Board shall, as soon as possible after the statutory meeting of
Members and after each annual general meeting, appoint a President and a Vice
President or a Chairman and a Deputy Chairman who shall be Directors.
(2) The Secretary and additional Officers, if any, shall be appointed
by the Board from time to time.
25. Remuneration of Officers
The Officers shall receive such remuneration as the Board may from time
to time determine.
26. Duties of Officers
The Officers shall have such powers and perform such duties in the
management, business and affairs of the Company as may be delegated to them by
the Board from time to time.
<PAGE>
12
27. Chairman of meetings
Unless otherwise agreed by a majority of those attending and entitled
to attend and vote thereat, the Chairman if there be one, and if not the
President shall act as chairman at all meetings of the Members and of the Board
at which such person is present. In their absence the Deputy Chairman or Vice
President, if present, shall act as chairman and in the absence of all of them a
chairman shall be appointed or elected by those present at the meeting and
entitled to vote.
28. Register of Directors and Officers
The Board shall cause to be kept in one or more books at the registered
office of the Company a Register of Directors and Officers and shall enter
therein the particulars required by the Act.
MINUTES
29. Obligations of Board to keep minutes
(1) The Board shall cause minutes to be duly entered in books provided
for the purpose:-
(a) of all elections and appointments of Officers;
(b) of the names of the Directors present at each meeting of the
Board and of any committee appointed by the Board; and
(c) of all resolutions and proceedings of general meetings of the
Members, meetings of the Board, meetings of managers and
meetings of committees appointed by the Board.
(2) Minutes prepared in accordance with the Act and these Bye-laws
shall be kept by the Secretary at the registered office of the Company.
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INDEMNITY
30. Indemnification of Directors and Officers of the Company
The Directors, Secretary and other Officers (such term to include, for
the purposes of Bye-laws 30 and 31, any person appointed to any committee by the
Board) for the time being acting in relation to any of the affairs of the
Company and the liquidator or trustees (if any) for the time being acting in
relation to any of the affairs of the Company and every one of them and their
heirs, executors and administrators, shall be indemnified and secured harmless
out of the assets of the Company from and against charges, losses, damages and
expenses which they or any of them, their heirs, executors or administrators,
shall or may incur or sustain by or by reason of any act done, concurred in or
omitted in or about the execution of their duty, or supposed duty, or in their
respective offices or trusts, and none of them shall be answerable for the acts,
receipts, neglects or defaults of the others of them or for joining in any
receipts for the sake of conformity, or for any bankers or other persons with
whom any moneys or effects belonging to the Company shall or may be lodged or
deposited for safe custody, or for insufficiency or deficiency of any security
upon which any moneys of or belonging to the Company shall be placed out on or
invested, or for any other loss, misfortune or damage which may happen in the
execution of their respective offices or trusts, or in relation thereto,
PROVIDED THAT this indemnity shall not extend to any matter in respect of any
fraud or dishonesty which may attach to any of said persons.
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14
31. Waiver of claim by Member
Each Member agrees to waive any claim or right of action such Member
might have whether individually or by or in the right of the Company, against
any Director or officer on account of any action taken by such Director or
Officer, or the failure of such Director or Officer to take any action in the
performance of his duties with or for the Company PROVIDED THAT such waiver
shall not extend to any matter in respect of any fraud or dishonesty which may
attach to such Director or Officer.
MEETINGS
32. Notice of annual general meeting
The annual general meeting of the Company shall be held in each year other than
the year of incorporation at such time and place as the President or the
Chairman or any two Directors or any Director and the Secretary or the Board
shall appoint. At least five days notice of such meeting shall be given to each
Member stating the date, place and time at which the meeting is to be held, that
the election of Directors will take place thereat, and as far as practicable,
the other business to be conducted at the meeting.
33. Noticed of special general meeting
The President or the Chairman or any two Directors or any Director and
the Secretary or the Board may convene a special general meeting of the Company
whenever in their judgment such a meeting is necessary, upon not less than five
days' notice which shall state the date, time, place and the general nature of
the business to be considered at the meeting.
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15
34. Accidental omission of notice of general meeting
The accidental omission to give notice of a general meeting to, or the
non-receipt of notice of a general meeting by, any person entitled to receive
notice shall not invalidate the proceedings at that meeting.
35. Meeting called on requisition of Members
Notwithstanding anything herein, the Board shall, on the requisition of
Members holding at the date of the deposit of the requisition not less than
one-tenth of such of the paid-up share capital of the Company as at the date of
the deposit carries the right to vote at general meetings of the Company,
forthwith proceed to convene a special general meeting of the Company and the
provisions of Section 74 of the Act shall apply.
36. Short notice
A general meeting of the Company shall, notwithstanding that it is
called by shorter notice than that specified in these Bye-laws, be deemed to
have been properly called if it is so agreed by (i) all the Members entitled to
attend and vote thereat in the case of an annual general meeting; and (ii) by a
majority in number of the Members having the right to attend and vote at the
meeting, being a majority together holding not less than 95% in nominal value of
the shares giving a right to attend and vote thereat in the case of a special
general meeting.
37. Postponement of meetings
The Secretary may postpone any general meeting called in accordance
with the provisions of these Bye-laws (other than a meeting requisitioned under
these Bye-laws) provided that notice of postponement is given to each Member
before the time for such meeting. Fresh notice of the
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16
date, time and place for the postponed meeting shall be given to each Member in
accordance with the provisions of these Bye-laws.
38. Quorum for general meeting
At any general meeting of the Company two persons present in person and
representing in person or by proxy in excess of 50% of the total issued voting
shares in the Company throughout the meeting shall form a quorum for the
transaction of business, PROVIDED that if the Company shall at any time have
only one Member, one Member present in person or by proxy shall form a quorum
for the transaction of business at any general meeting of the Company held
during such time. If within half an hour from the time appointed for the meeting
a quorum is not present, the meeting shall stand adjourned to the same day one
week later, at the same time and place or to such other day, time or place as
the Secretary may determine.
39. Adjournment of meetings
The chairman of a general meeting may, with the consent of the Members
at any general meeting at which a quorum is present (and shall if so directed)
adjourn the meeting. Unless the meeting is adjourned to a specific date and
time, fresh notice of the date, time and place for the resumption of the
adjourned meeting shall be given to each Member in accordance with the
provisions of these Bye-laws.
40. Attendance at meetings
Members may participate in any general meeting by means of such
telephone, electronic or other communication facilities as permit all persons
participating in the meeting to
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communicate with each other simultaneously and instantaneously, and
participation in such a meeting shall constitute presence in person at such
meeting.
41. Written resolutions
(1) Subject to subparagraph (6), anything which may be done by
resolution of the Company in general meeting or by resolution of a meeting of
any class of the Members of the Company, may, without a meeting and without any
previous notice being required, be done by resolution in writing signed by, or,
in the case of a Member that is a corporation whether or not a company within
the meaning of the Act, on behalf of, all the Members who at the date of the
resolution would be entitled to attend the meeting and vote on the resolution.
(2) A resolution in writing may be signed by, or, in the case of a
Member that is a corporation whether or not a company within the meaning of the
Act, on behalf of, all the Members, or any class thereof, in as many
counterparts as may be necessary.
(3) For the purposes of this Bye-law, the date of the resolution is the
date when the resolution is signed by, or, in the case of a Member that is a
corporation whether or not a company within the meaning of the Act, on behalf
of, the last Member to sign and any reference in any Bye-law to the date of
passing of a resolution is, in relation to a resolution made in accordance with
this Bye-law, a reference to such date.
(4) A resolution in writing made in accordance with this Bye-law is as
valid as if it had been passed by the Company in general meeting or by a meeting
of the relevant class of Members, as the case may be, and any reference in any
Bye-law to a meeting at which a
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18
resolution is passed or to Members voting in favour of a resolution shall be
construed accordingly.
(5) A resolution in writing made in accordance with this Bye-law shall
constitute minutes for the purposes of Sections 81 and 82 of the Act.
(6) This Bye-law shall not apply to:-
(a) a resolution passed pursuant to Section 89(5) of the
Act; or
(b) a resolution passed for the purpose of removing a
Director before the expiration of his term of office
under these Bye-laws.
42. Attendance of Directors
The Directors of the Company shall be entitled to receive notice of and
to attend and be heard at any general meeting.
43. Voting at meetings
(1) Subject to the provisions of the Act and these Bye-laws, any
question proposed for the consideration of the Members at any general meeting
shall be decided by the affirmative votes of a majority of the votes cast in
accordance with the provisions of these Bye-laws and in the case of an equality
of votes the resolution shall fail.
(2) No Member shall be entitled to vote at any general meeting unless
such Member has paid all the calls on all shares held by such Member.
44. Voting on show of hands
At any general meeting a resolution put to the vote of the meeting
shall, in the first instance, be voted upon by a show of hands and, subject to
any rights or restriction for the time being lawfully attached to any class of
shares and subject to the provisions of these Bye-laws,
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19
every Member present in person and every person holding a valid proxy at such
meeting shall be entitled to one vote and shall cast such vote by raising his or
her hand.
45. Decision of chairman
At any general meeting a declaration by the chairman of the meeting
that a question proposed for consideration has, on a show of hands, been
carried, or carried unanimously, or by a particular majority, or lost, and an
entry to that effect in a book containing the minutes of the proceedings of the
Company shall, subject to the provisions of these Bye-laws, be conclusive
evidence of that fact.
46. Demand for a poll
(1) Notwithstanding the provisions of the immediately preceding two
Bye-laws, at any general meeting of the Company, in respect of any question
proposed for the consideration of the Members (whether before or on the
declaration of the result of a show of hands as provided for in these Bye-laws),
a poll may be demanded by any of the following persons:-
(a) the chairman of such meeting; or
(b) at least three Members present in person or
represented by proxy; or
(c) any Member or Members present in person or
represented by proxy and holding between them not
less than one-tenth of the total voting rights of all
the Members having the right to vote at such meeting;
or
(d) any Member or Members present in person or
represented by proxy holding shares in the Company
conferring the right to vote at such meeting, being
shares on which an aggregate sum has been paid up
equal to not less than one-tenth of the total sum
paid up on all such shares conferring such right.
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20
(2) Where, in accordance with the provisions of subparagraph (1) of
this Bye-law, a poll is demanded, subject to any rights or restrictions for the
time being lawfully attached to any class of shares, every person present at
such meeting shall have one vote for each share of which such person is the
holder or for which such person holds a proxy and such vote shall be counted in
the manner set out in subparagraph (4) of this Bye-law or in the case of a
general meeting at which one or more Members are present by telephone in such
manner as the chairman of the meeting may direct and the result of such poll
shall be deemed to be the resolution of the meeting at which the poll was
demanded and shall replace any previous resolution upon the same matter which
has been the subject of a show of hands.
(3) A poll demanded in accordance with the provisions of subparagraph
(1) of this Bye-law, for the purpose of electing a chairman of the meeting or on
a question of adjournment, shall be taken forthwith and a poll demanded on any
other question shall be taken in such manner and at such time and place as the
Chairman (or acting chairman) may direct and any business other than that upon
which a poll has been demanded may be proceeded with pending the taking of the
poll.
(4) Where a vote is taken by poll, each person present and entitled to
vote shall be furnished with a ballot paper on which such person shall record
his or her vote in such manner as shall be determined at the meeting having
regard to the nature of the question on which the vote is taken, and each ballot
paper shall be signed or initialled or otherwise marked so as to identify the
voter and the registered holder in the case of a proxy. At the conclusion of the
poll, the ballot papers shall be examined and counted by a committee of not less
than two Members
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21
or proxy holders appointed by the chairman for the purpose and the result of the
poll shall be declared by the chairman.
47. Seniority of joint holders voting
In the case of joint holders the vote of the senior who tenders a vote,
whether in person or by proxy, shall be accepted to the exclusion of the votes
of the other joint holders, and for this purpose seniority shall be determined
by the order in which the names stand in the Register of Members.
48. Instrument of proxy
The instrument appointing a proxy shall be in writing in the form, or
as near thereto as circumstances admit, of Form "A" in the Schedule hereto,
under the hand of the appointor or of the appointer's attorney duly authorised
in writing, or if the appointor is a corporation, either under its seal, or
under the hand of a duly authorised officer or attorney. The decision of the
chairman of any general meeting as to the validity of any instrument of proxy
shall be final.
49. Representation of corporations at meetings
A corporation which is a Member may, by written instrument, authorise
such person as it thinks fit to act as its representative at any meeting of the
Members and the person so authorised shall be entitled to exercise the same
powers on behalf of the corporation which such person represents as that
corporation could exercise if it were an individual Member. Notwithstanding the
foregoing, the chairman of the meeting may accept such assurances as he or she
thinks fit as to the right of any person to attend and vote at general meetings
on behalf of a corporation which is a Member.
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22
SHARE CAPITAL AND SHARES
50. Rights of shares
Subject to any resolution of the Members to the contrary and without
prejudice to any special rights previously conferred on the holders of any
existing shares or class of shares, the share capital of the Company shall be
divided into shares of a single class the holders of which shall, subject to the
provisions of these Bye-laws:-
(a) be entitled to one vote per share;
(b) be entitled to such dividends as the Board may from time to
time declare;
(c) in the event of a winding-up or dissolution of the Company,
whether voluntary or involuntary or for the purpose of a
reorganisation or otherwise or upon any distribution of
capital, be entitled to the surplus assets of the Company; and
(d) generally be entitled to enjoy all of the rights attaching to
shares.
51. Power to issue shares
(1) Subject to these Bye-laws and to any resolution of the Members to
the contrary and without prejudice to any special rights previously conferred on
the holders of any existing shares or class of shares, the Board shall have
power to issue any unissued shares of the Company on such terms and conditions
as it may determine and any shares or class of shares may be issued with such
preferred, deferred or other special rights or such restrictions, whether in
regard to dividend, voting, return of capital or otherwise as the Company may
from time to time by resolution of the Members prescribe.
(2) The Board shall, in connection with the issue of any share, have
the power to pay such commission and brokerage as may be permitted by law.
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23
(3) The Company shall not give, whether directly or indirectly, whether
by means of loan, guarantee, provision of security or otherwise, any financial
assistance for the purpose of a purchase or subscription made or to be made by
any person of or for any shares in the Company, but nothing in this Bye-Law
shall prohibit transactions mentioned in Sections 39A, 39B and 39C of the Act.
(4) The Company may from time to time do any one or more of the
following things:
(a) make arrangements on the issue of shares for a
difference between the Members in the amounts and
times of payments of calls on their shares;
(b) accept from any Member the whole or a part of the
amount remaining unpaid on any shares held by him,
although no part of that amount has been called up;
(c) pay dividends in proportion to the amount paid up on
each share where a larger amount is paid up on some
shares than on others; and
(d) issue its shares in fractional denominations and deal
with such fractions to the same extent as its whole
shares and shares in fractional denominations shall
have in proportion to the respective fractions
represented thereby all of the rights of whole shares
including (but without limiting the generality of the
foregoing) the right to vote, to receive dividends
and distributions and to participate in a winding up.
52. Variation of rights, alteration of share capital and purchase of shares
of the Company
(1) Subject to the provisions of Sections 42 and 43 of the Act any
preference shares may be issued or converted into shares that, at a determinable
date or at the option of the Company, are liable to be redeemed on such terms
and in such manner as the Company before the issue or conversion may by
resolution of the Members determine.
(2) If at any time the share capital is divided into different classes
of shares, the rights attached to any class (unless otherwise provided by the
terms of issue of the shares of that class)
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24
may, whether or not the Company is being wound-up, be varied with the consent in
writing of the holders of three-fourths of the issued shares of that class or
with the sanction of a resolution passed by a majority of the votes cast at a
separate general meeting of the holders of the shares of the class in accordance
with Section 47(7) of the Act. The rights conferred upon the holders of the
shares of any class issued with preferred or other rights shall not, unless
otherwise expressly provided by the terms of issue of the shares of that class,
be deemed to be varied by the creation or issue of further shares ranking pari
passu therewith.
(3) The Company may from time to time by resolution of the Members
change the currency denomination of, increase, alter or reduce its share capital
in accordance with the provisions of Sections 45 and 46 of the Act. Where, on
any alteration of share capital, fractions of shares or some other difficulty
would arise, the Board may deal with or resolve the same in such manner as it
thinks fit including, without limiting the generality of the foregoing, the
issue to Members, as appropriate, of fractions of shares and/or arranging for
sale or transfer of the fractions of shares of Members.
(4) The Company may from time to time purchase its own shares in
accordance with the provisions of Section 42A of the Act.
53. Registered holder of shares
(1) The Company shall be entitled to treat the registered holder of any
share as the absolute owner thereof and accordingly shall not be bound to
recognise any equitable or other claim to, or interest in, such share on the
part of any other person.
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25
(2) Any dividend, interest or other moneys payable in cash in respect
of shares may be paid by cheque or draft sent through the post directed to the
Member at such Member's Address in the Register of Members or, in the case of
joint holders, to such address of the holder first named in the Register of
Members, or to such person and to such address as the holder or joint holders
may in writing direct. If two or more persons are registered as joint holders of
any shares any one can give an effectual receipt for any dividend paid in
respect of such shares.
54. Death of a joint holder
Where two or more persons are registered as joint holders of a share or
shares then in the event of the death of any joint holder or holders the
remaining joint holder or holders shall be absolutely entitled to the said share
or shares and the Company shall recognise no claim in respect of the estate of
any joint holder except in the case of the last survivor of such joint holders.
55. Share certificates
(1) Every Member shall be entitled to a certificate under the seal of
the Company (or a facsimile thereof) specifying the number and, where
appropriate, the class of shares held by such Member and whether the same are
fully paid up and, if not, how much has been paid thereon. The Board may by
resolution determine, either generally or in a particular case, that any or all
signatures on certificates may be printed thereon or affixed by affixed by
mechanical means.
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26
(2) The Company shall be under no obligation to complete and deliver a
share certificate unless specifically called upon to do so by the person to whom
such shares have been allotted.
(3) If any such certificate shall be proved to the satisfaction of the
Board to have been worn out, lost, mislaid or destroyed the Board may cause a
new certificate to be issued and request an indemnity for the lost certificate
if it sees fit.
56. Calls on shares
(1) The Board may from time to time make such calls as it thinks fit
upon the Members in respect of any monies unpaid on the shares allotted to or
held by such Members and, if a call is not paid on or before the day appointed
for payment thereof, the Member may at the discretion of the Board be liable to
pay the Company interest on the amount of such call at such rate as the Board
may determine, from the date when such call was payable up to the actual date of
payment. The joint holders of a share shall be jointly and severally liable to
pay all calls in respect thereof.
(2) The Board may, on the issue of shares, differentiate between the
holders as to the amount of calls to be paid and the times of payment of such
calls.
57. Forfeiture of shares
(1) If any Member fails to pay, on the day appointed for payment
thereof, any call in respect of any share allotted to or held by such Member,
the Board may, at any time thereafter during such time as the call remains
unpaid, direct the Secretary to forward to such
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27
Member a notice in the form, or as near thereto as circumstances admit, of Form
"B" in the Schedule thereto.
(2) If the requirements of such notice are not complied with, any such
share may at any time thereafter before the payment of such call and the
interest due in respect thereof be forfeited by a resolution of the Board to
that effect, and such share shall thereupon become the property of the Company
and may be disposed of as the Board shall determine.
(3) A Member whose share or shares have been forfeited as aforesaid
shall, notwithstanding such forfeiture, be liable to pay to the Company all
calls owing on such share or shares at the time of the forfeiture and all
interest due thereon.
REGISTER OF MEMBERS
58. Contents of Register of Members
The Board shall cause to be kept in one or more books a Register of
Members and shall enter therein the particulars required by the Act.
59. Inspection of Register of Members
The Register of Members shall be open to inspection at the registered
office of the Company on every business day, subject to such reasonable
restrictions as the Board may impose, so that not less than two hours in each
business day be allowed for inspection. The Register of Members may, after
notice has been given by advertisement in an appointed newspaper to that effect,
be closed for any time or times not exceeding in the whole thirty days in each
year.
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60. Determination of record dates
Notwithstanding any other provision of these Bye-laws, the Board may
fix any date as the record date for:-
(a) determining the Members entitled to receive any dividend; and
(b) determining the Members entitled to receive notice of and to
vote at any general meeting of the Company.
TRANSFER OF SHARES
61. Instrument of transfer
(1) An instrument of transfer shall be in the form or as near thereto
as circumstances admit of Form "C" in the Schedule hereto or in such other
common form as the Board may accept. Such instrument of transfer shall be signed
by or on behalf of the transferor and transferee provided that, in the case of a
fully paid share, the Board may accept the instrument signed by or on behalf of
the transferor alone. The transferor shall be deemed to remain the holder of
such share until the same has been transferred to the transferee in the Register
of Members.
(2) The Board may refuse to recognise any instrument of transfer unless
it is accompanied by the certificate in respect of the shares to which it
relates and by such other evidence as the Board may reasonably require to show
the right of the transferor to make the transfer.
62. Restriction on transfer
(1) The Board may in its absolute discretion and without assigning any
reason therefor refuse to register the transfer of a share. The Board shall
refuse to register a transfer unless all
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29
applicable consents, authorizations and permissions of any governmental body or
agency in Bermuda have been obtained.
(2) If the Board refuses to register a transfer of any share the
Secretary shall, within three months after the date on which the transfer was
lodged with the Company, send to the transferor and transferee notice of the
refusal.
63. Transfers by joint holders
The joint holders of any share or shares may transfer such share or
shares to one or more of such joint holders, and the surviving holder or holders
of any share or shares previously held by them jointly with a deceased Member
may transfer any such share to the executors or administrators of such deceased
Member.
TRANSMISSION OF SHARES
64. Representative of deceased Member
In the care of the death of a Member, the survivor or survivors where
the deceased Member was a joint holder, and the legal personal representatives
of the deceased Member where the deceased Member was a sole holder, shall be the
only persons recognised by the Company as having any title to the deceased
Member's interest in the shares. Nothing herein contained shall release the
estate of a deceased joint holder from any liability in respect of any share
which had been jointly held by such deceased Member with other persons. Subject
to the provisions of Section 52 of the Act, for the purpose of this Bye-law,
legal personal representative means the executor or administrator of a deceased
Member or such other person
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30
as the Board may in its absolute discretion decide as being properly authorised
to deal with the shares of a deceased Member.
65. Registration on death or bankruptcy
Any person becoming entitled to a share in consequence of the death or
bankruptcy of any Member may be registered as a Member upon such evidence as the
Board may deem sufficient or may elect to nominate some person to be registered
as a transferee of such share, and in such case the person becoming entitled
shall execute in favour of such nominee an instrument of transfer in the form,
or as near thereto as circumstances admit, of Form "D" in the Schedule hereto.
On the presentation thereof to the Board, accompanied by such evidence as the
Board may require to prove the title of the transferor, the transferee shall be
registered as a Member but the Board shall, in either case, have the same right
to decline or suspend registration as it would have had in the case of a
transfer of the share by that Member before such Member's death or bankruptcy,
as the case may be.
DIVIDENDS AND OTHER DISTRIBUTIONS
66. Declaration of dividends by the Board
The Board may, subject to these Bye-laws and in accordance with Section
54 of the Act, declare a dividend to be paid to the Members, in proportion to
the number of shares held by them, and such dividend may be paid in cash or
wholly or partly in specie in which case the Board may fix the value for
distribution in specie of any assets.
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67. Other distributions
The Board may declare and make such other distributions (in cash or in
specie) to the Members as may be lawfully made out of the assets of the Company.
68. Reserve fund
The Board may from time to time before declaring a dividend set aside,
out of the surplus or profits of the Company, such sum as it thinks proper as a
reserve fund to be used to meet contingencies or for equalising dividends or for
any other special purpose.
69. Deduction of Amounts due to the Company
The Board may deduct from the dividends or distributions payable to any
Member all monies due from such Member to the Company on account of calls or
otherwise.
CAPITALISATION
70. Issue of bonus shares
(1) The Board may resolve to capitalise any part of the amount for the
time being standing to the credit of any of the Company's share premium or other
reserve accounts or to the credit of the profit and loss account or otherwise
available for distribution by applying such sum in paying up unissued shares to
be allotted as fully paid bonus shares pro rata to the Members.
(2) The Company may capitalise any sum standing to the credit of a
reserve account or sums otherwise available for dividend or distribution by
applying such amounts in paying up in full partly paid shares of those Members
who would have been entitled to such sums if they were distributed by way of
dividend or distribution.
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ACCOUNTS AND FINANCIAL STATEMENTS
71. Records of account
The Board shall cause to be kept proper records of account with respect
to all transactions of the Company and in particular with respect to:-
(a) ll sums of money received and expended by the Company and the
matters in respect of which the receipt and expenditure
relates;
(b) all sales and purchases of goods by the Company; and
(c) the assets and liabilities of the Company.
Such records of account shall be kept at the registered office of the Company
or, subject to Section 83(2) of the Act, at such other place as the Board thinks
fit and shall be available for inspection by the Directors during normal
business hours.
72. Financial year end
The financial year end of the Company may be determined by resolution
of the Board and failing such resolution shall be 31st December in each year.
73. Financial statements
Subject to any rights to waive laying of accounts pursuant to Section
88 of the Act, financial statements as required by the Act shall be laid before
the Members in general meeting.
AUDIT
74. Appointment of Auditor
Subject to Section 88 of the Act, at the annual general meeting or at a
subsequent special general meeting in each year, an independent representative
of the Members shall be appointed by them as Auditor of the accounts of the
Company. Such Auditor may be a Member but no
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33
Director, Officer or employee of the Company shall, during his or her
continuance in office, be eligible to act as an Auditor of the Company.
75. Remuneration of Auditor
The remuneration of the Auditor shall be fixed by the Company in
general meeting or in such manner as the Members may determine
76. Vacation of office of Auditor
If the office of Auditor becomes vacant by the resignation or death of
the Auditor, or by the Auditor becoming incapable of acting by reason of illness
or other disability at a time when the Auditor's services are required, the
Board shall, as soon as practicable, convene a special general meeting to fill
the vacancy thereby created.
77. Access to books of the Company
The Auditor shall at all reasonable times have access to all books kept
by the Company and to all accounts and vouchers relating thereto, and the
Auditor may call on the Directors or Officers of the Company for any information
in their possession relating to the books or affairs of the Company.
78. Report of the Auditor
(1) Subject to any rights to waive laying of accounts or appointment of
an Auditor pursuant to Section 88 of the Act, the accounts of the Company shall
be audited at least once in every year.
(2) The financial statements provided for by these Bye-laws shall be
audited by the Auditor to accordance with generally accepted auditing standards.
The Auditor shall make a
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written report thereon in accordance with generally accepted auditing standards
and the report of the Auditor shall be submitted to the Members in general
meeting.
(3) The generally accepted auditing standards referred to in
subparagraph (2) of this Bye-law may be those of a country or jurisdiction other
than Bermuda. If so, the financial statements and the report of the Auditor must
disclose this fact and name such country or jurisdiction.
NOTICES
79. Notices to Members of the Company
A notice may be given by the Company to any Member either by delivering
it to such Member in person or by sending it to such Member's address in the
Register of Members or to such other address given for the purpose. For the
purposes of this Bye-law, a notice may be sent by mail, courier service, cable,
telex, telecopier, facsimile or other mode of representing words in a legible
and non-transitory form.
80. Notices to joint Members
Any notice required to be given to a Member shall,with respect to any
shares held jointly by two or more persons, be given to whichever of such
persons is named first in the Register of Members and notice so given shall be
sufficient notice to all the holders of such shares.
81. Service and delivery of notice
Any notice shall be deemed to have been served at the time when the
same would be delivered in the ordinary course of transmission and, in proving
such service, it shall be sufficient to prove that the notice was properly
addressed and prepaid, if posted, and the time
<PAGE>
35
when it was posted, delivered to the courier or to the cable company or
transmitted by telex, facsimile or other method as the case may be.
SEAL OF THE COMPANY
82. The Seal
The seal of the Company shall be in such form as the Board may from
time to time determine. The Board may adopt one or more duplicate seats for use
outside Bermuda.
83. Manner in which seal is to be affixed
The seal of the Company shall not be affixed to any instrument except
attested by the signature of a Director and the Secretary or any two Directors,
or any person appointed by the Board for the purpose, provided that any
Director, Officer or Resident Representative, may affix the seal of the Company
attested by such Director, Officer or Resident Representative's signature to any
authenticated copies of these By-law, the incorporating documents of the
Company, the minutes of any meetings or any other documents required to be
authenticated by such Director, Officer or Resident Representative.
HEAD OFFICE
83A. The Company shall have a head office located at Clarendon House, 2 Church
Street, Hamilton HM 11, Bermuda.
WINDING-UP
84. Winding-up/distribution by liquidator
A. If the Company shall be wound up the liquidator may, with the
sanction of a resolution of the Members, divide amongst the Members in specie or
in kind the whole or any
<PAGE>
36
part of the assets of the Company (whether they shall consist of property of the
same kind or not) and may, for such purpose, set such value as he or she deems
fair upon any property to be divided as aforesaid and may determine how such
division shall be carried out as between the Members or different classes of
Members. The liquidator may, with the like sanction, vest the whole or any part
of such assets in trustees upon such trusts for the benefit of the Members as
the liquidator shall think fit, but so that no Member shall be compelled to
accept any shares or other securities or assets whereon there is any liability.
B. The Company's existence will be perpetual until it is wound up in
accordance with the Act. Without prejudice to the foregoing, immediately
following notice to the Company that NB Capital Corporation, a Maryland
corporation, has delivered notice of an Exchange Event as defined in and
pursuant to Section 6.6.4(d) of the charter of NB Capital Corporation, the Board
shall convene a special general meeting of the Members for the purposes of
approving a resolution for the voluntary winding up of the Company, whereupon
the Company shall be wound up in accordance with the Act.
ALTERATION OF BYE-LAWS
85. Alteration of Bye-laws
No Bye-law shall be rescinded, altered or amended and no new Bye-law
shall be made until the same has been approved by a resolution of the Board and
by a resolution of the Members.
*****
***
*
<PAGE>
37
SCHEDULE - FORM A (Bye-law 48)
--------------------------
PROXY
I/We
of
the holder(s) of ___________ share(s) in the above-named company hereby appoint
____________________ or failing him/her ____________________ or failing him/her
____________________ as my/our proxy to vote on my/our behalf at the general
meeting of the Company to be held on the _____ day of__________, 19__, and at
any adjournment thereof.
Dated this _____ day of __________, 19__
*GIVEN under the seal of the Company
*Signed by the above-named
________________________________
________________________________
Witness
*Delete as applicable.
<PAGE>
38
SCHEDULE - FORM B (Bye-law 57)
NOTICE OF LIABILITY TO FORFEITURE FOR NON PAYMENT OF CALL
You have failed to pay the call of [amount of call] made on the _____ day of
__________, 19__ last, in respect of the [number] share(s) [numbers in figures]
standing in your name in the Register of Members of the Company, on the _____
day of __________, 19__ last, the day appointed for payment of such call. You
are hereby notified that unless you pay such call together with interest thereon
at the rate of _____ per annum computed from the said _____ day of __________,
19__ last, on or before the _____ day of __________, 19__ next at the place of
business of the Company the share(s) will be liable to be forfeited.
Dated this _____ day of __________, 19__
[Signature of Secretary]
By order of the Board
<PAGE>
39
SCHEDULE - FORM C (Bye-law 61)
TRANSFER OF A SHARE OR SHARES
FOR VALUE RECEIVED______________________________________________________[amount]
____________________________________________________________________[transferor]
hereby sell assign and transfer unto________________________________[transferee]
of_____________________________________________________________________[address]
______________________________________________________________[number of shares]
shares of______________________________________________________[name of Company]
Dated_______________________
______________________________
(Transferor)
In the presence of:
____________________________ ______________________________
(Witness) (Transferee)
In the presence of:
____________________________
(Witness)
<PAGE>
40
SCHEDULE - FORM D (Bye-law 65)
TRANSFER BY A PERSON BECOMING ENTITLED ON
DEATH/BANKRUPTCY OF A MEMBER
I/We having become entitled in consequence of the [death/bankruptcy] of
[name of the deceased Member] to [number] share(s) standing in the register of
members of [Company] in the name of the said [name of deceased Member] instead
of being registered myself/ourselves elect to have [name of transferee] (the
"Transferee") registered as a transferee of such share(s) and I/we do hereby
accordingly transfer the said share(s) to the Transferee to hold the same unto
the Transferee his or her executors administrators and assigns subject to the
conditions on which the same were held at the time of the execution thereof; and
the Transferee does hereby agree to take the said share(s) subject to the same
conditions.
WITNESS our hands this _____ day of ____________, 19__
Signed by the above-named )
[person or persons entitled] )
in the presence of: )
Signed by the above-named )
[transferee] )
in the presence of: )
[SHEARMAN & STERLING TAX OPINION]
March 2, 1998
National Bank of Canada
National Bank Tower
600 de La Gauchetiere Street West
Montreal, Quebec H3B 4L2
NB Capital Corporation
125 West 55th Street
New York, New York 10019
NB Finance, Ltd.
c/o National Bank of Canada
National Bank Tower
600 de La Gauchetiere Street West
Montreal, Quebec H3B 4L2
National Bank of Canada;
NB Capital Corporation; and
NB Finance, Ltd.
8.35% Noncumulative Exchangeable
Preferred Stock, Series A, of NB Capital Corporation
----------------------------------------------------
Ladies and Gentlemen:
We hereby confirm that, as of the date hereof, the statements
set forth under the caption "United States Federal Income Tax Considerations" in
the Prospectus contained in the Registration Statement on Form S-4/F-9
(Registration Nos. 333-41009; 333-41009-01; 333-41009-02) and Registration
Statement on Form S-11/F-9 (Registration Nos. 333-46481; 333-46481-01;
33346481-02), each dated March 2, 1998, of National Bank of Canada, NB Capital
Corporation and NB Finance, Ltd., to the extent that they constitute a summary
of legal matters or legal conclusions, have been reviewed by us and, in our
opinion, are accurate in all material respects.
We hereby consent to the filing of this opinion as an exhibit
to the above referenced Registration Statements and the reference in each to us
under the headings "United States Federal Income Tax Considerations" and "Legal
Matters" contained in the Prospectus forming a part of each such Registration
Statement.
Very truly yours,
/s/ SHEARMAN & STERLING
[DESJARDINS DUCHARME STEIN MONAST LETTERHEAD]
September 3, 1997
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Shearman & Sterling
Citicorp Center
153 East 53rd Street
New York, New York 10022
Osler, Hoskin & Harcourt
1 First Canadian Place
Toronto, Ontario
M5X 1B8
Ladies and Gentlemen:
Re: NB Capital Corporation
Offering of 300,000 Shares of 8.35%
Noncumulative Exchangeable Preferred Stock, Series A
We have acted as counsel to National Bank of Canada (the
"Bank"), a bank formed under the Bank Act (Canada) (the "Bank Act") in
connection with the sale by NB Capital Corporation (the "Company") and the
purchase by the Initial Purchaser named in the Purchase Agreement referred to
below (the "Initial Purchaser") of 300,000 shares of the Company's
<PAGE>
2
8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Series A
Preferred Shares"). Each share of the Series A Preferred Shares is exchangeable,
on the terms set forth in the Company's Articles of Amendment and Restatement,
into one share of the Bank's 8.45% Noncumulative First Preferred Shares, Series
Z (the "Bank Preferred Shares").
The Series A Preferred Shares are being issued pursuant to a
purchase agreement dated August 22, 1997 (the "Purchase Agreement") among the
Company, the Bank and the Initial Purchaser. Capitalized terms used and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Purchase Agreement.
The Bank Preferred Shares will be subject to the registration
rights set forth in the Registration Rights Agreement, dated as of September 3,
1997 (the "Registration Rights Agreement"), among the Bank, the Company and the
Initial Purchaser.
This opinion is furnished to the Initial Purchaser pursuant to
Section 5(b) of the Purchase Agreement.
A. DOCUMENTS EXAMINED
We have participated in the preparation of the Offering
Memorandum in connection with the issuance and sale of the Series A Preferred
Shares. In addition, for purposes of rendering our opinion, we have examined
originals or certified copies of the following documents and instruments:
(i) the Purchaser Agreement;
(ii) the Offering Memorandum;
(iii) a blueprint of the specimen of the form of Bank Preferred
Share;
(iv) the Bank Act (Canada), being the charter of the Bank;
(v) the By-laws of the Bank, as amended through the date hereof\
(the "By-laws"), as certified by the Secretary of the Bank as
of the date hereof;
(vi) the resolutions of the Board of Directors of the Bank adopted
at a meeting of the Board of Directors held on August 15,
1997, (the "Bank Resolutions"), as certified by the Secretary
of the Bank as of the date hereof;
<PAGE>
3
(vii) a certificate of confirmation dated August 25, 1997 issued by
the Superintendent of Financial Institutions (Canada) (the
"Superintendent") as to the incorporation of the Bank;
(viii) a letter dated August 15, 1997 and issued by the Canada
Deposit Insurance Corporation (the "CDIC") as to the insurance
of the Bank's eligible deposits by the CDIC;
(ix) a certificate of officers of the Bank as to certain matters
(the "Officers' Certificate");
(x) the Registration Rights Agreement;
(xi) a certificate of the Secretary of the Bank dated the date
hereof delivered by the Bank to the Initial Purchaser at the
Closing;
(xii) the mortgage loan purchase agreement executed before Mtre
Bertrand Ducharme, on September 3, 1997, between the Bank and
NB Finance, Ltd. ("NB Finance"), a Bermuda corporation, with
respect to the Initial Mortgage Loans as this expression is
more fully described therein (the "Mortgage Loan Purchase
Agreement");
(xiii) the loan agreement between NB Finance and the Company dated as
of September 3, 1997 under the terms of which the Company has
agreed to lend to NB Finance an aggregate amount of
U.S.$476,588,453 (the "Loan Agreement") and the promissory
notes of NB Finance evidencing its indebtedness thereunder.
(xiv) sixteen mortgage loan assignment agreements between NB
Finance, the Company and the Bank dated as of September 3,
1997 (the "Mortgage Loan Assignment Agreements");
(xv) the Foreign Opinions as this expression is hereinafter
defined;
(xvi) powers of attorney by the Bank in favour of the Company and
powers of attorney by NB Finance in favour of the Company
(collectively, the "Powers of Attorney");
(xvii) the advisory agreement dated September 3, 1997 between the
Bank and the Company (the "Advisory Agreement");
<PAGE>
4
(xviii) the assignment of the Servicing Agreement dated September 3,
1997 between NB Finance and the Company and to which the Bank
intervened (the "Assignment of Servicing Agreement"); and
(xix) a letter addressed to the undersigned on September 3, 1997, by
Shearman & Sterling relating to the mortgagors' rights and
recourses in general under U.S. law (the "S&S Letter").
We also have examined the originals or copies, certified or
otherwise identified to our satisfaction, of all such records of the Bank and
all such agreements, certificates of public officials, certificates of officers
or representatives of the Bank and others, and such other documents,
certificates and corporate or other records, as we have deemed necessary or
appropriate as a basis for the opinions set forth herein. In our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents.
B. DEFINITIONS
In addition to the terms defined in the Purchase Agreement,
the following terms are defined, in this opinion, as follows:
1. "Applicable Laws" means those laws, rules and regulations of
Canada and all the provinces of Canada which, in our
experience, are normally applicable to transactions of the
type contemplated by the Purchase Agreement and the
Transaction Agreements, but without having made any special
investigation concerning any other laws, rules or regulations;
2. "Applicable Orders" means any administrative order or decree
of any court or governmental authority or agency having
jurisdiction over the Bank, the existence of which has been
specifically disclosed to us by the Bank as listed in Schedule
I;
3. "Governmental Approval" means any consent, approval, license,
authorization or validation of, or filing, qualification or
registration with, any Governmental Authority pursuant to
Applicable Laws;
4. "Governmental Authorities" means any provincial or federal
executive, legislative, judicial, administrative or regulatory
body of Canada;
5. "Material Adverse Effect" means any material adverse change in
the condition, financial or otherwise, or in the earnings,
business affairs or business prospects
<PAGE>
5
of the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business;
6. "NHA" means the National Housing Act (Canada), as amended from
time to time, and the regulations promulgated thereunder;
7. The Purchase Agreement, the Registration Rights Agreement, the
Mortgage Loan Purchase Agreement, the Loan Agreement, the
Mortgage Loan Assignment Agreements, the Advisory Agreement,
the Servicing Agreement and the Assignment of Servicing
Agreement are sometimes hereinafter collectively referred to
as the "Transaction Agreements"; and
8. The Tory Opinion, the Stewart Opinion, the Thompson Opinion,
the Bennett Opinion, the McDougall Opinion, the Lawson
Opinion, the Ballard Opinion and the S&S Opinion as these
expressions are hereinafter defined, are sometimes hereinafter
collectively referred to as the "Foreign Opinions".
C. ASSUMPTIONS AND FACT RELIANCE
In making our examination of documents executed by parties
other than the Bank, we have assumed that such parties had the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the enforceability
of such documents by parties other than the Bank. As to any facts material to
our opinions expressed herein which were not independently established or
verified, we have relied upon certificates of public officials and written
statements and representations of officers and other representatives of the Ban,
the Company, NB Finance and others.
As to matters referred to in paragraphs 1 (second sentence),
4, 9 and 11 of Section D hereof, we have made no independent investigation but
rely in that respect upon the opinion of the Vice President - Legal Affairs and
Secretary of the Bank, copies of which opinion have been addressed and delivered
to you. As to those of the Transactions Agreements governed by the laws of a
jurisdiction other than the Province of Quebec, we have relied, without
verification on our part, on the Foreign Opinions. As to matters referred to in
paragraph 23, we have also, without verification on our part, relied on the S&S
Letter.
We have not undertaken any due diligence with respect to (i)
the Initial Mortgage Loans and, in particular, as to the title of the Bank, any
restriction or requirement or the need for consents of notice with respect to
the Initial Mortgage Loans, which may affect the validity of any purported
transfer or assignment of the Initial Mortgage Loans and (ii) the qualification
<PAGE>
6
of the Bank as an approved lender under the NHA, relying exclusively with
respect thereto on the Officers' Certificate.
D. OPINIONS
Based upon and subject to the limitations, qualifications and
exceptions set forth herein, we are of the opinion that:
1. The Bank has been duly organized and is validly existing as a
Canadian chartered bank under the Bank Act, with full power (corporate and
other) and authority to own, lease and operate its properties and to conduct its
business as described in the Offering Memorandum, and to enter into and perform
its obligations under the Purchase Agreement and each of the Transaction
Agreements to which it is a party. The Bank is duly licensed and qualified as a
foreign corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where
failure to so qualify or to be in good standing would not result in a Material
Adverse Effect.
2. All of the outstanding shares of capital stock of the Bank have been
duly authorized and validly issued and are fully paid and non-assessable.
3. The Bank is a Schedule I bank under the Bank Act in good standing
and CDIC has duly issued a letter stating that the Bank is an institution with
eligible deposits insured by the CDIC as provided in the CDIC Act and by-laws
thereunder, and, to our knowledge, no proceedings for the termination or
revocation of such insurance are pending or currently threatened.
4. The activities of each of the Bank's subsidiaries, as described in
the Offering Memorandum and the documents incorporated by reference therein, are
permitted to subsidiaries of a bank under Applicable Laws.
5. The Purchase Agreement has been duly authorized, executed and
delivered by the Bank.
6. Each of the Transaction Agreements to which the Bank is a party has
been duly authorized, executed and delivered by the Bank and constitutes a valid
and binding obligation of the Bank and is enforceable against the Bank in
accordance with its terms, except to the extent that enforcement of such
agreement may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law).
<PAGE>
7
7. The blueprint of the specimen of the Bank Preferred Shares is in the
form contemplated by the Offering Memorandum and the Bank Preferred Shares have
been duly authorized by the Bank and (assuming the conformity of the Bank
Preferred Shares with the blueprint of the specimen thereof examined by us), if
and when executed and delivered by the Bank pursuant to the terms and conditions
set forth in the Bank Resolutions, the Bank Preferred Shares will be duly
issued, fully paid and non-assessable.
8. The blueprint of the specimen of the Bank Preferred Shares conforms
in all material respects to the descriptions thereof contained in the Offering
Memorandum and such description conforms to the rights set forth in the Bank
Resolutions; furthermore, the issuance of the Bank Preferred Shares is not
subject to pre-emptive or other similar rights of any securityholder of the
Bank.
9. The Bank and its subsidiaries have all Governmental Approval
necessary to own or lease, as the case may be, and to operate their respective
properties and to carry on their respective businesses as presently conducted,
except where the failure to obtain such Governmental Approval would not have a
Material Adverse Effect.
10. The descriptions in the Offering Memorandum of Canadian statutes
and Canadian banking laws and regulations are accurate in all material aspects.
11. Except as disclosed in the Offering Memorandum, there are no
actions, suits, proceedings or investigations pending or threatened against or
affecting the Bank or its subsidiaries, or their respective properties or
businesses, at law or in equity, before any court in Canada or before any
governmental or administrative body or agency in Canada or Quebec, which, alone
or in the aggregate, could have a Material Adverse Effect or challenge the
right, power, authority or ability of the Bank to carry out the transactions
contemplated in the Offering Memorandum, the Purchase Agreement and each of the
Transaction Agreements to which it is a party.
12. No Governmental Approval is required for the issuance and sale of
the Series A Preferred Shares by the Company or the Bank Preferred Shares by the
Bank, the performance by the Bank of its respective obligations under the
Purchase Agreement and each of the Transaction Agreements to which it is a party
or consummation of the transactions contemplated thereby, except such as have
been obtained and made or as required pursuant to the terms of such Transaction
Agreements.
13. The execution and delivery by the Bank of the Purchase Agreement
and each of the Transaction Agreements to which the Bank is a party and the
consummation of the transactions contemplated thereby and in the Offering
Memorandum (including the issuance and sale of the Series A Preferred Shares by
the Company and the issuance of Bank Preferred Shares by the Bank), and the
performance by the Bank of its obligations under the Purchase Agreement
<PAGE>
8
and each of the Transaction Agreements to which it is a party, each in
accordance with its terms, do not conflict with the Bank Act, being the charter
of the Bank, or By-laws of the Bank.
14. The issue and sale of the Bank Preferred Shares by the Bank, the
execution and delivery of the Purchase Agreement and the Transaction Agreements
to which the Bank is a party, the compliance by the Bank with all of the
provisions of the Bank Preferred Shares, the Purchase Agreement, and the
Transaction Agreements to which it is a party, and the consummation by the Bank
of the transactions therein contemplated will comply with Applicable Laws and
Applicable Orders.
15. The information in the Offering Memorandum under "Canadian Federal
Income Tax Considerations" and Annex II to the Offering Memorandum to the extent
that it constitutes matters of law, summaries of legal matters, the Bank Act and
By-laws, legal proceedings or legal conclusions, has been reviewed by us and
fairly present the information disclosed therein in all material respects.
In addition, we have participated in conferences with officers
and representatives of the Bank and the Company, in-house counsel to the Bank
and the Company, Bermuda counsel to NB Finance, counsel to the Initial
Purchaser, representatives of the independent accountants for the Company and
the Bank and the Initial Purchaser at which the contents of the Offering
Memorandum and related matters were discussed. Although we are not passing upon,
and do not assume any responsibility for, the accuracy, completeness or fairness
of the statements contained in the Offering Memorandum and have made no
independent check or verification thereof (other than to the extent specified in
paragraph 10 above), on the basis of the foregoing, no facts have come to our
attention that have led us to believe that the Offering Memorandum (including
the annexes thereto), as of the date of the Offering Memorandum and as of the
date hereof, contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that we express no belief with respect to the financial
statements, schedules and other financial data included or incorporated by
reference therein or excluded therefrom.
16. The Mortgage Loan Purchase Agreement constitutes a legal, valid and
binding agreement as between the Bank and NB Finance transferring to NB Finance
such right, title and interest in and to the Initial Mortgage Loans as the Bank
had prior to transfer, including all interest accrued on the Initial Mortgage
Loans as of the date of the Mortgage Loan Purchase Agreement and the Bank's
rights under the CMHC insurance policies covering losses sustained as a result
of defaults under the said Initial Mortgage Loans.
17. The Mortgage Loan Purchase Agreement will not require compliance
with any bulk sales or similar legislation in Canada.
<PAGE>
9
18. The Initial Mortgage Assets (as defined in the Offering Memorandum)
conform in all material respects to the descriptions thereof contained in the
Offering Memorandum.
19. Pursuant to the Mortgage Loan Purchase Agreement, NB Finance has
been assigned, amongst other, the right to:
(a) physical possession of the documents evidencing the Initial
Mortgage Loans;
(b) the income derived from the Initial Mortgage Loans, together
with the capital falling due thereon and the right to give a
valid discharge thereof;
(c) institute in its own name (subject to compliance with various
procedural formalities) proceedings in recovery of the Initial
Mortgage Loans, including hypothecary recourses consisting of
taking the real property securing the Initial Mortgage Loans
in payment upon default of the mortgagor (hypothecary debtor)
or of having such real property sold by judicial authority
upon default of the said mortgagor (hypothecary debtor);
(d) have its interest in the Initial Mortgage Loans registered
(subject to compliance with various procedural formalities)
against the real properties underlying the Initial Mortgage
Loans; and
(e) dispose of the Initial Mortgage Loans.
20. Each of the Mortgage Loan Assignment Agreements constitutes a
legal, valid and binding agreement as between NB Finance and the Company
assigning to the Company, subject to an equitable right of redemption, such
right, title and interest in and to the Initial Mortgage Loans transferred
thereby as NB Finance had prior to such assignments.
21. Pursuant to the Mortgage Loan Assignment Agreements, the Company
has the right, amongst others, subject to an equitable right of redemption, to:
(a) physical possession of the documents evidencing the Initial
Mortgage Loans, which documents are to be held by the Bank as
agent of the Company;
(b) collect the income derived from the Initial Mortgaged Loans,
together with the capital falling due thereon and give a valid
discharge thereof;
(c) institute in its own name (subject to compliance with various
procedural formalities) proceedings in recovery of the Initial
Mortgage Loans, including hypothecary recourses consisting of
taking the real property securing the Initial Mortgage Loans
in payment upon default of the mortgagor (hypothecary debtor)
<PAGE>
10
or of having such real property sold by judicial authority
upon default of the said mortgagor (hypothecary debtor);
(d) have its interest in the Initial Mortgage Loans registered
(subject to compliance with various procedural formalities)
against the real properties underlying the Initial Mortgage
Loans;
(e) dispose of any Initial Mortgage Loan upon the occurrence of an
event of default under such Mortgage Loan; and
(f) make a claim under the CMHC insurance policy in respect of an
Initial Mortgage Loan, to the same extent as the Bank would
have been entitled to do.
22. The Initial Mortgage Assets will be secured by, and will constitute
an interest in, the Initial Mortgage Loans and the real property underlying the
Initial Mortgage Loans.
23. The legal rights, title and interest created in favor of the
Company pursuant to the Transaction Agreements are comparable to the legal
rights, title and interest which a mortgagee would obtain pursuant to a mortgage
under the laws in the United States.
24. The rights and powers conferred on the Company by virtue of the
Mortgage Loan Purchase Agreement, the Mortgage Loan Assignment Agreements and
the Powers of Attorney are sufficient to allow the Company, upon receipt of the
information with respect to the Initial Mortgage Loans to which the Company is
entitled pursuant to the Mortgage Loan Assignment Agreements, to prepare and
register assignments or transfers of such Initial Mortgage Loans in the land
registry or land titles offices in Canada in order to have the Company's
interest in the Initial Mortgage Loans as assignee thereof registered against
the real properties underlying the Initial Mortgage Loans.
25. The Powers of Attorney are irrevocable and cannot be revoked,
rescinded, or modified by any action of the Bank or NB Finance.
26. Except for registration in the land registry or land titles offices
in Canada, no further registration, recording or filing is currently required
under the laws of Canada to preserve, perfect or protect (to the extent capable
of preservation, perfection or protection by registration) the interest of the
Company in the Initial Mortgage Loans to the extent that such interest
constitutes an interest in real property.
E. QUALIFICATIONS
The opinion expressed herein is subject to the following
qualifications:
<PAGE>
11
1. Enforcement proceedings with respect to any of the mortgages and
hypothecs forming part of the Initial Mortgage Loans must be commenced in the
province of Canada in which the real property subject to the mortgage or
hypothec is located and then only in accordance with the rules and procedural
formalities in effect in such province.
2. In an action brought before a court of competent jurisdiction in
Quebec in respect of the Mortgage Loan Assignment Agreements, such court would
look at the laws of Bermuda, being the jurisdiction in which NB Finance had its
domicile at the time of the execution of such Mortgage Loan Assignment
Agreements, and such laws, to the extent specifically pleaded and proved as a
matter of a fact by expert evidence, would be recognized and applied by such
court to all issues relating to the creation, validity and perfection of the
rights constituted by the Mortgage Loan Assignment Agreements. Such court would
look at the laws of the country in which NB Finance is domiciled at the time the
Company exercises its rights under the Mortgage Loan Assignment Agreements, and
such laws, to the extent specifically pleaded and proved as a matter of a fact
by expert evidence, would be recognized and applied by such court to all issues
relating to the publication of the rights constituted by the Mortgage Loan
Assignment Agreements and its effects. The courts of Quebec will not apply those
laws of Bermuda or the laws of the country in which NB Finance is domiciled, as
the case may be, (i) which it characterizes as being of a revenue, penal or
public law nature, (ii) which relate to matters of a procedural nature or (iii)
the application of which would be inconsistent with public policy, as that term
is applied by the courts in Quebec. In addition, a court of competent
jurisdiction in Quebec may reserve to itself an inherent power to decline to
hear any such action if it is contrary to public policy for it to do so, or if
it is not the proper forum to hear such an action, or if concurrent proceedings
in respect of such matter are being brought elsewhere. Based on the nature of
the transactions contemplated by, and of the rights created pursuant to, the
Transaction Agreements, it is unlikely that a Quebec court would not give effect
to the Transaction Agreements on the basis of the foregoing grounds.
3. In any proceedings taken in a court of competent jurisdiction in
Quebec for the enforcement of the Mortgage Loan Assignment Agreements, any final
and conclusive judgment in personam for a sum certain obtained in Bermuda would
be recognized and enforced in Quebec except in the following cases: (i) the
foreign authority had no jurisdiction according to the provisions of the Civil
Code of Quebec, (ii) the decision is subject to ordinary remedy (such as an
appeal), or is not final (as opposed to provisional decisions) or enforceable at
the place where it was rendered, (iii) the decision was rendered in
contravention of the fundamental principles of procedure, (iv) a dispute between
the same parties, based on the same facts and having the same object has given
rise to a decision rendered in Quebec, whether it has acquired the authority of
a final judgment (res judicata) or not, or is pending before a Quebec authority,
in first instance, or has been decided by another foreign authority and the
decision meets the necessary conditions for recognition in Quebec, (v) the
outcome of the foreign decision is manifestly inconsistent with public order as
understood in international relations, or (vi) the decision enforces obligations
arising from the taxation laws of a foreign jurisdiction. A decision
<PAGE>
12
rendered by default may not be recognized or declared enforceable unless the
plaintiff proves that the act of procedure initiating the proceedings was duly
served on the defaulting party in accordance with the law of the place where the
decision was rendered. A Quebec court may refuse recognition or enforcement if
the defaulting party proves that, owing to the circumstances, it was unable to
learn of the act of procedure initiating the proceedings or was not given
sufficient time to offer its defense. In personal actions, the jurisdiction of a
foreign authority will be recognized under the Civil Code of Quebec when the
parties have submitted to the foreign authority disputes which have arisen or
which may arise between them in respect of a specific legal relationship or when
the defendant has recognized the jurisdiction of the foreign authority.
4. In the event that the Mortgage Loan Assignment Agreements are sought
to be enforced in any action or proceeding in the Province of Ontario in
accordance with the laws applicable thereto as chosen by the parties, namely the
laws of Bermuda, the courts of the Province of Ontario:
(a) would recognize the choice of laws provided that such choice
of laws is bona fide (in the sense that it was not made with a
view to avoiding the consequences of the laws of any other
jurisdiction) and is not contrary to public policy, as such
term is understood under the laws of the Province of Ontario;
and
(b) would apply the laws of Bermuda in any such action or
proceeding, upon appropriate evidence as to such laws being
adduced, provided that none of the provisions of the Mortgage
Loan Assignment Agreements or of the laws of Bermuda are
contrary to public policy, as such term is understood under
the laws of the Province of Ontario.
A court in the Province of Ontario has, however, an inherent
power to decline to hear such an action if it is contrary to public policy, as
such term is understood under the laws of the Province of Ontario, for it to do
so, or if it is not the proper forum to hear such action, or if concurrent
proceedings are being brought elsewhere.
5. The laws of the Province of Ontario permit an action to be brought
in a court of competent jurisdiction in Ontario on any final and conclusive
judgment in personam of a foreign jurisdiction, which is not impeachable as void
or voidable under the internal laws of such foreign jurisdiction, for a sum
certain if only:
(a) the court rendering such judgment had jurisdiction over the
judgment debtor, as recognized by the courts of the Province
of Ontario;
<PAGE>
13
(b) such judgment was not obtained by fraud or in a manner
contrary to natural justice and the enforcement thereof would
not be inconsistent with public policy, as such term is
understood under the laws of the Province of Ontario;
(c) the enforcement of such judgment does not constitute, directly
or indirectly, the enforcement of foreign revenue or penal
laws; and
(d) there has been compliance with the Limitations Act (Ontario),
which provides that any action to enforce a foreign judgment
must be commenced within six years of the date of the foreign
judgment.
6. Until the hypothecary debtors and mortgagors are properly notified
of the transfer and assignment of the Initial Mortgage Loans, such transfer and
assignment may not be set up against the said hypothecary debtors and mortgagors
and third persons, including a trustee in bankruptcy. Therefore, until such
proper notice is given, the mortgagors and hypothecary creditors under the
Initial Mortgage Loans may continue to discharge their respective payment
obligations under the Initial Mortgage Loans by making payment to the Bank.
Therefore, a hypothecary debtor (mortgagor) may set up against NB Finance and
the Company any payment made to the Bank before it has been notified of the
Mortgage Loan Purchase Agreement and the Mortgage Loan Assignment Agreements, as
well as any cause of extinction of its obligations under the Initial Mortgage
Loans which has occurred before it has been notified of the Mortgage Loan
Purchase Agreement and the Mortgage Loan Assignment Agreements. Under certain
circumstances, a hypothecary debtor (mortgagor) may also set up any payment made
in good faith to the apparent creditor.
7. In Quebec, until the Mortgage Loan Purchase Agreement and the
Mortgage Loan Assignment Agreements are registered at the registry offices where
the real properties securing the Initial Mortgage Loans are located and
certified statements of registration are furnished to the hypothecary debtors
(mortgagors) thereunder, such transfer and assignment may not be set up against
a subsequent assignee of the Initial Mortgage Loans who has observed these
formalities. This situation could only occur or be permitted to exist if:
(a) the representations and warranties of the Bank under the
Mortgage Loan Purchase Agreement were incorrect or if the Bank
were to breach its contractual obligations under the Mortgage
Loan Purchase Agreement; or
(b) the representations and warranties of NB Finance under the
Mortgage Loan Assignment Agreements were incorrect of if NB
Finance were to breach its contractual obligations under the
Mortgage Loan Assignment Agreements.
8. To the extent that the interest of the Company and NB Finance in the
Initial Mortgage Loans constitute interests in real property, such interests
will be subject to interests
<PAGE>
14
in the Initial Mortgage Loans acquired by any persons who register their
interests in the applicable land registry or land titles offices before the
Company and NB Finance register their respective interests in such offices.
However, the existence of such an intervening interest could only occur or be
permitted to exist if:
(a) the representations and warranties of the Bank under the
Mortgage Loan Purchase Agreement were incorrect of if the Bank
were to breach its contractual obligations under the Mortgage
Loan Purchase Agreement; or
(b) the representations and warranties of NB Finance under the
Mortgage Loan Assignment Agreements were incorrect or if NB
Finance were to breach its contractual obligations under the
Mortgage Loan Assignment Agreements.
9. Remedies such as specific performance and injunction may be granted
only in the discretion of a court of competent jurisdiction.
10. The ability to recover claims for certain costs or expenses may be
subject to judicial discretion.
11. Since the Servicing Agreement and the Advisory Agreement may be
considered by their nature to be contracts of successive performance within the
meaning of the Civil Code of Quebec, the company may be denied the right to
terminate such agreements, notwithstanding their terms and conditions, if the
default of the Bank is of minor importance, unless the default occurs
repeatedly, but the Bank would then be entitled to a proportional reduction of
its correlative obligations. Although there is no authority directly on point,
the Company should be able to terminate the Advisory Agreement and the Servicing
Agreement in accordance with their respective terms.
12. Under Article 1474 of the Civil Code of Quebec, a person may not
exclude or limit his liability for material injury caused to another through an
intentional or gross fault.
13. As to matters governed by the laws of Bermuda, the laws of the
provinces of Canada, excluding the province of Quebec, and the laws of the
United States of America, we have relied upon the hereinafter mentioned
opinions, copies of which have been addressed and delivered to you:
(a) an opinion dated September 3, 1997 by Conyers Dill & Pearman
(herein referred to as the "CD&P Opinion");
(b) an opinion dated September 3, 1997 by Tory Tory DesLauriers
and Binnington (herein referred to as the "Tory Opinion");
<PAGE>
15
(c) an opinion dated September 3, 1997 by Stewart McKelvey
Stirling Scales (herein referred to as the "Stewart Opinion");
(d) an opinion dated September 3, 1997 by Thompson Dorfman,
Sweatman (herein referred to as the "Thompson Opinion");
(e) an opinion dated September 3, 1997 by Bennett Jones Vercheres
(herein referred to as the "Bennett Opinion");
(f) an opinion dated September 3, 1997 by McDougall Ready (herein
referred to as the "McDougall Opinion");
(g) an opinion dated September 3, 1997 by Lawson Lundell Lawson
and McIntosh (herein referred to as the "Lawson Opinion");
(h) an opinion dated September 3, 1997 by Ballard Spahr Andrews &
Ingersoll (herein referred to as the "Ballard Opinion"); and
(i) an opinion dated September 3, 1997 by Shearman & Sterling
(herein referred to as the "S&S Opinion").
To the extent that each of these opinions is based upon any
assumption or is made subject to any limitation, qualification or exception, our
opinion given in reliance thereon is based upon such assumption and is subject
to such limitation, qualification or exception.
14. The CMHC insurance policies in respect of the Initial Mortgage
Loans will cease to be in force if any Initial Mortgage Loan is sold to a person
other than an approved lender (as this expression is defined in the NHA) unless
such Initial Mortgage Loan continues to be administered by CMHC or an approved
lender.
15. We express no opinion as to title of the Bank and NB Finance to any
property nor as to the rank or priority of any security interest, mortgage,
charge or assignment constituted by any of the Transaction Agreements.
16. The obligation of the parties to the Transaction Documents may be
affected by a case of "force majeure".
Members of our firm are admitted to the bar in the Province of
Quebec, and we express no opinion as to the laws of any jurisdiction other than
(i) the laws of Quebec and (ii) the laws of Canada to the extent specifically
referred to herein.
<PAGE>
16
Without express permission, this opinion letter may not be
used, circulated, quoted or otherwise referred to for any purpose except as
stated therein, except that reference may be made to this letter in the list of
closing documents pertaining to the offering of the Bank Preferred Shares.
Except as agreed by us in writing, the opinions expressed herein are solely for
the benefit of the addressees hereof, and may be relied upon solely by such
addressees for the purposes for which this letter is being furnished. Skadden,
Arps, Slate, Meagher & Flom LLP, counsel to the Initial Purchaser, Shearman &
Sterling, counsel to the Company, counsel to NB Finance, may rely on the
opinions expressed herein as if this opinion letter were addressed and delivered
to such counsel on the date hereof by the undersigned.
Yours very truly,
DESJARDINS DUCHARME STEIN MONAST
cc: National Bank of Canada
<PAGE>
SCHEDULE I
APPLICABLE ORDERS
1. Order from the Superintendent of Financial Institutions Canada (the
"Superintendent") dated September 2, 1997 permitting the National Bank
of Canada (the "Bank") to acquire NB Finance, Ltd.
2. Order from the Superintendent dated September 2, 1997 permitting the
Bank to acquire NB Capital Corporation.
[LETTERHEAD OF CONYERS DILL & PEARMAN]
RBX/ss/310589/d.360208 3 September 1997
Desjardins Ducharme Stein Monast
600, rue de la Gauchetiere Ouest
Bureau 2400, Montreal
Quebec
Canada H3B 4LB
Dear Sirs
NB Finance, Ltd. (the "Company")
We have acted as special legal counsel in Bermuda to the Company in connection
with a loan agreement dated 3 September, 1997 made between the Company as
borrower and NB Capital Corporation, a Maryland corporation, as lender ("NB
Capital") and the sale of certain mortgage loans by National Bank of Canada (the
"Bank") to the Company and the assignment of those mortgage loans, as security
for the obligations of the Company under the Loan Agreement (referred to below),
by the Company to NB Capital.
For the purposes of giving this opinion, we have examined and relied upon the
following documents:
(a) an executed copy of a deed of sale of mortgage loans dated 3 September,
1997 made between the Bank and the Company providing, inter alia, for
the purchase by the Company from the Bank of the mortgage loans
described therein (the "Mortgage Loans") (the "Mortgage Purchase
Agreement");
(B) an executed copy of a loan agreement dated 3 September, 1997 made
between the Company as borrower and NB Capital as lender providing,
inter alia, for sixteen loans in the aggregate principal amount of
US$476,588,453.00 to enable the Company to purchase the Mortgage Loans
pursuant to the Mortgage Purchase Agreement (the "Loan Agreement");
(c) executed copies of sixteen promissory notes each dated 3 September,
1997 made by the Company for the benefit of NB Capital evidencing each
of the sixteen loans made under the Loan Agreement (each, a "Note" and
together, the "Notes");
<PAGE>
2
(d) executed copies of sixteen mortgage loan assignment agreements each
dated 3 September, 1997 made between the Company as assignor and NB
Capital as assignee providing, inter alia, for the assignment by the
Company to NB Capital of the Mortgage Loans as security for the
Company's obligations under the Notes (together, the "Assignments").
(e) an executed copy of a power of attorney dated as of 3 September, 1997
by which the Company appoints NB Capital as its attorney-in-fact (the
"Power of Attorney");
(f) an executed copy of an assignment of servicing agreement dated as of 3
September, 1997 made by the Company, NB Capital and the Bank pursuant
to which the Company assigns and NB Capital assumes the Company's
rights and obligations under the Servicing Agreement dated as of 3
September, 1997 made by the Bank and the Company with respect to the
Mortgage Loans (the "Assignment of Servicing Agreement").
The Mortgage Purchase Agreement, the Loan Agreement, the Notes, the Assignments,
the Power of Attorney and the Assignment of Servicing Agreement are herein
sometimes collectively referred to as the "Documents".
We have also reviewed a copy of the Memorandum of Association and the Bye-laws
of the Company, resolutions of the Company's Board of Directors dated 3
September, 1997 and such other documents and made such enquiries as to questions
of law as we have deemed necessary in order to render the opinions set forth
below.
We have assumed:
(i) the genuineness and authenticity of all signatures and the conformity
to the originals of all copies (whether or not certified) of all
documents examined by us and the authenticity and completeness of the
originals from which such copies were taken.
(ii) the capacity, power and authority of each of the parties to the
Documents, other than the Company, to enter into and perform its
respective obligations under the Documents;
(iii) the due execution and delivery of the Documents by each of the parties
thereto, other than the Company;
(iv) the correctness, accuracy and completeness of all factual
representations made in the Documents and in the other documents which
we have reviewed;
(v) that there is no provision of the law of any jurisdiction, other than
Bermuda, which would have any implication in relation to the opinions
expressed herein;
<PAGE>
3
(vi) the validity and binding effect under the laws of the Province of
Quebec (the "Foreign Laws") of the Mortgage Purchase Agreement which is
expressed to be subject to such Foreign Laws in accordance with its
terms; and
(vii) the validity under the Foreign Laws of the submission by the Company
pursuant to the Mortgage Purchase Agreement to the non-exclusive
jurisdiction of the provincial courts of Canada (the "Foreign Courts").
(viii) that, pursuant to the Mortgage Purchase Agreement, the Company has
obtained legal title to the Mortgage Loans;
(ix) that, pursuant to the Mortgage Purchase Agreement, the Company will
upon demand be able to obtain physical possession of the documents
evidencing the Mortgage Loans;
(x) that, pursuant to the Mortgage Purchase Agreement, the Company will be
able to collect the revenues produced by the Mortgage Loans, together
with the capital falling due thereon and give a valid discharge
thereof; and
(xi) that, pursuant to the Mortgage Purchase Agreement, the Company will in
its own name be able to institute proceedings in recovery of the
Mortgage Loans.
We express no opinion as to the validity or the binding effect of obligations to
make any payment at an increased rate on overdue amounts or on the happening of
an event of default.
We express no opinion as to the validity or binding effect of obligations to pay
a specified rate of interest on the amount of a judgment after the date of
judgment.
We express no opinion as to the effectiveness of any provision which refers to
the deletion or severance of any other provision in any of the Documents if any
such other provision in the Documents is determined by a court to be illegal,
invalid or otherwise unenforceable.
Any provision providing that certain statements, calculations or certificates
will be conclusive and binding may not be effective if such statements,
calculations or certificates are incorrect on their face or fraudulent and will
not necessarily prevent judicial enquiry into the merits of a claim of an
aggrieved party.
The obligations of the Company under the Documents:
(i) will be subject to the laws from time to time in effect relating to
bankruptcy, insolvency, liquidation, possessory liens, rights of set
off, reorganisation, amalgamation, moratorium or any other laws or
legal procedures, whether of a similar nature or otherwise, generally
affecting the rights of creditors.
<PAGE>
4
(ii) will be subject to statutory limitation of the time within which
proceedings may be brought;
(iii) will be subject to general principles of equity and, as such, specific
performance and injunctive relief, being equitable remedies, may not be
available; and
(iv) may not be given effect to by a Bermuda court, whether or not it was
applying the Foreign Laws, if and to the extent they constitute the
payment of an amount which is in the nature of a penalty and not in the
nature of liquidated damages.
A Bermuda court may stay any proceedings commenced in Bermuda against the
Company under the Documents if there are other proceedings in respect of those
Documents simultaneously under way against the Company in another jurisdiction.
We have made no investigation of and express no opinion in relation to the laws
of any jurisdiction other than Bermuda. This opinion is to be governed by and
construed in accordance with the laws of Bermuda and is limited to and is given
on the basis of the current law and practice in Bermuda. This opinion is issued
solely for your benefit with respect to the matters referred to herein and is
not to be relied upon by any other person, firm or entity or in respect of any
other matter without our express written consent.
On the basis of and subject to the foregoing, we are of the opinion that:
1. The Company has been duly incorporated, is validly existing and in good
standing (meaning that it has not failed to make any filing with any
Bermuda governmental authority or to pay any Bermuda government fee or
tax which might make it liable to be stuck off the Register of
Companies and thereby cease to exist under the laws of Bermuda) under
the laws of Bermuda.
2. The Company has the necessary corporate power and authority to enter
into and perform its obligations under the Documents. The execution and
delivery of the Documents by the Company and the performance by the
Company of its obligations under the Documents in accordance with their
respective terms will not violate the Memorandum of Association or
Bye-laws of the Company or any applicable law, regulation, order or
decree in Bermuda.
3. The Company has taken all corporate action required to authorise its
execution and delivery of the Documents and the performance of its
obligations under the Documents in accordance with their respective
terms. The Documents have been duly executed by or on behalf of the
Company and upon delivery will constitute the valid and binding
obligations of the Company enforceable in accordance with the terms
thereof.
<PAGE>
5
4. The registered office of the Company is Clarendon House, 2 Church
Street, Hamilton, Bermuda and the bye-laws of the Company provide that
the Company shall have a head office in Bermuda.
5. The Company has, pursuant to the Assignments assigned to NB Capital,
without recourse to the Company, all its right, title and interest to
the Mortgage Loans and NB Capital may therefore:
(a) obtain legal title to the Mortgage Loans subject to the right
of redemption of the Company upon the satisfaction of the
obligations of the Company under the applicable Note;
(b) upon demand obtain physical possession of the documents
evidencing the Mortgage Loans;
(c) collect the revenues produced by the Mortgage Loans, together
with the capital falling due thereon and give a valid
discharge thereof; and
(d) in its own name institute proceedings in recovery of the
Mortgage Loans.
6. No order, consent, approval, license, authorisation or validation of or
exemption by any government or public body or authority of Bermuda or
any sub-division thereof is required to authorise or is required in
connection with the execution and delivery by the Company of the
Documents or the performance and enforcement of its obligations
thereunder.
7. It is not necessary or advisable, in order to ensure their
enforceability in Bermuda, that the Documents be registered in any
register kept by, or filed with, any governmental authority or
regulatory body in Bermuda. However, it may be desirable, in order to
ensure their priority in Bermuda, that the Assignments and any document
which creates a mortgage or charge (a "Security Document") be
registered in the Register of Charges in accordance with Section 55 of
the Companies Act 1981. Upon registration the Security Document will
have priority in Bermuda over any unregistered charge created after
11th July, 1984 and over any subsequently registered charge in respect
of the assets which are the subject of the Security Document. A
registration fee of BD$425 will be payable in respect of the
registration of each Security Document so registered.
8. There is no income or other tax of Bermuda imposed by withholding or
otherwise on any payment to be made to or by the Company under the
Documents. The Documents will not be subject to ad valorem stamp duty
in Bermuda and no registration, documentary, recording, transfer or
other similar tax, fee or charge is payable in connection with the
<PAGE>
6
execution, delivery, filing, registration or performance of the
Documents other than as stated in paragraph 7 hereof.
9. Neither the Bank nor NB Capital will be deemed to be resident,
domiciled or carrying on business in Bermuda by reason only of their
execution, performance or enforcement of the Documents.
10. The Bank and NB Capital each have standing to bring an action or
proceedings before the appropriate courts in Bermuda for the
enforcement of the Documents. It is not necessary or advisable in order
for the Bank or NB Capital to enforce its rights under the Documents,
including the exercise of remedies thereunder, that it be licensed,
qualified or otherwise entitled to carry on business in Bermuda.
11. The choice of the Foreign Laws as the governing law of the Mortgage
Purchase Agreement is a valid choice of law and would be recognised and
given effect to in any action brought before a court of competent
jurisdiction in Bermuda, except for those laws (i) which such court
considers to be procedural in nature, (ii) which are revenue or penal
laws or (iii) the application of which would be inconsistent with
public policy, as such term is interpreted under the laws of Bermuda.
12. The submission by the Company under the Mortgage Purchase Agreement to
the non-exclusive jurisdiction of the Foreign Courts is valid and
binding upon the Company.
13. A Bermuda court would recognise as a valid judgment, a final and
conclusive judgement in personam obtained in the Foreign Courts against
the Company based upon the Documents under which a sum of money is
payable (other than a sum of money payable in respect of multiple
damages, taxes or other charges of a like nature or in respect of a
fine or other penalty) and would give a judgment based thereon provided
that (a) such courts had proper jurisdiction over the parties subject
to such judgment, (b) such courts did not contravene the rules of
natural justice of Bermuda, (c) such judgment was not obtained by
fraud, (d) the enforcement of the judgment would not be contrary to the
public policy of Bermuda, (e) no new admissible evidence relevant to
the action is submitted prior to the rendering of the judgment by the
courts of Bermuda and (f) there is due compliance with the correct
procedures under the laws of Bermuda.
14. The Documents are in an acceptable legal form under the laws of Bermuda
for enforcement therefore in Bermuda.
Yours faithfully
[OSLER, HOSKIN & HARCOURT LETTERHEAD]
September 3, 1997
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
North Tower
World Financial Center
New York, New York 10281-1209
Dear Sirs and Mesdames:
Re: NB Capital Corporation
Public Offering of 300,000 Shares of 8.35%
Noncumulative Exchangeable Preferred Stock, Series A
----------------------------------------------------
We have acted as Canadian counsel to Merrill Lynch & Co. and Merrill Lynch,
Pierce, Fenner & Smith (the "Initial Purchaser") in connection with the sale by
NB Capital Corporation (the "Company") and the purchase by the Initial Purchaser
of 300,000 shares of the Company's 8.35% Noncumulative Exchangeable Preferred
Stock, Series A (the "Series A Preferred Shares"). The Series A Preferred Shares
are being issued pursuant to a purchase agreement dated August 22, 1997 (the
"Purchase Agreement") among the Company, the Bank and the Initial Purchaser. We
have been advised by the Initial Purchaser there were no sales of Series A
Preferred Shares in Canada.
This opinion letter is being provided pursuant to Section 5(d)(B) of the
Purchase Agreement. Capitalized terms used and not otherwise defined herein
shall have the meanings ascribed to such terms in the Purchase Agreement.
As Canadian counsel for the Initial Purchaser, we have examined the following
documents and agreements:
(a) the Offering Memorandum;
(b) an executed copy of the Purchase Agreement;
(c) resolutions of the Board of Directors of the Bank adopted at a
meeting of the Board of Directors held on August 15, 1997 (the
"Bank Resolutions"), as certified by the Secretary of the Bank
as of the date hereof;
<PAGE>
- 2 -
(d) a certificate of officers of the Bank as to certain matters
(the "Officers' Certificate");
(e) the registration rights agreement among the Company, NB
Finance, Ltd. ("NB Finance"), a Bermuda corporation and the
Bank, dated as of the Closing Date (the "Registration Rights
Agreement");
(f) the mortgage loan purchase agreement executed before Mtre
Bertrand Ducharme, on September 3, 1997, between the Bank and
NB Finance (the "Mortgage Loan Purchase Agreement");
(g) the loan agreement between NB Finance and the Company dated as
of September 3, 1997 pursuant to which the Company has agreed
to lend to NB Finance an aggregate amount of U.S.$476,588,453
(the "Loan Agreement") and the promissory notes of NB Finance
evidencing its indebtedness thereunder;
(h) the sixteen mortgage loan assignment agreements among NB
Finance, the Company and the Bank dated September 3, 1997 (the
"Mortgage Loan Assignment Agreements");
(i) the advisory agreement between the Bank and the Company, dated
September 3, 1997 (the "Advisory Agreement");
(j) the servicing agreement among the Bank, the Company and NB
Finance in respect of the Mortgage Loans (as such expression
is defined in the Offering Memorandum) dated September 3, 1997
(the "Servicing Agreement"); and
(k) the assignment of the Servicing Agreement dated September 3,
1997 between NB Finance and the Company (the "Assignment of
Servicing Agreement").
In this opinion, the following terms shall have the following meanings:
(a) "Applicable Laws" means those laws, rules and regulations of
the Provinces of Canada and the Federal Laws of Canada
applicable therein which are normally applicable to
transactions of the type contemplated in the Transaction
Agreements (defined below), but without having made any
special investigation concerning other laws, rules or
regulations;
(b) "Applicable Orders" means any administrative order or decree
of any court or government authority or agency having
jurisdiction over the Bank, the existence of which has been
specifically disclosed by the Bank in a Schedule to the
opinion of Desjardins Ducharme Stein Monast of even date
herewith;
<PAGE>
- 3 -
(c) "Government Approval" means any consent, approval, license,
authorization or validation of, or filing, qualification or
registration with, any Governmental Authority pursuant to
Applicable Law;
(d) "Government Authorities" means any provincial or federal
executive, legislative, judicial, administrative or regulatory
body of Canada;
(e) "NHA" means the National Housing Act (Canada), as amended from
time to time, and the regulations promulgated thereunder; and
(f) The Purchase Agreement, the Registration Rights Agreement, the
Mortgage Loan Purchase Agreement, the Loan Agreement, the
Mortgage Loan Assignment Agreements, the Advisory Agreement,
the Servicing Agreement and the Assignment of Servicing
Agreements are sometimes collectively referred to herein as
the "Transaction Agreements".
In connection with the opinions expressed in this opinion letter we have
examined such questions of law and such public and corporate records,
certificates and other documents and conducted such other examinations as we
have considered necessary. In such examinations we have assumed the legal
capacity of all individuals, the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity to authentic
original documents of all documents submitted to us as certified, conformed,
photostatic or facsimile copies.
In addition, we have not undertaken any due diligence with respect to (i) the
Initial Mortgage Loans and, in particular, as to the title of the Bank, any
restriction or requirement or the need for consents or notice with respect to
the Initial Mortgage Loans, which may affect the validity of any purported
transfer or assignment of the Initial Mortgage Loans and (ii) the qualification
of the Bank as an approved lender under the NHA, relying exclusively with
respect thereto on the Officers' Certificate and the opinion of Desjardins
Ducharme Stein Monast of even date herewith.
We are solicitors qualified to carry on the practice of law in the Province of
Ontario and, except to the extent that we rely upon opinions of other counsel as
herein set forth, we express no opinion as to any laws, or any matters governed
by any laws, other than the laws of the Province of Ontario and the federal laws
of Canada applicable therein.
On the basis of the foregoing and subject to the qualifications hereinafter
expressed, we are of the opinion that:
1. The Bank has been duly organized and is validly existing as a Canadian
chartered bank under the Bank Act (Canada) (the "Bank Act"), with full
power (corporate and other) and authority to own, lease and operate its
properties and to conduct its business as described
<PAGE>
- 4 -
in the Offering Memorandum, and to enter into and perform its
obligations under each of the Transaction Agreements to which it is a
party.
2. All of the outstanding shares of capital stock of the Bank have been
duly authorized and validly issued and are fully paid and
non-assessable.
3. Each of the Transaction Agreements to which the Bank is a party has
been duly authorized, executed and delivered by the Bank.
4. The Bank Preferred Shares have been duly authorized by the Bank and, if
and when executed and delivered by the Bank pursuant to the terms and
conditions set forth in the Bank Resolutions, the Bank Preferred Shares
will be duly issued, fully paid and non-assessable.
5. No Government Approval is required for the issuance and sale of the
Series A Preferred Shares by the Company or the Bank Preferred Shares
by the Bank except such that have been obtained and made.
6. No Government Approval is required in connection with the performance
by the Bank of its respective obligations under the Transaction
Agreements to which it is a party, or the consummation of the
transactions contemplated thereby, except such as have been obtained
and made.
7. (a) Provided there has been fulfilment of the procedural
requirements under the laws of the Province of Ontario and
there has been registration of the interest of NB Finance in
the Initial Mortgage Loans against the real properties
securing such Initial Mortgage Loans (by power of attorney
granted or otherwise in the Province of Ontario), NB Finance
may enforce its rights as if it were the original mortgagee
under such Initial Mortgage Loans, pursuant to the Mortgage
Loan Purchase Agreement.
(b) The choice of Quebec law as the governing law of the Mortgage
Loan Purchase Agreement will be upheld as a valid choice of
law by the courts of the Province of Ontario provided that
such choice of law is bona fide (in the sense that it was not
made with a view to avoiding the consequences of the law of
any other jurisdiction) and is not contrary to public policy
as this term is understood under the laws of the Province of
Ontario. In the event that such agreement is sought to be
enforced in the Province of Ontario, in accordance with the
laws of Quebec, the courts of competent jurisdiction of the
Province of Ontario would, subject to subparagraph (a) above,
recognize the choice of law and apply the laws of Quebec, upon
proof of those laws, except to the extent that the provisions
of such agreement or of the laws of Quebec are contrary to
public policy as that term is
<PAGE>
- 5 -
understood under Ontario laws, those laws are foreign revenue,
expropriatory or penal laws, or those laws deal with matters
which an Ontario court would consider procedural in nature.
(c) A final and conclusive civil judgment for a sum certain
obtained in a court of competent jurisdiction of Quebec
against the Bank in connection with any action arising out of
or relating to such agreement which judgment is not
impeachable as void or voidable under the laws of Quebec would
be recognized and could be sued upon in a court in the
Province of Ontario and such court would grant a judgment
which would be enforceable against the Bank in the Province of
Ontario provided that:
(i) the court of competent jurisdiction of Quebec has
jurisdiction over the Bank as recognized by the
courts of the Province of Ontario;
(ii) such judgment was not obtained by fraud or in any
manner contrary to natural justice and the
enforcement thereof would not be inconsistent with
public policy as such term is understood under the
laws of the Province of Ontario and the laws of
Canada applicable therein;
(iii) enforcement of such judgment does not constitute,
directly or indirectly, the enforcement of foreign
revenue, expropriatory or penal laws; and
(iv) there has been compliance with the Limitations Act
(Ontario).
(d) Provided there has been fulfilment of the procedural
requirements under the laws of the Province of Ontario and
there has been registration of the interest of the Company in
the Initial Mortgage Loans against the real properties
securing such Initial Mortgage Loans (by power of attorney
granted or otherwise in the Province of Ontario), the Company
may enforce its rights as if it were the original mortgagee
under such Initial Mortgage Loans, pursuant to the Mortgage
Loan Assignment Agreements.
(e) The choice of Bermuda law as the governing law of the Mortgage
Loan Assignment Agreements will be upheld as a valid choice of
law by the courts of the Province of Ontario provided that
such choice of law is bona fide (in the sense that it was not
made with a view to avoiding the consequences of the law of
any other jurisdiction) and is not contrary to public policy
as this term is understood under the laws of the Province of
Ontario. In the event that the such agreement is sought to be
enforced in the Province of Ontario, in accordance with the
laws of Bermuda, the courts of competent jurisdiction of the
Province of Ontario would, subject to subparagraph (d) above,
recognize the choice of law
<PAGE>
- 6 -
and apply the laws of Bermuda, upon proof of those laws,
except to the extent that the provisions of such agreement or
of the laws of Bermuda are contrary to public policy as that
term is understood under Ontario laws, those laws are foreign
revenue, expropriatory or penal laws, or those laws deal with
matters which an Ontario court would consider procedural in
nature.
(f) A final and conclusive civil judgment for a sum certain
obtained in a court of competent jurisdiction of Bermuda
against NB Finance in connection with any action arising out
of or relating to such agreement which judgment is not
impeachable as void or voidable under the laws of Bermuda
would be recognized and could be sued upon in a court in the
Province of Ontario and such court would grant a judgment
which would be enforceable against NB Finance in the Province
of Ontario provided that:
(i) the court of competent jurisdiction of Bermuda has
jurisdiction over NB Finance as recognized by the
courts of the Province of Ontario;
(ii) such judgment was not obtained by fraud or in any
manner contrary to natural justice and the
enforcement thereof would not be inconsistent with
public policy as such term is understood under the
laws of the Province of Ontario and the laws of
Canada applicable therein;
(iii) enforcement of such judgment does not constitute,
directly or indirectly, the enforcement of foreign
revenue, expropriatory or penal laws; and
(iv) there has been compliance with the Limitations Act
(Ontario).
8.
(a) In the event that:
(i) a liquidator of the Bank is appointed under the
Winding Up and Restructuring Act (Canada) (the "W-U
Act"), or
(ii) Canada Deposit Insurance Company ("CDIC") is
appointed the receiver of the Bank or assumes control
of the assets or shares and subordinated debt of the
Bank under an order made under the Canada Deposit
Insurance Act (the "CDIC Act"), or
<PAGE>
- 7 -
(iii) the Superintendent of Financial Institutions (the
"Superintendent") assumes control and management of
the Bank under the Bank Act,
the registration of its interest against any of the Initial
Mortgage Loans by NB Finance or the Company would not
constitute a preference under the W-U Act, the Bank Act, the
CDIC Act or under any Ontario law. The registration of such
interest by NB Finance or the Company against such mortgage
subsequent to the appointment of a liquidator, CDIC or the
Superintendent would be permitted.
(b) If a liquidator of any mortgagor of any of the Initial
Mortgage Loans under the W-U Act, or any such mortgagor is
declared a bankrupt or files a notice of intention or proposal
under the Bankruptcy and Insolvency Act (Canada) (the "BIA")
or proceedings are commenced by or against a mortgagor under
the Company Creditors Arrangement Act (the "CCAA"), the
registration of the interest of NB Finance or the Company
against any of such mortgages would not constitute a
preference under the W-U Act, the BIA, the CCAA or any other
Ontario law.
In addition, we have participated in conferences with officers and
representatives of the Bank, representatives of independent accountants of the
Bank and representatives of the Initial Purchaser at which the contents of the
Offering Memorandum and related matters were discussed and, although we are not
passing upon or assuming responsibility for the accuracy, completeness or
fairness of the statements contained or incorporated by reference in the
Offering Memorandum, on the basis of the foregoing, nothing has come to our
attention that would lead us to believe that the Offering Memorandum (except for
financial statements and schedules and other financial data included or
incorporated by reference therein or omitted therefrom, as to which we make no
statement), as of its date or on the date hereof, includes an untrue statement
of a material fact or omitted or omits to state a material fact necessary in
order to make the statements, in light of the circumstances in which they were
made, not misleading.
The foregoing opinions are subject to the following qualifications:
(a) The opinions set forth at paragraphs 7 and 8 hereof are
subject to the following qualification:
(i) Until a mortgagor has been given written notice of
any assignment of any Initial Mortgage Loans secured
by real property in the Province of Ontario (an
"Ontario Mortgage"), such mortgagor may continue to
pay the Bank in respect of such Ontario Mortgage;
<PAGE>
- 8 -
(ii) To the extent that the interest of the Company and NB
Finance in the Ontario Mortgages constitutes
interests in real property, such interests will be
subject to interests in the Ontario Mortgages
acquired by any persons who register their interests
in the applicable land registry or land titles
offices before the Company and NB Finance register
their respective interests in such offices;
(iii) Enforcement proceedings with respect to any of the
Ontario Mortgages forming part of the Initial
Mortgage Loans must be commenced in Ontario and then
only in accordance with the rules and procedural
formalities in effect in Ontario at that time;
(iv) Canada Mortgage Housing Corporation ("CMHC")
insurance will cease to be in force if any Initial
Mortgage Loan is sold to a person other than a lender
approved by CMHC unless such Initial Mortgage Loan
continues to be administered by CMHC or a lender
approved by CMHC; and
(v) We express no opinion as to the title of the Bank,
the Company and NB Finance to any property nor as to
the rank or priority of any security interest,
mortgage, charge or assignment constituted by any of
the Transaction Documents.
(b) In expressing the opinions set forth in paragraph 1 and 2 with
respect to the Bank, the opinions set forth in paragraphs 4, 5
and 6, insofar as they relate to matters governed by the laws
of the Province of Quebec and the federal laws of Canada
applicable therein, and the opinions set forth in paragraphs 3
and 4 with respect to certain matters pertaining to due
authorization, execution and delivery of agreements and
instruments by the Bank and the due issuance of the Series A
Preferred Shares, we have relied, with your consent, solely on
the opinion of Desjardins Ducharme Stein Monast, dated the
date of this opinion letter and addressed to you.
(c) In expressing the opinions set forth in paragraphs 5 and 6, we
are not expressing any opinion as to the laws of any Provinces
(or the Federal laws applicable in such Provinces) other than
with respect to the Province of Quebec.
(d) In relying on the opinions of Desjardins Ducharme Stein Monast
and of counsel in each relevant jurisdiction dated the date
hereof and addressed to us and to Desjardins Ducharme Stein
Monast, our opinions are limited in scope to the matters upon
which such counsel have opined and are subject to the
assumptions, qualifications, restrictions and conditions
contained in the opinions of such
<PAGE>
- 9 -
counsel, and such assumptions, qualifications, restrictions
and conditions are incorporated herein by reference.
Except as set forth below, this opinion is given solely for the benefit of the
addressees and may not be relied upon, shown or distributed in whole or in part
to any other person, by any other person. Notwithstanding the foregoing,
Skadden, Arps, Slate, Meagher & Flom LLP and Shearman & Sterling may rely on
paragraphs 7 and 8 of this opinion letter as if it was addressed to them.
Yours very truly,
Osler, Hoskin & Harcourt
SS/RL/RC/JL/FT
Servicing Agreement
-- between --
National Bank of Canada
-- and --
NB Capital Corporation
========================================
September 3, 1997
========================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<C> <C>
1. DEFINITIONS............................................................................................ 2
1.1 Definitions.................................................................................. 2
2. SERVICING.............................................................................................. 6
2.1 Duties of Servicer........................................................................... 6
2.2 Liquidation of Mortgage Loans................................................................ 7
2.3 Collection of Mortgage Loan Payments......................................................... 9
2.4 Establishment of and Deposits to Custodial Account........................................... 9
2.5 Permitted Withdrawals from Custodial Account................................................. 10
2.6 Establishment of and Deposits to Escrow Account.............................................. 11
2.7 Permitted Withdrawals from Escrow Account.................................................... 11
2.8 Payment of Taxes, Insurance and Other Charges................................................ 12
2.9 Protection of Accounts....................................................................... 13
2.10 Maintenance of Hazard Insurance.............................................................. 13
2.11 Maintenance of Mortgage Impairment Insurance................................................. 14
2.12 Maintenance of Fidelity Bond................................................................. 14
2.13 Inspections.................................................................................. 15
2.14 Restoration of Mortgaged Property............................................................ 15
2.15 Title, Management and Disposition of REO Property............................................ 15
2.16 Permitted Withdrawals with respect to REO Property........................................... 17
2.17 Real Estate Owned Reports.................................................................... 17
3. PAYMENTS TO THE COMPANY................................................................................ 17
3.1 Remittances.................................................................................. 17
3.2 Statements to the Company.................................................................... 18
4. GENERAL SERVICING PROCEDURES........................................................................... 18
4.1 Transfers of Mortgaged Property.............................................................. 18
4.2 Satisfaction of Mortgages and Release of Mortgage Files...................................... 19
4.3 Servicing Compensation....................................................................... 19
4.4 Annual Statement as to Compliance............................................................ 20
4.5 Annual Independent Chartered Accountants Servicing Report.................................... 20
4.6 Right to Examine Servicer Records............................................................ 20
5. SERVICER TO COOPERATE.................................................................................. 20
5.1 Provision of Information..................................................................... 20
6. TERMINATION............................................................................................ 21
6.1 Agency Suspension............................................................................ 21
6.2 Damages...................................................................................... 21
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
6.3 Termination.................................................................................. 21
6.4 Termination without Cause.................................................................... 21
7. BOOKS AND RECORDS...................................................................................... 22
7.1 Possession of Servicing Files................................................................ 22
8. INDEMNIFICATION AND ASSIGNMENT......................................................................... 23
8.1 Indemnification.............................................................................. 23
8.2 Limitation on Liability of Servicer and Others............................................... 23
8.3 Limitation on Registration and Assignment by Servicer........................................ 23
8.4 Assignment by the Company.................................................................... 24
8.5 Merger or Consolidation of the Servicer...................................................... 24
8.6 Successor to the Servicer.................................................................... 25
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY............................................... 26
9.1 Due Organization and Authority............................................................... 26
9.2 No Conflicts................................................................................. 26
9.3 Ability to Perform........................................................................... 26
9.4 No Litigation Pending........................................................................ 27
9.5 No Consent Required.......................................................................... 27
10. REPRESENTATIONS AND WARRANTIES OF SERVICER............................................................. 27
10.1 Due Organization and Authority............................................................... 27
10.2 Ordinary Course of Business.................................................................. 28
10.3 No Conflicts................................................................................. 28
10.4 Ability to Service........................................................................... 28
10.5 Ability to Perform........................................................................... 28
10.6 No Litigation Pending........................................................................ 28
10.7 No Consent Required.......................................................................... 29
10.8 No Untrue Information........................................................................ 29
10.9 Reasonable Servicing Fee..................................................................... 29
10.10 Conflict of Interest......................................................................... 29
11. DEFAULT................................................................................................ 29
11.1 Events of Default............................................................................ 29
11.2 Waiver of Defaults........................................................................... 31
12. MISCELLANEOUS PROVISIONS............................................................................... 32
12.1 Notices...................................................................................... 32
12.2 Waivers...................................................................................... 32
12.3 Entire Agreement-- Amendment................................................................. 33
12.4 Execution-- Binding Effect................................................................... 33
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
12.5 Headings..................................................................................... 33
12.6 Governing Law................................................................................ 33
12.7 Relationship of Parties...................................................................... 34
12.8 Quebec Sales Tax and Goods and Services Tax.................................................. 34
12.9 Severability of Provisions................................................................... 34
12.10 Recordation of Assignments of Mortgage....................................................... 34
12.11 Exhibits..................................................................................... 34
12.12 English Language............................................................................. 35
</TABLE>
iv
<PAGE>
SERVICING AGREEMENT
Servicing Agreement (the "Servicing Agreement" or the "Agreement") entered into
as of September 3, 1997.
BETWEEN: NATIONAL BANK OF CANADA, a Canadian chartered bank;
(the "Servicer")
AND: NB CAPITAL CORPORATION, a Maryland Corporation;
(the "Company")
WHEREAS NB Finance, Ltd., a Bermuda Corporation (the "Purchaser"), and National
Bank of Canada, acting as seller (the "Seller"), entered into a deed of sale of
mortgage loans dated as of September 3, 1997 (the "Purchase Agreement") pursuant
to which the Purchaser agreed to purchase from the Seller certain Canada
Mortgage and Housing Corporation insured residential first mortgage loans as set
forth on Exhibit A (the "Mortgage Loans");
WHEREAS the Purchaser and the Company entered into an assignment agreement dated
as of September 3, 1997 (the "Mortgage Loan Assignment Agreement") pursuant to
which the Purchaser assigned all of its right, title and interest in, to and
under the Mortgage Loans to the Company;
WHEREAS the Company intends to qualify as a "real estate investment trust"
("REIT") under the Internal Revenue Code of 1986, as amended;
WHEREAS the Company desires to have the Servicer service and administer the
Mortgage Loans, the Servicer desires to service and administer the Mortgage
Loans on behalf of the Company, and the parties desire to set forth the terms
and conditions on which the Servicer will service and administer to the Mortgage
Loans.
NOW, THEREFORE, in consideration of the mutual agreements set forth herein and
for other good and valuable consideration, the receipt and the sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
<PAGE>
1. DEFINITIONS
-----------
1.1 Definitions
The following terms are defined as follows:
1.1.1 "Accepted Servicing Practices" means, with respect to any
Mortgage Loan, those mortgage servicing practices (i)
provided for in the CMHC Guide and in the NHA, (ii)
established by the Company, and (iii) subject to the terms
of this Agreement, those normal mortgage servicing practices
of prudent mortgage lending institutions which service
mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located
to the extent such normal mortgage servicing practices do
not conflict with the practices established by the CMHC
Guide, the NHA and the Company;
1.1.2 "Ancillary Income" means all late payment charges, penalties
and assumption fees, non-sufficient funds fees ("NSF"),
escrow account benefits, reinstatement fees and other
miscellaneous and similar types of fees arising from or in
connection with any Mortgage Loan to the extent not
otherwise payable to the Mortgagor under applicable law or
pursuant to the terms of any applicable loan documents
contained in the related Mortgage Loan File;
1.1.3 "CDIC" means The Canadian Deposit Insurance Corporation, or
any successor thereto;
1.1.4 "Closing Date" means September 3, 1997, or such other date
as is mutually agreed upon by the parties hereto;
1.1.5 "CMHC" means the Canada Mortgage and Housing Corporation;
1.1.6 "CMHC Guide" means the CMHC Mortgage Loan Insurance Handbook
and all amendments or additions thereto, a copy of which is
delivered to the Company concurrently with the execution
hereof;
1.1.7 "Condemnation Proceeds" means all awards or settlements in
respect of a Mortgaged Property, whether permanent or
temporary, partial or entire, by exercise of the power of
eminent domain, expropriation or condemnation, to the extent
not required to be released to a Mortgagor in accordance
with the terms of the related Mortgage Loan File;
1.1.8 "Custodial Account" means the separate account or accounts
created and maintained pursuant to Section 2.4;
2
<PAGE>
1.1.9 "Cutoff Date" means September 3, 1997;
1.1.10 "Determination Date" means one (1) Business Day prior to the
related Remittance Date;
1.1.11 "Due Period" means, with respect to each Remittance Date,
the calendar month preceding the Remittance Date;
1.1.12 "Escrow Account" means the separate account or accounts
created and maintained pursuant to Section 2.6;
1.1.13 "Escrow Payment" means, with respect to any Mortgage Loan,
the amounts constituting real estate tax payments and any
other payments required to be escrowed by the Mortgagor
under the applicable documents contained in the Mortgage
Loan File;
1.1.14 "Event of Default" means any one of the conditions or
circumstances enumerated in Section 11.1;
1.1.15 "Fidelity Bond" means a fidelity bond to be maintained by
the Servicer pursuant to Section 2.12;
1.1.16 "Insurance Proceeds" means, with respect to each Mortgage
Loan, proceeds of insurance policies insuring the Mortgage
Loan or the related Mortgaged Property;
1.1.17 "Liquidation Proceeds" means cash received in connection
with the liquidation of a defaulted Mortgage Loan, whether
through the sale of such Mortgage Loan, foreclosure sale or
otherwise, or the sale of the related Mortgaged Property if
the Mortgaged Property is acquired in satisfaction of the
Mortgage Loan;
1.1.18 "Monthly Remittance Advice" means the monthly remittance
advice to be provided to the Company pursuant to Section
3.2;
1.1.19 "Mortgage Impairment Insurance Policy" means a mortgage
impairment or blanket hazard insurance policy as described
in Section 2.11;
1.1.20 "Mortgage Loan File" means, collectively, all of the
agreements, deeds and proceedings evidencing the Mortgage
Loans and the Security, as well as any architectural and
engineering report, title report, survey, insurance policy
and other information and material with respect to the real
property securing the Mortgage Loans and, with respect to
each Mortgage Loan, all of the agreements, deeds and
proceedings evidencing such Mortgage Loan and the
2
<PAGE>
Security relating thereto as well as any architectural and
engineering report, title report, survey, insurance policy
and other information and material with respect to the real
property securing such Mortgage Loan;
1.1.21 "Mortgage Loans" has the meaning set forth in the recitals;
1.1.22 "Mortgage Property" means, with respect to each Mortgage
Loan, the real or immoveable property mortgaged, charged or
hypothecated pursuant to such Mortgage Loan, including all
fixtures attached thereto;
1.1.23 "Mortgagor" means the mortgagor or hypothecary debtor under
the Mortgage Loans;
1.1.24 "NHA" means the National Housing Act (Canada) as amended
from time to time, and the regulations promulgated
thereunder;
1.1.25 "Non-recoverable Advance" means any Servicing Advance
previously made or proposed to be made in respect of a
Mortgage Loan which, in the good faith judgement of the
Servicer, will not or, in the case of a proposed Servicing
Advance, would not, be ultimately recoverable from related
Insurance Proceeds, Liquidation Proceeds or otherwise. The
determination by the Servicer that it has made a
Non-recoverable Advance or that any proposed Servicing
Advance, if made, would constitute a Non-recoverable
Advance, shall be evidenced by an Officers' Certificate
delivered to the Company;
1.1.26 "Officer's Certificate" means a certificate signed by the
Vice-President, Verification of the Servicer, and delivered
to the Company as required by this Agreement;
1.1.27 "Principal Prepayment" means any payment or other recovery
of principal on a Mortgage Loan which is received in advance
of its scheduled maturity date, including any prepayment
penalty or premium thereon, and which is not accompanied by
an amount of interest representing scheduled interest due on
any date or dates in any month or months subsequent to the
month of prepayment;
1.1.28 "Purchase Agreement" has the meaning set forth in the
recitals;
1.1.29 "Qualified Depository" means a depository the accounts of
which are insured by the CDIC;
1.1.30 "Qualified Insurer" means an insurance company duly
qualified to carry on business as such under the laws of the
provinces in which the Mortgaged
4
<PAGE>
Properties are located, duly authorized and licensed in such
provinces to engage in the applicable insurance business and
to sell policies of insurance and provide the coverages set
forth in such policies provided, and approved by CMHC as an
insurer with respect to hazard insurance and flood
insurance;
1.1.31 "Remittance Date" means at the latest, on the 15th day (or
if such 15th day is not a Business Day, the first Business
Day immediately following) of any month, beginning with the
first Remittance Date on October 15, 1997;
1.1.32 "REO Property" means a Mortgaged Property acquired by the
Servicer on behalf of the Company through foreclosure or by
deed in lieu of foreclosure or by taking in payment, as
described in Section 2.15;
1.1.33 "Required Servicing Practices" means, with respect to any
Mortgage Loan, those mortgage servicing practices (i)
provided for in the CMHC Guide and in the NHA and (ii) where
not inconsistent with the CMHC Guide and the NHA,
established in writing by the Company;
1.1.34 "Security" means collectively the moveable and immoveable
security securing the Mortgage Loans and set forth in the
Mortgage Loan File, including, without limitation, any
moveable and immoveable hypothecs, mortgages and similar
instruments securing the Mortgage Loans;
1.1.35 "Servicer Employees" has the meaning set forth in Section
2.12;
1.1.36 "Servicing Advances" means all customary, reasonable and
necessary "out of pocket" costs and expenses (including
reasonable attorneys' fees and disbursements) incurred in
the performance by the Servicer of its servicing
obligations, including, but not limited to, the cost of (a)
the preservation, restoration and protection of the
Mortgaged Property, (b) any enforcement or judicial
proceedings, including foreclosures or the exercise of the
hypothecary rights contemplated in the Civil Code of Quebec,
(c) the management and liquidation of the Mortgaged Property
if the Mortgaged Property is acquired in satisfaction of the
Mortgage Loan and (d) compliance with the obligations under
Section 2.8;
1.1.37 "Servicing Agreement" means this agreement between the
Company and the Servicer for the servicing and
administration of the Mortgage Loans;
1.1.38 "Servicing Fee" means the amount of the annual fee the
Company shall pay to the Servicer, which shall, for a period
of one (1) full month, be equal to the sum of (i)
one-twelfth of the product of the Servicing Fee Rate and the
aggregate outstanding balance of the Mortgage Loans as of
the last day of
5
<PAGE>
each calendar month, and (ii) any amounts not required to be
deposited in the Custodial Account pursuant to Section 2.4.
Such fee shall be payable quarterly and shall be [computed
on the basis of the same principal amount and period in
respect of which any related interest payment on a Mortgage
Loan is computed] and shall be pro rated for any portion of
a month during which the Mortgage Loan is serviced by the
Servicer under this Agreement; and
1.1.39 "Servicing Fee Rate" means, [with respect to each Mortgage
Loan], a rate of 0.25% per annum or such other rate to which
the parties may mutually agree.
2. SERVICING
---------
2.1 Duties of Servicer
From and after the Closing Date, the Servicer, as provider of services, shall
service and administer the Mortgage Loans in strict compliance with the
servicing provisions of the CMHC Guide and the NHA and shall, subject to such
serving provisions, do all things in connection with such servicing and
administration which are consistent with the terms of this Agreement and
Required Servicing Practices. In the event of any conflict, inconsistency or
discrepancy between any of the servicing provisions of this Agreement and any of
the servicing provisions of the CMHC Guide and/or of the NHA, the provisions of
the CMHC Guide and the NHA shall control and be binding upon the Servicer.
Consistent with the terms of this Agreement, but in strict compliance with the
CMHC Guide and the NHA, the Servicer shall, if so instructed in writing by the
Company, waive, modify or vary any term of any Mortgage Loan or consent to the
postponement of strict compliance with any such term or in any manner grant any
indulgence to any Mortgagor. For greater certainty, unless the Servicer has
obtained the consent of CMHC and the Company, the Servicer shall not permit any
modification with respect to any Mortgage Loan that would change the mortgage
interest rate, defer or forgive the payment of principal or interest, reduce or
increase the outstanding principal balance (except for actual payments of
principal) or change the final maturity date on such Mortgage Loan. Without
limiting the generality of the foregoing, the Servicer shall, in accordance with
Required Servicing Practices, execute and deliver all instruments of
satisfaction or cancellation, or of partial or full release, discharge and all
other comparable instruments, with respect to the Mortgage Loans and with
respect to the Mortgaged Properties.
In servicing and administering the Mortgage Loans, the Servicer shall employ
procedures (including collection procedures) consistent with the provisions of
this Agreement, in compliance with Required Servicing Practices and exercise the
same care that it customarily employs and exercises in servicing and
administering mortgage and hypothecary loans for its own account, giving due
consideration to Accepted Servicing Practices and the Company's reliance on the
Servicer.
6
<PAGE>
The Servicer shall keep at its servicing office books and records (including
electronic records) in which, subject to such reasonable regulations as it may
prescribe, the Servicer shall note sales and transfers of Mortgage Loans. No
sale or transfer of a Mortgage Loan may be made unless such transfer is approved
in writing by the Company, and is in compliance with the terms hereof and the
NHA. For the purposes of this Agreement, the Servicer shall be under no
obligation to deal with any person with respect to this Agreement or the
Mortgage Loans unless the Servicer has been notified of such transfers as
provided in this Section 2.1. The Company may sell and transfer, in whole or in
part, the Mortgage Loans, provided that no such sale and transfer shall be
binding upon the Servicer unless such transferee shall agree in writing to be
bound by the terms of this Agreement, and an executed copy of the same shall
have been delivered to the Servicer. Upon receipt thereof, the Servicer shall
mark its books and records to reflect the ownership of the Mortgage Loans by
such assignee, and the Company shall be released from its obligations hereunder.
The Servicer shall be required to remit all amounts required to be remitted to
the Company hereunder to said transferee, and said transferee shall succeed to
all rights of the Company hereunder, commencing with the first Remittance Date
falling after receipt of said copy of the related assignment and assumption
agreement provided that the Servicer receives said copy no later than fifteen
(15) Business Days immediately prior to the first day of the month of the
related Remittance Date.
Upon request by the Company, or as provided in Section 2.10, the Mortgage Loan
File retained by the Servicer pursuant to this Agreement shall be amended to
clearly record the sale of the related Mortgage Loan to the Company. The
Servicer shall release from its custody the contents of the Mortgage Loan File
retained by it only in accordance with this Agreement.
The Servicer covenants that it will, within 30 days of the date of this
Agreement, establish an internal quality control program that is capable of
evaluating and monitoring the overall quality of its servicing activities. The
program shall ensure that the Mortgage Loans are (i) serviced in accordance with
Accepted Servicing Practices and generally accepted accounting principles; (ii)
guard against dishonest, fraudulent or negligent acts; and (iii) guard against
errors and omissions by officers, employees or other authorized persons.
For greater certainty, the Company and the Servicer acknowledge that in acting
hereunder, the Servicer shall have only such authority to act on behalf of the
Company as is expressly conferred in this Agreement and more specifically, this
Agreement does not provide the Servicer with the authority to conclude or modify
contracts in the name of the Company and the Servicer shall not hold itself out
as having any such authority.
2.2 Liquidation of Mortgage Loans
In the event that any payment due under any Mortgage Loan and not postponed
pursuant to Section 2.1 is not paid when the same becomes due and payable, or in
the event the Mortgagor fails to perform any other covenant or obligation under
the Mortgage Loan File
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and such failure continues beyond any applicable grace period, the Servicer
shall take such administrative action as is consistent with Required Servicing
Practices.
In the event that any payment due under any Mortgage Loan is not postponed
pursuant to Section 2.1 and remains delinquent beyond the expiration of any
grace or cure period (or such other period as is required by law in the
jurisdiction where the related Mortgaged Property is located), the Servicer
shall commence foreclosure proceedings as directed by the Company in accordance
with Required Servicing Practices. The Servicer shall transmit to the Company
copies of the notices given to, and received from, CMHC with respect thereto. In
such connection, the Servicer shall from its own funds make all necessary and
proper Servicing Advances, provided, however, that the Servicer shall not be
required to expend its own funds in connection with any foreclosure or towards
the restoration or preservation of any Mortgaged Property, unless its shall
determine:
(a) that such preservation, restoration and/or foreclosure will increase
the proceeds of liquidation of the Mortgage Loan to Company after
reimbursement to itself for such expenses, and
(b) that such expenses will be recoverable by it either through Liquidation
Proceeds (in respect of which it shall have priority for purposes of
withdrawals from the Custodial Account pursuant to Section 2.5) or
through Insurance Proceeds (in respect of which it shall have similar
priority).
Notwithstanding anything to the contrary contained herein, in connection with a
foreclosure, in the event the Servicer has reasonable cause to believe that a
Mortgaged Property is contaminated by hazardous or toxic substances or wastes,
or if CMHC otherwise requests an environmental inspection or review of such
Mortgaged Property to be conducted by a qualified inspector, the Servicer shall
immediately notify the Company and, upon receipt of instructions from the
Company, the Servicer shall cause the Mortgaged Property to be so inspected at
the expense of the Company. Upon completion of the inspection, the Servicer
shall promptly provide the Company with a written report of the environmental
inspection.
After reviewing the environmental inspection report, the Company, subject to the
rights of CMHC under the NHA, shall determine how the Servicer shall proceed
with respect to the Mortgaged Property. In the event:
(a) the environmental inspection report indicates that the Mortgaged
Property is contaminated by hazardous or toxic substances or wastes,
and
(b) the Company and/or CMHC directs the Servicer, in writing, to proceed
with foreclosure or acceptance of a deed in lieu of foreclosure,
the Servicer shall be reimbursed for all reasonable costs associated with such
foreclosure or acceptance of a deed in lieu of foreclosure and any related
environmental clean up costs, as
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applicable, from the related Liquidation Proceeds, or if the Liquidation
Proceeds are insufficient to fully reimburse the Servicer, the Servicer shall be
entitled to be reimbursed from amounts in the Custodial Account pursuant to
Section 2.5 hereof and to the extent amounts in the Custodial Account are
insufficient to fully reimburse the Servicer, the Servicer shall be entitled to
be reimbursed by the Company for such deficiencies (upon presentation of
satisfactory evidence of such deficiency). In the event the Company and/or CMHC
directs the Servicer, in writing, not to proceed with foreclosure or acceptance
of a deed in lieu of foreclosure, the Servicer shall be reimbursed for all
Servicing Advances made with respect to the related Mortgaged Property from the
Custodial Account pursuant to Section 2.5 hereof.
2.3 Collection of Mortgage Loan Payments
Continuously from the Closing Date, the Servicer shall proceed diligently to
collect all payments due under each of the Mortgage Loans when the same shall
become due and payable and shall take special care in ascertaining and
estimating Escrow Payments and all other charges that will become due and
payable with respect to the Mortgage Loans and each related Mortgaged Property,
to the end that the installments payable by the Mortgagors will be sufficient to
pay such charges if and when they become due and payable.
2.4 Establishment of and Deposits to Custodial Account
The Servicer shall segregate and hold the hereinafter mentioned funds collected
and received pursuant to the Mortgage Loans separate and apart from any of its
own funds and general assets and shall establish and maintain one or more
Custodial Accounts, in the form of term deposit or demand accounts, titled
"National Bank of Canada in trust for NB Capital Corporation" (or similar
designation with respect to any subsequent Company). The Custodial Account shall
be established with a depository acceptable to the Company. If the Custodial
Account is held at a depository the deposit accounts of which are insured by
CDIC, any funds deposited in the Custodial Account shall at all times be insured
to the full extent permitted under applicable law. Funds deposited in the
Custodial Account may be drawn on by the Servicer in accordance with Section
2.5. The creation of any Custodial Account shall be evidenced by a certificate
in the form of Exhibit 2 hereto. A copy of such certificate shall be furnished
to the Company and, upon request, to any subsequent company.
The Servicer shall deposit in the Custodial Account and retain therein the
following collections received by the Servicer and payments made by the Servicer
after the Cut-off Date, other than payments of principal and interest due on or
before the Cut-off Date, or received by the Servicer prior to the Cut-off Date
but allocable to a period subsequent thereto:
2.4.1 all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
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2.4.2 all payments on account of interest on the Mortgage Loans;
2.4.3 all Liquidation Proceeds and any amount received with
respect to REO Property;
2.4.4 all Insurance Proceeds including amounts required to be
deposited pursuant to Section 2.10 (other than proceeds to
be held in the Escrow Account and applied to the restoration
or repair of the Mortgaged Property or released to the
Mortgagor in accordance with Section 2.14);
2.4.5 all Condemnation Proceeds which are not applied to the
restoration or repair of the Mortgaged Property or released
to the Mortgagor in accordance with Section 2.14; and
2.4.6 any amount required to be deposited in the Custodial Account
pursuant to Section 2.15 or 3.1.
The collections mentioned in Sections 2.4.1 and 2.4.2 shall be deposited in the
Custodial Account within one (1) Business Day of receipt by the Servicer. The
collections mentioned in Sections 2.4.3 to 2.4.6 inclusive shall be deposited
within thirty (30) Business Days of receipt.
2.5 Permitted Withdrawals from Custodial Account
Subject to Section 2.15 hereof, the Servicer shall, from time to time, withdraw
funds from the Custodial Account for the following purposes:
2.5.1 to make payments to the Company in the amounts and in the
manner provided for in Section 3.1;
2.5.2 to reimburse itself for unreimbursed Servicing Advances
(except to the extent reimbursed pursuant to Section 2.7),
any accrued but unpaid Servicing Fees and for unreimbursed
advances of Servicer funds made pursuant to Section 2.15,
the Servicer's right to reimburse itself pursuant to this
subparagraph with respect to any Mortgage Loan being limited
to related Liquidation Proceeds, Condemnation Proceeds,
Insurance Proceeds and such other amounts as may be
collected by the Servicer from the Mortgagor or otherwise
relating to the Mortgage Loan, it being understood that, in
the case of any such reimbursement, the Servicer's right
thereto shall be subordinate to the right of the Company;
2.5.3 to pay to the person entitled thereto any amounts deposited
in error; and
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2.5.4 to clear and terminate the Custodial Account upon the
termination of this Agreement.
On each Remittance Date, the Servicer shall withdraw all funds from the
Custodial Account except for those amounts which, pursuant to Section 3.1, the
Servicer is not obligated to remit on such Remittance Date. The Servicer may use
such withdrawn funds only for the purposes described in this Section 2.5.
2.6 Establishment of and Deposits to Escrow Account
The Servicer shall segregate and hold all funds collected and received pursuant
to a Mortgage Loan constituting Escrow Payments separate and apart from any of
its own funds and general assets and shall establish and maintain one or more
Escrow Accounts, in the form of term deposit or demand accounts. The Escrow
Account or Accounts shall be established with a Qualified Depository. If the
Escrow Account is held at a Qualified Depository the deposit accounts of which
are insured by CDIC, any funds deposited in the Escrow Account shall at all
times be insured to the full extent permitted under applicable law. Funds
deposited in the Escrow Accounts may be drawn on by the Servicer in accordance
with Section 2.7. The creation of any Escrow Account shall be evidenced by a
certification in the form of Exhibit 4 hereto. A copy of such certificate shall
be furnished to the Company and, upon request, to any subsequent Company.
The Servicer shall deposit in the Escrow Account or Accounts within one Business
Day of receipt, and retain therein all Escrow Payments collected on account of
the Mortgage Loans, for the purpose of effecting timely payment of any such
items as required under the terms of this Agreement. The Servicer shall deposit
in the Escrow Account or Accounts as soon as possible, but within a maximum of
five (5) Business Days of receipt, all amounts representing Insurance Proceeds
or Condemnation Proceeds which are to be applied to the restoration or repair of
any Mortgaged Property.
The Servicer shall make withdrawals from the Escrow Account only to effect such
payments as are required under this Agreement, as set forth in Section 2.7. The
Servicer shall be entitled to retain any interest paid on, or other income
generated by and paid on, funds deposited in the Escrow Account by the
depository institution, other than interest on escrowed funds required by law of
the Mortgage Loan File to be paid to the Mortgagor. To the extent required by
law, the Servicer shall pay from its own funds interest on escrowed funds to the
Mortgagor notwithstanding that the Escrow Account may be non-interest bearing or
that interest paid thereon is insufficient for such purposes.
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2.7 Permitted Withdrawals from Escrow Account
Withdrawals from each Escrow Account may be made by the Servicer only:
2.7.1 to effect timely payments of taxes, assessments, mortgage
insurance premiums, condominium charges or other items
constituting Escrow Payments for the related Mortgage Loan;
2.7.2 to reimburse the Servicer for any Servicing Advance made by
the Servicer pursuant to Section 2.8 with respect to a
related Mortgage Loan, but only from amounts received on the
related Mortgage Loan which represent late payments or
collections of Escrow Payments thereunder;
2.7.3 to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the
related Mortgage Loan or applicable federal or provincial
law or judicial or administrative ruling;
2.7.4 for transfer to the Custodial Account and application to
reduce the principal balance of the Mortgage Loan in
accordance with the terms of the related Mortgage Loan File;
2.7.5 for application to restoration or repair of the related
Mortgaged Property in accordance with the procedures
outlined in Section 2.14;
2.7.6 to pay to the Servicer, or any Mortgagor to the extent
required by law, any interest paid on the funds deposited in
the Escrow Account;
2.7.7 to pay to the person entitled thereto any amounts deposited
in error; and
2.7.8 to clear and terminate the Escrow Account on the termination
of this Agreement.
2.8 Payment of Taxes, Insurance and Other Charges
With respect to each Mortgage Loan, the Servicer shall maintain accurate records
reflecting the status of ground rents, taxes, assessments, water rates, sewer
rents, and other charges, as applicable, which are or may become a lien, legal
hypothec or priority upon the Mortgaged Property and fire and hazard insurance
coverage and shall obtain, from time to time, all bills for the payment of such
charges (including renewal premiums) and shall effect payment thereof prior to
the applicable penalty or termination date, employing for such purpose deposits
of the Mortgagor in the Escrow Account which shall have been estimated and
accumulated by the Servicer in amounts sufficient for such purposes, as allowed
under the terms of the Mortgage Loan File. To the extent that a Mortgage Loan
does not provide for Escrow Payments, the Servicer shall determine that any such
payments relating to taxes or
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maintaining insurance policies are made by the Mortgagor at the time they first
become due. The Servicer assumes full responsibility for the timely payment of
all such bills to the extent it has or should have notice of such bills and
shall effect timely payment of all such charges irrespective of each Mortgagor's
faithful performance in the payment of same or the making of the Escrow
Payments, and the Servicer shall make advances from its own funds to effect such
payments, such advances to be reimbursable to the same extent as Servicing
Advances.
2.9 Protection of Accounts
The Servicer may transfer the Custodial Account or the Escrow Account to a
different depository from time to time. Such transfer shall be made only upon
obtaining the written consent of the Company. The Servicer shall bear any
expenses, losses or damages sustained by the Company because the Custodial
Account and/or the Escrow Account are not demand deposit accounts.
2.10 Maintenance of Hazard Insurance
The Servicer shall cause to be maintained for each Mortgage Loan hazard
insurance such that all buildings upon the Mortgaged Property are insured
against loss by fire, hazards of extended coverage and such other hazards as are
required to be insured pursuant to Required Servicing Practices.
If at any time during the term of the Mortgage Loan, the Servicer determines in
accordance with applicable law and pursuant to the CMHC Guide that a Mortgaged
Property is located in a special flood hazard area and is not covered by flood
insurance satisfactory to CMHC, the Servicer shall notify the related Mortgagor
(to the extent permitted by the applicable Mortgage Loan File) that the
Mortgagor must obtain such flood insurance coverage, and if said Mortgagor fails
to obtain the required flood insurance coverage within forty-five (45) days
after such notification, the Servicer shall immediately purchase the required
flood insurance on the Mortgagor's behalf.
The Servicer shall cause to be maintained on each Mortgaged Property such other
or additional insurance as may be required pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of CMHC Guide. All
policies required hereunder shall name the Servicer and its successors and
assigns as mortgagee and shall provide for at least thirty (30) days' prior
written notice of any cancellation, reduction in amount or material change in
coverage.
The Servicer shall not interfere with the Mortgagor's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Servicer shall not accept any such insurance policies from insurance companies
which do not meet or exceed applicable requirements of the CMHC Guide. The
Servicer shall determine that such policies provide sufficient risk coverage and
amounts as required pursuant to the CMHC Guide, that they insure the property
owner, and that they properly describe the property address. To the
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extent reasonably possible the Servicer shall furnish to the Mortgagor a formal
notice of expiration of any such insurance in sufficient time for the Mortgagor
to arrange for renewal coverage by the expiration date; provided, however, that
in the event that no such notice is furnished by the Servicer, the Servicer
shall ensure that replacement insurance policies are in place in the required
coverages and the Servicer shall be solely liable for any losses in the event
such coverage is not provided.
Pursuant to Section 2.4, any amounts collected by the Servicer under any such
policies (other than amounts to be deposited in the Escrow Account and applied
to the restoration or repair of the related Mortgaged Property, or property
acquired in liquidation of the Mortgage Loan, or to be released to the Mortgagor
as specified in Section 2.14) shall be deposited in the Custodial Account
subject to withdrawal pursuant to Section 2.5.
2.11 Maintenance of Mortgage Impairment Insurance
In the event that the Servicer shall obtain and maintain a blanket policy
insuring against losses arising from fire and hazards covered under extended
coverage on all of the Mortgage Loans, then, to the extent such policy provides
coverage in an amount equal to the amount required pursuant to Section 2.10 and
otherwise complies with all other requirements of Section 2.10, it shall
conclusively be deemed to have satisfied its obligations as set forth in Section
2.10. Any amounts collected by the Servicer under any such policy relating to a
Mortgage Loan shall be deposited in the Custodial Account subject to withdrawal
pursuant to Section 2.5. Such policy may contain a deductible clause, in which
case, in the event that there shall not have been maintained on the related
Mortgaged Property a policy complying with Section 2.10, and there shall have
been a loss which would have been covered by such policy, the Servicer shall
deposit in the Custodial Account at the time of such loss the amount not
otherwise payable under the blanket policy because of such deductible clause,
such amount to be deposited from the Servicer's funds, without reimbursement
therefor. Upon request of the Company, the Servicer shall cause to be delivered
to the Company a certified true copy of such policy and a statement from the
insurer thereunder that such policy shall in no event be terminated or
materially modified without thirty (30) days' prior written notice to the
Company.
2.12 Maintenance of Fidelity Bond
The Servicer shall maintain with responsible companies, at its own expense, a
blanket Fidelity Bond, with broad coverage on all officers, employees or other
persons acting in any capacity requiring such persons to handle funds, money,
documents or papers relating to the Mortgage Loans ("Servicer Employees"). Any
such Fidelity Bond and Errors and Omissions Insurance Policy shall be in the
form of the Mortgage Banker's Blanket Bond and shall protect and insure the
Servicer against losses, including forgery, theft, embezzlement, fraud, errors
and omissions and negligent acts of such Servicer Employees. Such Fidelity Bond
also shall protect and insure the Servicer against losses in connection with the
release or satisfaction of a Mortgage Loan without having obtained payment in
full of the
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indebtedness secured thereby. No provision of this Section 2.12 requiring such
Fidelity Bond shall diminish or relieve the Servicer from its duties and
obligations as set forth in this Agreement. The minimum coverage under any such
Fidelity Bond shall be at least equal to the corresponding amounts required by
Accepted Servicing Practices. Upon the request of the Company, the Servicer
shall cause to be delivered to the Company a certified true copy of such
Fidelity Bond and a statement from the surety that such Fidelity Bond shall in
no event be terminated or materially modified without thirty (30) days' prior
written notice to the Company. In the event that the surety charges the Servicer
a fee for providing such evidence, the Company shall reimburse the Servicer for
the reasonable expense incurred by the Servicer in furnishing such evidence.
2.13 Inspections
The Servicer shall inspect the Mortgaged Property as often as deemed necessary
by the Servicer to assure itself that the value of the Mortgaged Property is
being preserved, the whole in accordance with Accepted Servicing Practices. The
Servicer shall keep a written report of each such inspection.
2.14 Restoration of Mortgaged Property
The Servicer need not obtain the approval of the Company prior to releasing any
Insurance Proceeds or Condemnation Proceeds to the Mortgagor to be applied to
the restoration or repair of the Mortgaged Property if such release is in
accordance with the applicable Mortgage Loan File. The Servicer shall comply
with the CMHC Guide and the NHA and, to the extent they do not contravene the
CMHC Guide and NHA, with the following conditions in connection with any such
release of Insurance Proceeds or Condemnation Proceeds:
2.14.1 the Servicer shall receive satisfactory independent
verification of completion of repairs and issuance of any
required approvals with respect thereto;
2.14.2 the Servicer shall take all steps necessary to preserve the
priority of the lien securing the Mortgage Loan, including,
but not limited to, requiring waivers or releases with
respect to mechanics' and materialmen's liens or legal
hypothecs in favour of the persons having taken part in the
renovation of the Mortgaged Property;
2.14.3 the Servicer shall verify that the Mortgage Loan is not in
default; and
2.14.4 pending repairs or restoration, the Servicer shall place the
Insurance Proceeds or Condemnation Proceeds in the Escrow
Account.
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If the Company is named as an additional mortgagee, the Servicer shall, in
accordance with CMHC Guide and the NHA, endorse any loss draft issued in respect
of such a claim in the name of the Company.
2.15 Title, Management and Disposition of REO Property
In the event that title to any Mortgaged Property is acquired in foreclosure or
by deed in lieu of foreclosure, the deed or certificate of sale shall be taken
in the name of the Company.
The Servicer shall manage, conserve, protect and operate each REO Property for
the Company solely for the purpose of its prompt disposition and sale (unless
otherwise directed in writing by the Company). The Servicer, either itself or
through an agent selected by the Servicer and reasonably acceptable to the
Company and CMHC, shall manage, conserve, protect and operate the REO Property
in accordance with Required Servicing Practices and to the extent it does not
contravene the Accepted Servicing Practices, in the same manner that it manages,
conserves, protects and operates other foreclosed property for its own account,
and in the same manner that similar property in the same locality as the REO
Property is managed.
The Servicer shall use its best efforts to dispose of the REO Property as soon
as possible and shall sell such REO Property in any event within one year after
title has been taken to such REO Property (unless otherwise directed by CMHC or
otherwise directed in writing by the Company). If a period longer than one (1)
year is permitted under the foregoing sentence and is necessary to sell any REO
Property, the Servicer shall report monthly to the Company as to the progress
being made in selling such REO Property.
The Servicer shall also maintain on each REO Property fire and hazard insurance
with extended coverage in an amount which is at least equal to the maximum
insurable value of the improvements which are a part of such property, liability
insurance and, to the extent required and available, flood insurance in the
amount required above.
The disposition of REO Property shall be carried out by the Servicer at such
price, and upon such terms and conditions, as the Servicer deems appropriate
(subject to approval by CMHC and the Company). The proceeds of sale of the REO
Property shall be promptly deposited in the Custodial Account. As soon as
practical thereafter the expenses of such sale shall be paid and the Servicer
shall reimburse itself pursuant to Section 2.5.3 hereof, as applicable, for any
related unreimbursed Servicing Advances, unpaid Servicing Fees and unreimbursed
advances made pursuant to this Section, and on the Remittance Date immediately
following the Due Period in which such sale proceeds are received the net cash
proceeds of such sale remaining in the Custodial Account shall be distributed to
the Company; provided that such distribution shall, in any event, be made within
ninety (90) days from and after the closing of the sale of such REO Property.
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In addition to the Servicer's obligations set forth in this Section 2.15, the
Servicer shall deliver to the Company, upon request, whenever title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure
copies of all notices transmitted to, and received from, CMHC with respect
thereto, together with a copy of the appraisal, if any, of the related Mortgaged
Property obtained by the Servicer on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Company may, at
the Company's sole option, terminate the Servicer as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Company gives the Servicer notice of such termination within ten
(10) Business Days of receipt of said copies of notices from the Servicer which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the Company and (ii) the Servicer shall on
the date said termination takes effect be reimbursed by the Company for any
unreimbursed advances of the Servicer's funds made pursuant to Section 3.2 and
any unreimbursed Servicing Advances in each case relating to the Mortgage Loan
underlying such REO Property. In the event of any such termination, the
provisions of Section 8.6 hereof shall apply to said termination and the
transfer of servicing responsibilities with respect to such REO Property to the
Company.
With respect to each REO Property, the Servicer shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Servicer shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
2.16 Permitted Withdrawals with respect to REO Property
For so long as the Servicer is acting as servicer of any Mortgage Loan relating
to any REO Property, the Servicer shall withdraw funds on deposit in the
Custodial Account with respect to each related REO Property necessary for the
proper operation, management and maintenance of the REO Property, including the
cost of maintaining any hazard insurance pursuant to Section 2.10 and the fees
of any managing agent acting on behalf of the Servicer. The Servicer shall make
monthly distributions on each Remittance Date to the Company of the net cash
flow from the REO Property (which shall equal the revenues from such REO
Property net of the expenses described in Section 2.15 and of any reserves
reasonably required from time to time to be maintained to satisfy anticipated
liabilities for such expenses).
2.17 Real Estate Owned Reports
For so long as the Servicer is acting as servicer of any Mortgage Loan relating
to any REO Property, the Servicer shall submit to the Company all reports with
respect to such Mortgaged Property which it is obligated to submit to the CMHC
pursuant to Required Servicing Practices.
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3. PAYMENTS TO THE COMPANY
3.1 Remittances
On each Remittance Date, the Servicer shall remit by wire transfer of
immediately available funds to the Company:
(a) all amounts deposited in the Custodial Account as of the close of
business on the Determination Date, minus
(b) any amounts payable to the Servicer under Article 2 of this Agreement.
With respect to any remittance received by the Company after the fifth day
following the Business Day on which such payment was due, the Servicer shall pay
to the Company a "late charge" in an amount equal to 5% of such late payment.
Such late charge shall be deposited in the Custodial Account by the Servicer on
the date such late payment is made for each day/week which such payment remains
outstanding. Such late charge shall be remitted along with the distribution
payable on the next succeeding Remittance Date. The payment by the Servicer of
any such late charge shall not be deemed an extension of time for payment or a
waiver of any Event of Default by the Servicer.
3.2 Statements to the Company
Not later than the fifteenth day of each month, the Servicer shall furnish to
the Company in a mutually acceptable format the reports required by the Company,
together with a Monthly Remittance Advice showing the scheduled payments of
principal and interest, the principal prepayments and the prepayment penalties.
In addition, the Servicer shall furnish to the Company an annual statement in
accordance with the requirements of applicable income tax laws as to the
aggregate of remittances for the applicable portion of such year. Such
obligation of the Servicer shall be deemed to have been satisfied to the extent
that substantially comparable information shall be provided by the Servicer
pursuant to any requirements of the governmental taxing authority as from time
to time are in force.
The Servicer shall prepare and file, with respect to each Mortgage Loan, any and
all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Company pursuant to any
applicable law with respect to the Mortgage Loans and the transactions
contemplated hereby. In addition, the Servicer shall provide the Company with
such information concerning the Mortgage Loans as is necessary for the Company
to prepare any applicable income tax returns as the Company may reasonably
request from time to time.
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4. GENERAL SERVICING PROCEDURES
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4.1 Transfers of Mortgaged Property
The Servicer shall be required, consistent with Required Servicing Practices, to
enforce on behalf of the Company any "due-on-sale" provision contained in any
Mortgage Loan File and to deny assumption by the person to whom the Mortgaged
Property has been or is about to be sold whether by absolute conveyance or by
contract of sale, whether or not the Mortgagor remains liable on the Mortgage
Loan. When the Mortgaged Property has been conveyed by the Mortgagor, the
Servicer shall, to the extent it has knowledge of such conveyance, exercise its
rights on behalf of the Company to accelerate the maturity of such Mortgage Loan
under the "due-on-sale" clause applicable thereto, provided, however, that the
Servicer shall not exercise such rights if the Servicer determines in good faith
that it is prohibited by law from doing so or if, subject to written
confirmation of the Company, the exercise of such rights would impair or
threaten to impair any recovery under the related CMHC insurance policy issued
with respect to such Mortgage Loan, if any.
If the Servicer reasonably believes it is unable under applicable law to enforce
"due-on-sale" clause, the Servicer, in the Company's name and with the prior
written consent of the Company, shall, to the extent permitted by applicable
law, enter into (i) an assumption and modification agreement with the person to
whom such property has been conveyed, pursuant to which such person becomes
liable under the Mortgage Loan and the original Mortgagor remains liable thereon
or (ii) in the event the Servicer is unable under applicable law to require that
the original Mortgagor remain liable under the Mortgage Note and the Servicer
has the prior consent of the CMHC and the Company, a substitution of liability
agreement with the purchaser of the Mortgaged Property pursuant to which the
original Mortgagor is released from liability and the purchaser of the Mortgaged
Property is substituted as Mortgagor and becomes liable under the Mortgage Loan.
In connection with any such assumption, neither the mortgage interest rate borne
by the related Mortgage Loan, the term of the Mortgage Loan nor the outstanding
principal amount of the Mortgage Loan shall be changed.
To the extent that any Mortgage Loan is assumable, the Servicer shall inquire
diligently into the creditworthiness of the proposed transferee, and shall use
the underwriting criteria for approving the credit of the proposed transferee
which are used by CMHC with respect to underwriting mortgage loans of the same
type as the Mortgage Loans. If the credit of the proposed transferee does not
meet such underwriting criteria, the Servicer diligently shall, to the extent
permitted by the Mortgage Loan File and by applicable law (and unless otherwise
directed by the Company), accelerate the maturity of the Mortgage Loan.
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4.2 Satisfaction of Mortgages and Release of Mortgage Files
Upon the payment in full of any Mortgage Loan, or the receipt by the Servicer of
a notification that payment in full will be escrowed in a manner customary for
such purposes, the Servicer shall notify the Company in the Monthly Remittance
Advice as provided in Section 3.2 and may request the release of any Mortgage
Loan File from the Company in accordance with this Section 4.2 hereof. The
Servicer shall obtain discharge of the related Mortgage Loan as of record within
any related time limit required by applicable law.
4.3 Servicing Compensation
As consideration for servicing the Mortgage Loans hereunder, the Servicer shall
deduct the Servicing Fee with respect to each Mortgage Loan from payments as
received from Mortgagors and shall remit the net balance into the Custodial
Account.
Additional servicing compensation in the form of Ancillary Income shall be
retained by the Servicer as and when collected. The Servicer shall be required
to pay all expenses incurred by it in connection with its servicing activities
hereunder and shall not be entitled to reimbursement thereof except as
specifically provided for herein.
4.4 Annual Statement as to Compliance
The Servicer shall deliver to the Company, on or before March 1st of each year
beginning March 1, 1998, an Officer's Certificate, stating that (i) a review of
the activities of the Servicer during its preceding fiscal year and of
performance under this Agreement has been made under such officer's supervision,
and (ii) the Servicer has complied in all material respects with the provisions
of Article 2 and Article 3, and (iii) to the best of such officer's knowledge;
based on such review, the Servicer has fulfilled all its obligations under this
Agreement throughout such year or part thereof, or, if there has been a default
in the fulfillment of any such obligation, specifying each such default known to
such officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.
4.5 Annual Independent Chartered Accountants Servicing Report
On or before March 1 of each year, beginning with March 1, 1998, the Servicer at
its expense shall cause a firm of independent chartered accountants (who may
also render other services to the Servicer or any affiliate thereof) which is a
member of the "Ordre des comptables agrees du Quebec" (Corporation of the
Chartered Accountants of Quebec) to furnish a report to the Company to the
effect that such firm has, in addition to their examination of the financial
statements of the Servicer, performed specified auditing procedures to financial
information, other than financial statements relating to Mortgage Loans serviced
by the Servicer in accordance with the requirements of the Chapter 9100 of the
Canadian Institute of Chartered Accounts Handbook and that, as the results of
applying the procedures, any exceptions were disclosed.
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4.6 Right to Examine Servicer Records
The Company shall have the right to examine and audit any and all of the books,
records, or other information of the Servicer, whether held by the Servicer or
by another on its behalf, with respect to or concerning this Agreement or the
Mortgage Loans.
5. SERVICER TO COOPERATE
---------------------
5.1 Provision of Information
During the term of this Agreement, the Servicer shall furnish to the Company
such periodic, special, or other reports or information, whether or not provided
for herein, as the Company shall request. The Servicer shall execute and deliver
all such instruments and take all such action as the Company may reasonably
request from time to time, in order to effectuate the purposes and to carry out
the terms of this Agreement.
6. TERMINATION
-----------
6.1 Agency Suspension
Should the Servicer at any time during the term of this Agreement have its right
to service temporarily or permanently suspended by CMHC or otherwise cease to be
an approved servicer of conventional residential mortgage loans for CMHC, then
the Company may immediately terminate this Agreement without assessment of any
termination fee.
6.2 Damages
The Company shall have the right at any time to seek and recover from the
Servicer any damages or losses suffered by it as a result of any failure by the
Servicer to observe or perform any duties, obligations, covenants or agreements
herein contained, or as a result of the Servicer's failure to remain an approved
CMHC mortgage servicer.
6.3 Termination
The respective obligations and responsibilities of the Servicer shall terminate
upon:
6.3.1 the earlier of the final payment or other liquidation (or
any advance with respect thereto) of the last Mortgage Loan
serviced by the Servicer, the remittance of all funds due
hereunder or the first anniversary of this Agreement; or
6.3.2 by mutual consent of the Servicer and the Company in
writing, unless earlier terminated pursuant to this
Agreement.
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6.4 Termination without Cause
The Company, may, at its sole option, upon not less than sixty (60) days' prior
written notice to the Servicer terminate any rights the Servicer may have
hereunder with respect to any or all of the Mortgage Loans, without cause, upon
written notice, provided that the Servicer shall have an additional period of
not more than sixty (60) days from and after the date of said notice from the
Company within which to effect the related transfer of servicing. Any such
notice of termination shall be in writing and delivered to the Servicer as
provided in Section 12.1 of this Agreement. In the event of such termination,
the Servicer shall be entitled to a termination fee, equal to the product of
0.0002% of the then current aggregate unpaid principal balance of the related
Mortgage Loans and the number of months remaining until the first anniversary of
this Agreement, provided, however, that the successor servicer is not an
affiliate of the Servicer.
7. BOOKS AND RECORDS
-----------------
7.1 Possession of Servicing Files
The contents of each Servicing File are and shall be held by the Servicer for
the benefit of the Company as the owner thereof. The Servicer shall maintain in
the Servicing File a copy (which may be in microfiche form) of the contents of
each Mortgage Loan File and the originals of the required documents in each
Mortgage Loan File not delivered to the Company. The possession of the Servicing
File by the Servicer is at the will of the Company for the sole purpose of
servicing the related Mortgage Loan, pursuant to this Agreement, and such
retention and possession by the Servicer is in its capacity as Servicer only and
at the election of the Company. The Servicer shall release its custody of the
contents of any Servicing File only in accordance with written instructions from
the Company or other termination of the Servicer with respect to the related
Mortgage Loans, unless such release is required as incidental to the Servicer's
servicing of the Mortgage Loans pursuant to this Agreement.
The Servicer shall be responsible for maintaining, and shall maintain, a
complete set of books and records (including electronic records) for each
Mortgage Loan which shall be marked clearly to reflect the ownership of each
Mortgage Loan by the Company. In particular, the Servicer shall maintain in its
possession, available for inspection by the Company during normal business
hours, and shall deliver to the Company upon reasonable notice, evidence of
compliance with all federal, provincial and local laws, rules and regulations,
and requirements of CMHC, documentation evidencing insurance coverage and
eligibility of any condominium project for approval by CMHC and periodic
inspection reports as required by Section 2.13 and Accepted Servicing Practices.
To the extent that original documents are not required for purposes of
realisation of Liquidation Proceeds or Insurance Proceeds, documents maintained
by the Servicer may be
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in the form of microfilm or microfiche so long as the Servicer complies with the
requirements of Accepted Servicing Practices.
The Servicer shall keep at its servicing office books and records (including
electronic records) in which, subject to such reasonable regulations as it may
prescribe, the Servicer shall note transfers of Mortgage Loans. No transfer of a
Mortgage Loan may be made unless such transfer is in compliance with the terms
hereof. For the purposes of this Agreement, the Servicer shall be under no
obligation to deal with any person with respect to this Agreement or the
Mortgage Loans unless the books and records show such person as the owner of the
Mortgage Loan. The Company may, subject to the terms of this Agreement, sell or
transfer one or more of the Mortgaged Loan. The Company also shall advise the
Servicer of the transfer. Upon receipt of notice of the transfer, the Servicer
shall record the ownership of the Mortgage Loans of such assignee in its books
and records, and shall release the Company from its obligations hereunder with
respect to the Mortgage Loans sold or transferred.
8. INDEMNIFICATION AND ASSIGNMENT
------------------------------
8.1 Indemnification
The Servicer agrees to indemnify and hold the Company harmless from any
liability, claim, loss or damage (including, without limitation, any reasonable
legal fees, judgements or expenses relating to such liability, claim, loss or
damage) to the Company directly or indirectly resulting from the Servicer's
failure to observe and perform any or all of Servicer's duties, obligations,
covenants, agreements, warranties or representations contained in this Agreement
or the Servicer's failure to comply with all applicable requirements with
respect to the transfer of servicing rights as set forth herein.
The Servicer shall notify the Company as soon as reasonably possible if a claim
is made by a third party with respect to this Agreement.
8.2 Limitation on Liability of Servicer and Others
Neither the Servicer nor any of the directors, officers, employees or agents of
the Servicer shall be under any liability to the Company for any action taken or
for refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgement, provided, however, that this provision
shall not protect the Servicer or any such person against any breach of
warranties or representations made herein, or failure to perform its obligations
in material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Servicer and any director, officer,
employee or agent of the Servicer may rely in good faith on any document of any
kind prima facie properly executed and submitted by any person with respect to
any matter arising hereunder. The Servicer shall not be under any obligation to
appear in, prosecute or defend any legal action
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which is not incidental to its duties to service the Mortgage Loans in
accordance with this Agreement and which in its opinion may involve it in any
expense or liability, provided, however, that the Servicer may, with the prior
written consent of the Company, undertake any such action which it may deem
necessary or desirable in respect to this Agreement and the rights and duties of
the parties hereto. In such event, the Servicer shall be entitled to
reimbursement from the Company of the reasonable legal expenses and costs of
such action.
8.3 Limitation on Registration and Assignment by Servicer
The Company has entered into this Agreement with the Servicer in reliance upon
the representations as to the adequacy of its servicing facilities, plant,
personnel, records and procedures, its integrity, reputation and financial
standing, and the continuance thereof. Therefore, the Servicer shall not (i)
assign this Agreement or the servicing hereunder or (ii) delegate any
substantial part of its rights or duties hereunder without the prior written
consent of the Company, which consent shall not be unreasonably withheld or
conditioned provided that (a) any delegation of such rights or duties shall not
release the Servicer from its obligations hereunder and the Servicer shall
remain responsible hereunder for all acts and omissions of any delegee as if
such acts or omissions were those of the Servicer and (b) any such assignee or
designee shall satisfy the requirements for a successor or surviving person set
forth in Section 8.5 and Section 8.6 hereof. The Servicer shall notify the
Company in writing at least 30 days prior to selling or otherwise disposing of
all or substantially all of its assets and receipt of such notice shall entitle
the Company to terminate this Agreement, without payment of any termination fee,
except as set forth in Section 8.5 hereof.
The Servicer shall not resign from the obligations and duties hereby imposed on
it except by mutual consent of the Servicer and the Company or upon the
determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. Any such
determination permitting the resignation of the Servicer shall be evidenced by
an opinion of counsel of the Servicer to such effect delivered to the Company
which opinion of counsel shall be in form and substance acceptable to the
Company. No such resignation shall become effective until a successor approved
by the CMHC shall have assumed the Servicer's responsibilities and obligations
hereunder in the manner provided in Section 8.6.
Without in any way limiting the generality of this Section 8.3, in the event
that the Servicer either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without (i) satisfying the requirements set forth herein or (ii) the
prior written consent of the Company, then the Company shall have the right to
terminate this Agreement as set forth in Section 6.4, without any payment of any
penalty or damages and without any liability whatsoever to the Servicer (other
than with respect to accrued but unpaid Servicing Fees and Servicing Advances
remaining unpaid) or any third party.
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8.4 Assignment by the Company
The Company shall have the right, without the consent of the Servicer, to
assign, in whole or in part, its interest under this Agreement with respect to
some or all of the Mortgage Loans and designate any person to exercise any
rights of the Company hereunder, by executing an assignment and assumption
agreement and the assignee or designee shall accede to the rights and
obligations hereunder of the Company with respect to such Mortgage Loans. All
references to the Company in this Agreement shall be deemed to include its
assignee or designee.
8.5 Merger or Consolidation of the Servicer
The Servicer will keep in full effect its existence and rights as a bank under
the laws of its jurisdiction of incorporation except as permitted herein.
Any person into which the Servicer may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any person succeeding to the business of the
Servicer, shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving person shall be (i) obligated to
service the Mortgage Loans in accordance with this Agreement and Required
Servicing Practices, (ii) an institution whose deposits are insured by CDIC and
(iii) a CMHC-approved servicer in good standing.
8.6 Successor to the Servicer
Prior to termination of Servicer's responsibilities and duties under this
Agreement pursuant to Sections 2.15, 6.1, 6.4, 8.3 or 11.1, the Company shall
appoint a successor which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Servicer under this Agreement.
In connection with such appointment and assumption, the Company may make such
arrangements for the compensation of such successor out of payments on Mortgage
Loans as it and such successor shall agree. In the event that the Servicer's
duties, responsibilities and liabilities under this Agreement should be
terminated pursuant to the aforementioned sections, the Servicer shall discharge
such duties and responsibilities during the period from the date it acquires
knowledge of such termination until the effective date thereof with the same
degree of diligence and prudence which it is obligated to exercise under this
Agreement, and shall take no action whatsoever that might impair or prejudice
the rights or financial condition of its successor. The resignation or removal
of Servicer pursuant to the aforementioned Sections shall not become effective
until a successor shall be appointed pursuant to this Section 8.6 and shall in
no event relieve the Servicer of the representations, warranties and covenants
made pursuant to and the remedies available to the Company with respect thereto,
it being understood and agreed that the provisions of Article 10 shall be
applicable to the Servicer notwithstanding any such resignation or termination
of the Servicer, or the termination of this Agreement.
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Any successor appointed as provided herein shall execute, acknowledge and
deliver to the Servicer and to the Company an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Servicer, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Sections 2.15, 6.1, 6.4, 8.3 or
11.1 shall not affect any claims that the Company may have against the Servicer
arising prior to any such termination or resignation.
The Servicer shall timely deliver to the successor the funds in the Custodial
Account and the Escrow Account and the Mortgage Loan Files and related documents
and statements held by it hereunder and the Servicer shall account for all
funds. The Servicer shall execute and deliver such instruments and do such other
things all as may reasonably be required to more fully and definitely vest and
confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Servicer. The successor shall make
arrangements as it may deem appropriate to reimburse the Servicer for amounts
the Servicer actually expended pursuant to this Agreement which the successor is
entitled to retain hereunder and which would otherwise have been recovered by
the Servicer pursuant to this Agreement but for the appointment of the successor
servicer.
Upon a successor's acceptance of appointment as such, the Servicer shall notify
by mail the Company of such appointment.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
------------------------------------------------
COMPANY
-------
As of the Closing Date, the Company warrants and represents to, and covenants
and agrees with, the Servicer as follows:
(a) the Servicer shall not take any action which would cause the Company
not to qualify as a REIT under the Internal Revenue Code of 1986, as
amended.
9.1 Due Organization and Authority
The Company is a corporation duly organized, validly existing and in good
standing under the laws of Maryland. The Company has the full corporate power
and authority to execute and deliver this Agreement and to perform in accordance
therewith; the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement evidences the valid, binding and
enforceable obligation of the Company; and all requisite corporation action has
been taken by the Company to make this Agreement valid and binding upon the
Company in accordance with its terms.
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9.2 No Conflicts
Neither the execution and delivery of this Agreement, nor the fulfillment of or
compliance with the terms and conditions of this Agreement, will conflict with
or result in a breach of any of the terms, conditions or provisions of the
Company's charter or by-laws or any legal restrictions or any agreement or
instrument to which the Company is now a party or by which it is bound, or
constitute a default or result in an acceleration under any of the foregoing, or
result in the violation of any law, rule, regulation, order, judgement or decree
to which the Company or its property is subject.
9.3 Ability to Perform
The Company does not believe, nor does it have any reason or cause to believe,
that it cannot perform each and every covenant made by it in this Agreement.
9.4 No Litigation Pending
There is no action, suit, proceeding or investigation pending or threatened
against the Company, before any court, administrative agency or other tribunal
asserting the invalidity of this Agreement, seeking to prevent the consummation
of any of the transactions contemplated by this Agreement or which, either in
any one instance or in the aggregate, may result in any material adverse change
in the business, operations, financial condition, properties or assets of the
Company, or in any material impairment of the right or ability of the Company to
carry on its business substantially as now conducted, or in any material
liability on the part of the Company, or which would draw into question the
validity of this Agreement or of any action taken or to be taken in connection
with the obligations of the Company contemplated herein.
9.5 No Consent Required
No consent, approval, authorization or order of any court or governmental agency
or body is required for the execution, delivery and performance by the Company
of, or compliance by the Company with, this Agreement as evidenced by the
consummation of the transactions contemplated by this Agreement, or if required,
such approval has been obtained prior to the Closing Date.
10. REPRESENTATIONS AND WARRANTIES OF SERVICER
------------------------------------------
As of the Closing Date, the Servicer warrants and represents to, and covenants
and agrees with, the Company as follows:
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10.1 Due Organization and Authority
The Servicer is a Canadian chartered bank duly organized, validly existing and
in good standing under the laws of Canada, and is licensed, qualified and in
good standing in each jurisdiction where a Mortgaged Property is located if
applicable laws require licensing or qualification in order to conduct business
of the type conducted by the Servicer, and in any event the Servicer is in
compliance with the laws of any such jurisdiction to the extent necessary to
ensure the enforceability of the related Mortgage Loan in accordance with the
terms of this Agreement; the Servicer has the full corporate power and authority
to execute and deliver this Agreement and to perform in accordance herewith; the
execution, delivery and performance of this Agreement (including all instruments
of transfer to be delivered pursuant to this Agreement) by the Servicer and the
consummation of the transactions contemplated hereby have been duly and validly
authorized; this Agreement evidences the valid, legal, binding and enforceable
obligation of the Servicer subject to bankruptcy laws and other similar laws of
general application affecting rights of creditors, including those respecting
the availability of specific performance, none of which will materially
interfere with the realisation of the benefits provided thereunder, and all
requisite corporate action has been taken by the Servicer to make this Agreement
valid and binding upon the Servicer in accordance with its terms.
10.2 Ordinary Course of Business
The consummation of the transactions contemplated by this Agreement are in the
ordinary course of business of the Servicer.
10.3 No Conflicts
Neither the execution and delivery of this Agreement, nor the fulfillment of or
compliance with the terms and conditions of this Agreement, will conflict with
or result in a breach of any of the terms, conditions or provisions of the
Servicer's charter or by-laws or any legal restriction or any agreement or
instrument to which the Servicer is now a party or by which it is bound, or
constitute a default or result in an acceleration under any of the foregoing, or
result in the violation of any law, rule, regulation, order, judgement or decree
to which the Servicer or its property is subject, or impair the ability of the
Company to realize on the Mortgage Loans, impair the value of the Mortgage
Loans, or impair the ability of the Company to realize the full amount of any
mortgage insurance benefits accruing pursuant to this Agreement.
10.4 Ability to Service
The Servicer is an approved servicer of CMHC residential mortgage loans in
accordance with the NHA, with the facilities, procedures and experienced
personnel necessary for the sound servicing of mortgage loans of the same type
as the Mortgage Loans. The Servicer is duly qualified, licensed, registered and
otherwise authorized under all applicable federal,
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provincial and municipal laws, regulations and by-laws, if applicable, and is in
good standing to enforce, originate, sell mortgage loans to, and service
mortgage loans in the jurisdictions wherein the Mortgaged Properties are located
and no event has occurred, including but not limited to a change in insurance
coverage, which would make the Servicer unable to comply with either CMHC
eligibility requirements or which would require notification to CMHC.
10.5 Ability to Perform
The Servicer can and shall perform each and every covenant contained in this
Agreement.
10.6 No Litigation Pending
There is no action, suit, proceeding or investigation pending or threatened
against the Servicer, before any court, administrative agency or other tribunal
asserting the invalidity of this Agreement, seeking to prevent the consummation
of any of the transactions contemplated by this Agreement or which, either in
any one instance or in the aggregate, may result in any material adverse change
in the business, operations, financial condition, properties or assets of the
Servicer, or in any material impairment of the right or ability of the Servicer
to carry on its business substantially as now conducted, or in any material
liability on the part of the Servicer, or which would draw into question the
validity of this Agreement or the Mortgage Loans or of any action taken or to be
taken in connection with the obligations of the Servicer contemplated herein, or
which would be likely to impair materially the ability of the Servicer to
perform under the terms of this Agreement.
10.7 No Consent Required
No consent, approval, authorization or order of any court or governmental agency
or body is required for the execution, delivery and performance by the Servicer
of or compliance by the Servicer with this Agreement or the servicing of the
Mortgage Loans as evidenced by the consummation of the transactions contemplated
by this Agreement, or if required, such approval has been obtained prior to the
Closing Date.
10.8 No Untrue Information
Neither this Agreement nor any statement, tape, diskette, form, report or other
document furnished or to be furnished pursuant to this Agreement or in
connection with the transactions contemplated hereby contains any untrue
statement of fact or omits to state a fact necessary to make the statements
contained therein not misleading.
10.9 Reasonable Servicing Fee
The Servicer acknowledges and agrees that the Servicing Fee represents
reasonable compensation for performing such services and that the entire
Servicing Fee shall be treated
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by the Servicer, for accounting and tax purposes, as compensation for the
servicing and administration of the Mortgage Loans pursuant to this Agreement.
10.10 Conflict of Interest
The Servicer agrees that it shall service the Mortgage Loans hereunder solely
with a view toward the interests of the Company, and without regard to the
interests of the Seller or its other affiliates.
11. DEFAULT
11.1 Events of Default
The following shall constitute an Event of Default under this Agreement on the
part of the Servicer:
11.1.1 any failure by the Servicer to remit to the Company any
payment required to be made under the terms of this
Agreement which continues unremedied for a period of five
(5) Business Days after the date upon which written notice
of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the Company; or
11.1.2 the failure by the Servicer to duly observe or perform in
any material respect any other of the covenants or
agreements on the part of the Servicer set forth in this
Agreement which continues unremedied for a period of thirty
(30) days (except that such number of days shall be fifteen
(15) in the case of a failure to pay any premium for any
insurance policy required to be maintained under this
Agreement) after the date on which written notice of such
failure, requiring the same to be remedied, shall have been
given to the Servicer by the Company; or
11.1.3 a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
receiver or liquidator in any insolvency, bankruptcy,
similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered against the Servicer
and such decree or order shall have remained in force
undischarged or unstayed for a period of sixty (60) days; or
11.1.4 the Servicer shall consent to the appointment of a receiver
or liquidator in any insolvency, bankruptcy, or similar
proceedings of or relating to the Servicer of or relating to
all or substantially all of its property; or
11.1.5 the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take
advantage of any applicable
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insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment
of its obligations; or
11.1.6 the Servicer loses temporarily or permanently its
qualification as an approved lender under the NHA; or
11.1.7 the Servicer, without the consent of the Company (other than
as permitted by Sections 8.3 or 8.5 hereof), attempts to
assign this Agreement or the servicing responsibilities
hereunder or to delegate any substantial part of its duties
hereunder or any portion thereof; or
11.1.8 the Servicer fails to maintain its license to do business or
service residential mortgage loans in any jurisdiction where
the Mortgaged Properties are located and such failure
results in a material adverse effect on the Mortgage Loans,
the servicing of the Mortgage Loans, or the Company's rights
with respect to the Mortgage Loans; or
11.1.9 the Servicer carries out servicing, administration or other
duties and obligations imposed on it under this Agreement
without first seeking and obtaining, in writing,
instructions, directions or confirmation from the Company as
required by Section 2 of this Agreement.
In each and every such case, so long as an Event of Default shall not have been
remedied, in addition to whatsoever rights the Company may have at law or equity
to damages, including injunctive relief and specific performance, the Company,
by notice in writing to the Servicer, may terminate without compensation or
reimbursement (other than Servicing Fees previously earned but remaining unpaid
and Servicing Advances remaining unreimbursed) all the rights and obligations of
the Servicer under this Agreement and in and to the Mortgage Loans and the
proceeds thereof.
Upon receipt by the Servicer of such written notice, all authority and power of
the Servicer under this Agreement, whether with respect to the Mortgage Loans or
otherwise, shall pass to and be vested in the successor appointed pursuant to
Section 8.6. Upon written request from the Company, the Servicer shall prepare,
execute and deliver any and all documents and other instruments reasonably
requested by the Company, place in such successor's possession all Mortgage Loan
Files (to the extent not properly delivered to the Company by the Servicer
previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Servicer's sole expense. The Servicer
agrees to reasonably cooperate with the Company and such successor in effecting
the termination of the Servicer's responsibilities and rights hereunder,
including, without limitation, the transfer to such successor for administration
by it of all cash amounts which shall at the time be credited by the Servicer to
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the Custodial Account or Escrow Account or thereafter received with respect to
the Mortgage Loans.
11.2 Waiver of Defaults
The Company may waive any default by the Servicer in the performance of its
obligations hereunder and its consequences. Upon any such waiver of a past
default, such default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been remedied for every purpose of this
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereon except to the extent expressly so waived.
12. MISCELLANEOUS PROVISIONS
------------------------
12.1 Notices
All notices, requests, demands and other communications which are required or
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given upon the delivery or mailing thereof, as the case
may be, sent by registered or certified mail, return receipt requested:
12.1.1 If to the Company to:
NB CAPITAL CORPORATION
125 West 55th Street
New York, NEW YORK 10019
U.S.A.
Attention: President
---------------------
12.1.2 If to the Servicer to:
NATIONAL BANK OF CANADA
600 de la Gauchetiere Street West
Montreal, Quebec
H3B 4L2
Attention: Senior Vice-President, Treasury and Financial Markets
-----------------------------------------------------------------
32
<PAGE>
12.2 Waivers
Either the Servicer or the Company may upon consent of all parties, by written
notice to the others:
12.2.1 waive compliance with any of the terms, conditions or
covenants required to be complied with by the others
hereunder; and
12.2.2 waive or modify performance of any of the obligations of the
others hereunder.
The waiver by any party hereto of a breach of any provisions of this Agreement
shall not operate or be construed as a waiver of any other subsequent breach.
12.3 Entire Agreement -- Amendment
This Agreement constitutes the entire agreement between the parties with respect
to servicing of the Mortgage Loans. This Agreement may be amended and any
provision hereof waived but, only in writing signed by the party against whom
such enforcement is sought.
12.4 Execution -- Binding Effect
This Agreement may be executed in one or more counterparts and by different
parties hereto on separate counterparts, each of which, when so executed, shall
be deemed to be an original; such counterparts, together, shall constitute one
and the same agreement. Subject to Sections 8.3 and 8.4, this Agreement shall
inure to the benefit of and be binding upon the Servicer and the Company and
their respective successors and assigns.
12.5 Headings
Headings of the Articles and Sections in this Agreement are for reference
purposes only and shall not be deemed to have any substantive effect.
12.6 Governing Law
This Agreement shall be governed by and construed in accordance with the laws of
the Province of Quebec and the obligations, rights and remedies hereunder shall
be determined in accordance with the substantive laws of the Province of Quebec.
Each of the parties hereto irrevocably and unconditionally submits, for itself
and its property, to the non-exclusive jurisdiction of the Quebec courts, and
any appellate court thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be
33
<PAGE>
heard and determined in such court. Each of the parties hereto agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any party
may otherwise have to bring any action or proceeding relating to this Agreement
in the courts of any jurisdiction. Each of the parties hereto irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection they may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement in the
courts of the Province of Quebec. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defence of an inconvenient
forum to the maintenance of such action or proceeding in any such court. The
Company hereby irrevocably appoints General Trust of Canada, 1100 University
Street, Montreal, Quebec, Canada, H3B 2G7 ("Company's Process Agent"), as its
agent to receive, on behalf of the Company, service of copies of the summons and
complaint and any other process that may be served in any such action or
proceeding. Any such service may be made by mailing or delivering a copy of such
process, in care of the Company's Process Agent at the Company's Process Agent's
above address. The Company hereby irrevocably authorizes and directs its agent
to accept such service on its behalf. The parties hereto hereby agree that the
final judgment in any such action or proceeding shall be conclusive and may be
in force in any other jurisdiction by suit on the judgment or in any other
manner provided by law.
12.7 Relationship of Parties
Nothing herein contained shall be deemed or construed to create a partnership or
joint venture between the parties. The duties and responsibilities of the
Servicer shall be rendered by it as a provider of services and not as a general
purpose agent of the Company. The Servicer shall have full control of all of its
acts, doings, proceedings, relating to or requisite in connection with the
discharge of its duties and responsibilities under this Agreement.
12.8 Quebec Sales Tax and Goods and Services Tax
The Servicer shall collect from the Company the Goods and Services Tax ("GST")
and the Quebec Sales Tax ("QST") on the Servicing Fee at the applicable rates,
and shall remit them to the appropriate tax authorities.
12.9 Severability of Provisions
If any one or more of the covenants, agreements, provisions or terms of this
Agreement shall be held invalid for any reason whatsoever, then such covenants,
agreements, provisions or terms shall be deemed severable from the remaining
covenants, agreements, provisions or terms of this Agreement and shall in no way
affect the validity or enforceability of the other provisions of this Agreement.
34
<PAGE>
12.10 Recordation of Assignments of Mortgage
Until the Company or its assignee registers its title to the Mortgage Loans, the
Seller will hold the registered title to the Mortgage Loans for and on behalf of
the Company and its assignee. Notwithstanding any provision herein to the
contrary, in the event that any of the issued and outstanding senior, unsecured
indebtedness of National Bank of Canada is rated "Baa3," or less, by Moody's
Investors Service, Inc., or "BBB-," or less, by Standard & Poor's Ratings
Services, the Servicer will promptly cause any mortgage loans to which the
Servicer holds title on behalf of the Company, to be registered in the name of
the Company.
12.11 Exhibits
The exhibits to this Agreement are hereby incorporated and made a part hereon
and are integral parts of this Agreement.
12.12 English Language
The parties hereto confirm that the present Agreement has been drawn up in the
English language at their request. Les parties aux presentes confirment que la
presente convention a ete redigee en langue anglaise a leur demande.
35
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
NB CAPITAL CORPORATION
By: /s/ Real Raymond
----------------
NATIONAL BANK OF CANADA
By: /s/ Real Raymond
----------------
36
<PAGE>
EXHIBIT 1
Custodial Account Certification
______________________ , 1997
National Bank of Canada hereby certified that it has established the account
described below as a Custodial Account pursuant to Section 2.4 of the Servicing
Agreement, dated as of o, 1997.
Title of Account: National Bank of Canada, in trust for [REIT],
and various Mortgagors
Depositary: _____________________________________________
Account Number:
Address of Depositary at which the Account is maintained:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NATIONAL BANK OF CANADA
By: _______________________________________
Name: _______________________________________
Title: _______________________________________
<PAGE>
EXHIBIT 2
Custodial Account Letter Agreement
_______________________________ , 1997
To: ______________________________________________ (the "Depository")
As Servicer under the Servicing Agreement dated as of o, 1997 (the "Agreement"),
we hereby authorize and request you to establish an account, as a Custodial
Account pursuant to Section 2.4 of the Agreement, to be designated as "National
Bank of Canada, in trust for [REIT] and various Mortgagors". All deposits in the
account shall be subject to withdrawal therefrom by order signed by National
Bank of Canada. This letter is submitted to you in duplicate. Please execute and
return one original to us.
NATIONAL BANK OF CANADA
By: __________________________________
Name: __________________________________
Title: __________________________________
The undersigned, as Depository, hereby certified that the above described
account has been established under Account Number _____________________, at the
office of the Depository indicated above, and agrees to honour withdrawals on
such account as provided above.
DEPOSITORY
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
<PAGE>
EXHIBIT 3
Escrow Account Certification
__________________________ , 1997
National Bank of Canada hereby certified that it has established the account
described below as an Escrow Account pursuant to Section 2.4 of the Servicing
Agreement, dated as of o, 1997.
Title of Account: National Bank of Canada, in trust for [REIT],
and various Mortgagors
Depositary: ______________________________________________
Account Number:
Address of Depositary at which the Account is maintained:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NATIONAL BANK OF CANADA
By: __________________________________
Name: __________________________________
Title: __________________________________
<PAGE>
EXHIBIT 4
Escrow Account Letter Agreement
__________________________ , 1997
To: ______________________________________ (the "Depository")
As Servicer under the Servicing Agreement dated as of o, 1997 (the "Agreement"),
we hereby authorize and request you to establish an account, as an Escrow
Account pursuant to Section 2.4 of the Agreement, to be designated as "National
Bank of Canada, in trust for [REIT] and various Mortgagors". All deposits in the
account shall be subject to withdrawal therefrom by order signed by National
Bank of Canada. This letter is submitted to you in duplicate. Please execute and
return one original to us.
NATIONAL BANK OF CANADA
By: __________________________________
Name: __________________________________
Title: __________________________________
The undersigned, as Depository, hereby certified that the above described
account has been established under Account Number , at the office of the
Depository indicated above, and agrees to honour withdrawals on such account as
provided above.
DEPOSITORY
By: _________________________________
Name: _________________________________
Title: _________________________________
DEED OF SALE OF MORTGAGE LOANS
ON THE THIRD (3rd) DAY OF SEPTEMBER NINETEEN HUNDRED AND
NINETY-SEVEN (1997)
BEFORE Mtre Bertrand Ducharme, the undersigned notary for the Province of
Quebec, practising in the City of Montreal;
APPEARED: NATIONAL BANK OF CANADA, a bank
incorporated under the terms of the Bank Act (S.C. 1991, Chapter 46) and having
its head office at 600 de La Gauchetiere West, Montreal, Quebec H3B 4L2, herein
acting and represented by Johanne Remillard, its
, duly
authorized in virtue of a resolution of its Board of Directors adopted on August
15, 1997, a certified copy of which remains hereto annexed after having been
acknowledged true and signed for identification by the said representative in
the presence of the undersigned Notary.
(hereinafter called the "Bank")
AND: NB FINANCE, LTD., a corporation formed under the laws
of Bermuda, having its head office and registered office at Clarendon House, 2
Church Street, Hamilton, HM 11, Bermuda, herein acting and represented by
Francois Bourassa, its
, duly
authorized in virtue of a resolution of its Board of Directors adopted on
September 3, 1997, a certified copy of which remains hereto annexed after having
been acknowledged true and signed for identification by the said representative
in the presence of the undersigned Notary.
(hereinafter called "NB Finance")
<PAGE>
-2-
NOW THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Unless the context otherwise requires, the following expressions shall
have the following meanings:
1.1 " CMHC " means the Canada Mortgage and Housing Corporation;
1.2 " Mortgage Loans " means collectively all contractual rights,
claims and rights of action arising from or pursuant to the
terms of the mortgage loans and hypothecary loans listed in
Schedule A, which Schedule is annexed hereto after having been
acknowledged true and signed for identification by the
representatives of the parties hereto in presence of the
undersigned Notary, and, without limitation, all claims for
principal, interest, costs, expenses and other sums which are
due and outstanding or become due to the Bank under the terms
thereof;
1.3 " Mortgage Loan File " means collectively all of the
agreements, deeds and proceedings evidencing the Mortgage
Loans and the Security, as well as any architectural and
engineering report, title report, survey, insurance policy and
other information and material with respect to the real
property securing the Mortgage Loans and, with respect to each
Mortgage Loan, all of the agreements, deeds and proceedings
evidencing such Mortgage Loan and the Security relating
thereto as well as any architectural and engineering report,
title report, survey, insurance policy and other information
and material with respect to the real property securing such
Mortgage Loan;
1.4 " Security " means collectively the movable and immovable
security securing the Mortgage Loans and set forth in the
Mortgage Loan File, including, without limitation, any
moveable and immoveable hypothecs,
<PAGE>
-3-
guarantees, pledges, mortgages, notes, bonds, letters of
credit and similar instruments, or other property in any other
personal rights securing the Mortgage Loans;
1.5 " Servicing Agreement " means that certain servicing agreement
entered into as of this day between the Bank, as servicer and
NB Finance that sets forth the terms and conditions under
which the Bank will service and administer the Mortgage Loans.
2. In consideration of the sale price of EIGHT HUNDRED FORTY-SIX MILLION
FOUR HUNDRED TWENTY-ONE THOUSAND FIFTY-SIX CANADIAN DOLLARS AND
TWENTY-FIVE CENTS (C$846,421,056.25) (calculated based on the aggregate
outstanding principal balances of the Mortgage Loans as of August 8,
1997 multiplied by 102.174655%) including estimated accrued interest as
of the date hereof ("Sale Price"), the receipt and sufficiency of which
is hereby acknowledged by the Bank, whereof quit, the Bank hereby
sells, assigns, conveys and transfers absolutely, as and from the date
hereof, to NB Finance, hereto accepting, and hereby subrogates NB
Finance in, all right, title and interest of the Bank in and to the
Mortgage Loans, the Security and the Mortgage Loan File (including all
rights and obligations arising under the documents contained therein),
as well as in all right, title and interest of the Bank in and to the
insurance policies issued by CMHC under the National Housing Act (R.S.
c.N-10, s.1) with respect to the Mortgage Loans and the personal
property and real property subject to the Security. On or prior to
September 17, 1997, the Sale Price of the Mortgage Loans shall be
adjusted to reflect the decrease in the aggregate outstanding principal
balances of the Mortgage Loans between August 8, 1997 and the date
hereof, and the exact accrued interest as of September 3, 1997. The
Bank or NB Finance, as applicable, shall pay, on or prior to September
17, 1997 an amount equal to the difference between (i) $846,421,056.25
and (ii) an amount representing the sum of (a) the amount
<PAGE>
-4-
of accrued interest on the Mortgage Loans as of September 3, 1997 and
(b) the product of the outstanding balances of the Mortgage Loans as of
September 3, 1997 and 102.174655%, the whole together with the interest
accrued on such amount at a rate per annum equal to 3.375% from the
date hereof until the payment of such amount.
3. NB Finance hereby assumes, as and from the date hereof, to the complete
and entire exoneration of the Bank, all of the covenants, obligations
and liabilities of the Bank arising from or pursuant to the terms of
the Mortgage Loans, the Security and any document contained in the
Mortgage Loan File, the whole for a period commencing on the date
hereof.
4. The Bank represents and warrants as of the date hereof, unless
specifically indicated otherwise, as follows:
4.1 The Bank is a bank duly organized, validly existing and in
good standing under the laws of the jurisdiction of its
incorporation.
4.2 The execution, delivery and performance by the Bank of this
Deed have been duly authorized by all necessary corporate
action, and do not contravene the Bank Act (Canada), being the
Charter of the Bank, or its by-law, and do not violate any law
or governmental regulation or permit applicable to the Bank.
4.3 The Bank (i) is the sole owner of the Mortgage Loans and such
ownership is free and clear of any lien, security interest or
other encumbrance, (ii) has not granted any participation or
other interest or assignment, other option or rights to the
Mortgage Loans, other than pursuant to this Deed, and (iii)
has not pledged, collaterally assigned or otherwise
hypothecated any interest therein or agreed to do so, other
than pursuant to this Deed.
<PAGE>
-5-
4.4 National Bank of Canada has in its possession duly executed
originals of all mortgage loans and hypothecary loans listed
in Schedule A as well as the Mortgage Loan File. From and
after the date of this Deed, the Bank shall no longer hold the
Mortgage Loan File as owner thereof but as custodian for NB
Finance or its successors or assigns pursuant to the terms of
the Servicing Agreement and as provided therein, the Mortgage
Loan File shall be appropriately identified in the Bank's
books and records to clearly reflect the sale of the Mortgage
Loans to NB Finance.
4.5 Each of the Mortgage Loans is an existing and valid
CMHC-insured residential first mortgage or hypothecary loan
enforceable in accordance with its terms. The Mortgage Loans
have been fully advanced, have not been amended or modified
and are in full force and effect.
4.6 To the knowledge of the Bank, there has not occurred an event
which, if uncorrected, constitutes or would constitute, with
the giving of notice, passage of time or both, a material
default under any Mortgage Loan.
4.7 As of August 8, 1997, the aggregate outstanding principal
balance of the Mortgage Loans was EIGHT HUNDRED TWENTY-EIGHT
MILLION SEVENTY-TWO THOUSAND FOUR HUNDRED THIRTY-SEVEN
CANADIAN DOLLARS AND NINETY-THREE CENTS (C$828,072,437.93).
4.8 The Bank is an approved lender in good standing as this
expression is defined in the National Housing Act (R.S.c.N-10,
s.1). A copy of a letter from the CMHC confirming same is
attached hereto as Schedule B after having been acknowledged
true and signed for identification by the representatives of
the parties hereto in presence of the undersigned Notary.
<PAGE>
-6-
4.9 None of the Mortgage Loans is secured by real estate property
in respect of which the registration of mortgages or hypothecs
is governed by the federal laws of Canada including, without
limitation, lands governed by the Indian Act (Canada) and the
Railway Act (Canada).
4.10 There are no provisions in the Mortgage Loans restricting the
assignability of the Bank's rights thereunder.
4.11 The law governing relations between the mortgagors and/or
hypothecary debtors under each Mortgage Loan is the law of the
province of Canada where the real estate property securing
each such Mortgage Loan is situated.
4.12 Each of the Mortgage Loans has been administered by the Bank
in accordance with the Bank's usual servicing practises and
the CMHC Guide (as this expression is defined in the Servicing
Agreement) and there has been no default by the Bank
thereunder.
4.13 No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory
body or any other third party is required for the due
execution, delivery, recordation, filing or performance by the
Bank of this Deed.
5. NB Finance shall be the sole owner of the property and rights herein
sold, assigned and transferred, as of the date hereof, with possession
as at the same date. In virtue of this Deed, NB Finance shall have the
right to collect the sums due under the Mortgage Loans from the person
liable therefor, to grant acquittance for all sums received including
any such sum received prior to the date hereof by the Bank, with or
without consideration to grant mainlevee or discharge of the said
hypothecs and mortgages, to exercise all legal recourses in
<PAGE>
-7-
order to recover the sums due thereunder, in its own name or in the
name of the Bank, and for this purpose the Bank irrevocably appoints NB
Finance as its true and lawful attorney in this regard with full power
of substitution, to pursue to completion the legal proceedings
commenced with respect thereto, if any, to enforce any judgment
obtained against the defendants to any such proceedings, to
hypothecate, pledge or further assign the Mortgage Loans and generally
to perform such acts and to execute such documents, with or without
consideration, as NB Finance, in its entire discretion, shall consider
necessary or useful, the whole without further notice to or
intervention on the part of the Bank, except in its role as servicer or
custodian under the Servicing Agreement.
6. The Bank and NB Finance hereby agree to do all further things and
execute such further documents as may be necessary in order to give
full effect to the present sale; to that effect, NB Finance shall have
the irrevocable right to execute on behalf of the Bank, any other
documents or deeds required or necessary in order to have this sale
published at the land registry or title registry offices where the
immovable properties affected by the Mortgage Loans are located.
7. Simultaneously herewith, the Bank and NB Finance have entered into the
Servicing Agreement pursuant to which NB Finance has retained the Bank
as an independent contract servicer of the Mortgage Loans.
8. The Bank hereby undertakes, in accordance with the provisions of the
National Housing Act and the National Housing Loan regulations, to
administer the Mortgage Loans hereby transferred, until their
respective maturity, in accordance with the National Housing Act and
the said regulations, and to carry out that administration in
accordance with normal and prudent mortgage practice and in accordance
with the Servicing Agreement.
<PAGE>
-8-
9. This Deed will be governed by the laws of the Province of Quebec and
the laws of Canada applicable therein.
10. Each of the parties hereto irrevocably and unconditionally submits, for
itself and its property, to the non exclusive jurisdiction of any
provincial court of Canada, and any appellate court thereof, in any
action or proceeding arising out of or relating to this Deed, or for
recognition or enforcement of any judgment, and each of the parties
hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in
such court. Each of the parties hereto agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Deed shall affect any right that any
party may otherwise have to bring any action or proceeding relating to
this Deed in the courts of any jurisdiction. Each of the parties hereto
irrevocably and unconditionally waives, to the fullest extent it may
legally and effectively do so, any objection they may now or hereafter
have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Deed in any provincial court of Canada. Each
of the parties hereto hereby irrevocably waives, to the fullest extent
permitted by law, the defence of an inconvenient forum to the
maintenance of such action or proceeding in any such court. NB Finance
hereby irrevocably appoints General Trust of Canada, 1100 University
Street, Montreal, Quebec, Canada H3B 2G7 ("NB Finance's Process
Agent"), as its agent to receive, on behalf of NB Finance, service of
copies of the summons and complaint and any other process that may be
served in any such action or proceeding. Any such service may be made
by mailing or delivering a copy of such process, in care of NB
Finance's Process Agent at NB Finance's Process Agent's above address.
NB Finance hereby irrevocably authorizes and directs its agent to
accept such service on its behalf. The parties hereto hereby agree that
the final judgment in any such action
<PAGE>
-9-
or proceeding shall be conclusive and may be in force in any other
jurisdiction by suit on the judgment or in any other manner provided by
law.
11. The Bank hereby undertakes to timely deliver, upon demand from NB
Finance or NB Capital Corporation, the Mortgage Loan File to NB Finance
or, as the case may be, to NB Capital Corporation.
12. The parties hereto have requested that this Deed be drawn up in the
English language. Les parties aux presentes ont requis que cet acte
soit redige en langue anglaise.
WHEREOF ACTE, in Montreal, province of Quebec, under number nine thousand and
fourteen (9014) of the minutes of the undersigned notary.
AND AFTER DUE READING, the parties have signed in the presence of the
undersigned notary.
NATIONAL BANK OF CANADA
per:
-----------------------------
NB FINANCE, LTD.
per:
-----------------------------
-----------------------------------
Bertrand Ducharme, NOTARY
MORTGAGE LOAN ASSIGNMENT AGREEMENT
THIS MORTGAGE LOAN ASSIGNMENT AGREEMENT (this "Assignment")
made as of the 3rd day of September, 1997, constitutes an assignment from NB
FINANCE, LTD., a Bermuda corporation (the "Assignor"), to NB CAPITAL
CORPORATION, a Maryland corporation, (the "Assignee"), and an agreement by and
among Assignor, Assignee and NATIONAL BANK OF CANADA, a Canadian chartered bank,
as custodian and servicer on behalf of Assignee (the "Bank").
W I T N E S S E T H :
WHEREAS, Assignor has entered into a certain Loan Agreement,
of even date herewith, by and between Assignor and Assignee (such Loan
Agreement, as it may be amended or modified from time to time, the "Loan
Agreement"), pursuant to which Assignee has agreed, subject to the terms and
conditions thereof, to lend, with respect to the 1997 Series 8 Loan (as defined
in the Loan Agreement), a principal amount of U.S.$ 29,713,817 to Assignor on
the date hereof.
WHEREAS, to evidence and secure its obligations with respect
to the 1997 Series 8 Loan under the Loan Agreement, Assignor shall execute and
deliver as of the date hereof, certain Loan Documents (as defined in the Loan
Agreement).
WHEREAS, Assignee has required and Assignor has agreed that
Assignor shall assign all of its right, title and interest in, to and under the
mortgage loans listed on Exhibit A attached hereto (the "Mortgage Loans"), each
such Mortgage Loan evidenced by certain agreements, deeds and proceedings (the
"Mortgage Loan Documents") to Assignee and permit Assignee or its agents, to
administer, perform and enforce the Mortgage Loans upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the transactions
hereinabove described, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Assignment. (a) Assignor as beneficial owner hereby
assigns, charges and sets over to Assignee, and its successors and assigns,
without recourse to Assignor, all of Assignor's right, title and interest now or
hereafter acquired in, to and under the Mortgage Loans and all of the real
property (together with any proceeds (including, but not limited to, any
insurance, casualty and mortgage insurance proceeds), products, substitutions,
additions or replacements of any collateral mortgaged, assigned or pledged under
the Mortgage Loans) described therein (collectively, the "Collateral").
(b) Assignee hereby accepts the foregoing assignment, on
behalf of itself and its respective successors and assigns.
<PAGE>
3
(c) Assignor hereby appoints Assignee the true and lawful
attorney-in-fact of Assignor, with full power of substitution, in its own name,
both before and/or after any Event of Default (as defined in the Loan
Agreement), to take any action under or in connection with the Mortgage Loans.
This power shall be deemed to be coupled with an interest and shall be
irrevocable.
(d) Assignor agrees that the assignment herein provided is
absolute and from and after the date hereof, subject to Section 16, Assignee
shall obtain legal title to the Mortgage Loans and Assignor shall not have, and
shall not exercise, any rights in and to the Collateral, including, without
limitation, any rights as payee, mortgagee or assignee under any of the Mortgage
Loan Documents, or any rights to receive any payments or to exercise or omit to
exercise, waive, compromise or make any other actions or determinations or give
or receive any notices under or in respect of the Mortgage Loan Documents,
except such as Assignee may direct in order to better effectuate the rights,
remedies and security herein provided or contemplated.
(e) Assignee, as payee under the Mortgage Loans, shall have
the right, both before and after an Event of Default (as defined in the Loan
Agreement) to collect and receive all payments of principal and interest and any
other amounts due and payable under the Mortgage Loan Documents. On each
Interest Payment Date (as defined in the Loan Agreement), Assignee shall apply
the U.S. Dollar Equivalent (as defined in the Loan Agreement) of the funds
collected under the Mortgage Loan Documents (i) first, to the payment of any
interest due and payable under the Loan Documents, (ii) second, to the payment
of any scheduled or unscheduled principal payments due and payable under the
Loan Documents, (iii) third, to the payment of any Excess Loan Amount (as
defined in the Loan Agreement) and (iv) fourth, to any other amounts due and
payable under the Loan Documents and shall, to the extent available after
payment of the amounts in clauses (i), (ii), (iii) and (iv) above, remit the
balance of any collections or payments to Assignor.
TO HAVE AND TO HOLD the same unto Assignee, and its successors
and assigns.
2. Representations and Warranties of Assignor. Assignor
represents and warrants as follows:
(a) Assignor (i) is the sole owner of the Mortgage Loans and
such ownership is free and clear of any lien, security interest or
other encumbrance, (ii) has not granted any participation or other
interest or assignment, other option or rights to the Mortgage Loans,
other than to Assignee, and (iii) has not pledged, collaterally
assigned or otherwise hypothecated any interest therein or agreed to do
so, other than to Assignee.
<PAGE>
4
(b) The registered office and principal place of business of
the Assignor is located in Hamilton, Bermuda.
(c) The execution, delivery and performance of this Assignment
by Assignor are within Assignor's power and authority, have been duly
authorized by all necessary action and do not and will not (i) require
any authorization which has not been obtained, (ii) contravene the
articles of incorporation or by-laws of the Assignor, any applicable
laws or any agreement or restriction binding on or affecting Assignor
or its property, or (iii) result in or require the creation or
imposition of any lien or right of others upon or with respect to any
property now or in the future owned by Assignor (other than liens
created in favor of Assignee hereunder). No authorization which has not
been obtained is required for the assignment hereunder or the
enforcement by Assignee of its remedies under this Assignment. This
Assignment, when executed and delivered, will constitute the legal,
valid and binding obligation of Assignor enforceable against Assignor
in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the rights of
creditors generally.
(d) The originals (including duplicate originals, if any) of
all the Mortgage Loan Documents, have been simultaneously herewith
delivered to the Bank as custodian for Assignee (except for any loan
documents which have been or will be submitted to public officials for
filing or recording and policies of title or other insurance which have
not yet been received by Assignor, which in either case will be
delivered directly to the Bank or forthwith turned over to the Bank as
and when received by the Assignor).
3. Servicing. Until the satisfaction in full of all
obligations of Assignor under the Loan Agreement shall have occurred:
(a) Assignee or its agents, shall have the sole power and
authority to do or refrain from doing any act under or in connection
with the Mortgage Loan Documents and the property described therein
and/or this Assignment, including, without limitation, the sole power
and authority in its sole discretion, to (i) advance funds thereunder,
(ii) determine that all conditions to the advance of funds thereunder
have been satisfied (or to waive some or all of the conditions to
advance thereunder), and (iii) determine that a default or event of
default has occurred thereunder and to give any notice, demand or
protest in respect thereof;
(b) Assignor acknowledges that (i) the Bank, as agent of
Assignee, shall be named as mortgagee and loss payee on all fire,
extended coverage and other hazard insurance policies required under
the Mortgage Loan Documents, to the extent set forth therein and (ii)
Assignor and any mortgagor and all other parties obligated to
<PAGE>
5
Assignor under the Mortgage Loan Documents shall deal solely with the
Bank, acting on behalf of Assignee, under the Mortgage Loan Documents
and this Assignment, Assignor and all other parties so obligated shall
be entitled to rely on their actions so taken with respect to the Bank
and upon the action taken by the Bank, acting on behalf of Assignee,
with respect to them until the satisfaction in full of all obligations
of Assignor under the Loan Agreement or until Assignee shall appoint
another person to act on its behalf (or otherwise revoke the Bank's
authority to act on behalf of Assignee);
(c) Assignor agrees that Assignee or it agents shall have the
full power and authority, in its discretion, to take, or defer from
taking, any and all actions with respect to the administration and
enforcement of the Loan Documents, in order to effectuate the purposes
contemplated herein and therein, including the right, power and
authority to exercise any and all of the rights, remedies and options
reserved to Assignee or its agents in, or given by law or equity to
Assignee or it agents as holder of the Mortgage Loan Documents, to
enforce the Mortgage Loan Documents, and to take such other actions for
the protection and preservation of the lien of the Mortgages, and
protect and preserve all property described therein should Assignee or
its agents become the owner thereof by foreclosure or otherwise as may
be necessary and/or appropriate.
4. Event of Default; Remedies. If an event of default shall
occur under any Mortgage Loan (an "Event of Default"), Assignee or its agents
shall have all the rights and remedies which would be available to Assignor (but
for this Assignment) under the Mortgage Loan Documents as set forth therein and
as permitted thereunder or otherwise available to Assignor (but for this
Assignment) in law or in equity, including, without limitation but in each
instance to the extent provided in and as conditioned by the Mortgage Loan
Documents, the right:
(a) To accelerate the maturity of such Mortgage Loan and all
other amounts due under the applicable Mortgage Loan Documents and to
declare the same to be or become immediately due and payable and
enforce payment thereof upon the happening of any Event of Default by
the mortgagor under such Mortgage Loan, as permitted therein, after the
giving of such applicable notice and/or the passage of such time as may
be provided for in such Mortgage Loan;
(b) To take such steps, institute and prosecute such actions
and proceedings and do or omit such acts which, in its judgment, are
advisable in order to enforce payment of all amounts due under the
Mortgage Loan Documents and realize upon the security provided
therefor, including, without limitation, (i) to select any of the
remedies available under the Mortgage Loan Documents or otherwise
available at law or in equity, (ii) to enter into or consent to any
amendment, modification and/or
<PAGE>
6
extension of the Mortgage Loan Documents, (iii) to enter into or
consent to any release, substitution or exchange of all or any part of
any security for such Mortgage Loan, (iv) to waive any claim against
the mortgagor or any person or entity obligated under the Loan
Documents and (v) to defer, extend, increase or decrease any payment,
installment or other sum required or on account of such Mortgage Loan
and/or the applicable Mortgage Loan Documents;
(c) To discontinue any such action or proceeding commenced as
provided in subsection 4(b) above or to stay, delay, defer, discontinue
or withdraw the same;
(d) To enter or cause to be entered a bid at any foreclosure
sale of the property mortgaged securing such Mortgage Loan pursuant to
the applicable Mortgage Loan Documents (each such property a "Mortgaged
Property") or any portion thereof;
(e) To acquire title in and to any Mortgaged Property or any
portion thereof in any foreclosure proceeding in its name or the name
of its nominee or designee;
(f) To accept a deed to any Mortgaged Property or any portion
thereof in lieu of foreclosure and to release the mortgagor from its
obligations under the Mortgage in consideration of such deed in lieu of
foreclosure;
(g) To operate, manage and/or develop, or hire agents to
operate, manage and/or develop, any foreclosed or acquired Mortgaged
Property and to lease all or any portion thereof upon such terms and
conditions as it deems to be in the best interests of Assignee;
(h) To sell any foreclosed or acquired Mortgaged Property or
any portion thereof, upon such terms as it may deem to be in the best
interests of Assignee, including, without limitation, the right to take
back one or more purchase money notes and mortgages;
(i) To make advances for the payment for taxes, assessments,
water, sewer and vault charges, and all interest and penalties thereon,
insurance premiums and other similar or dissimilar items relating to
any Mortgaged Property, to the extent permitted by the applicable
Mortgage Loan Documents;
(j) To make advances for the account of the mortgagor under
such Mortgage Loan, to the extent permitted by the applicable Mortgage
Loan Documents;
<PAGE>
7
(k) To collect, sue for, receive and, subject to applicable
provisions of law, settle or compromise any claims for loss or damage
covered by insurance and/or condemnation of all or any portion of any
Mortgaged Property and to exercise its discretion in the proper
application and disposition of the net proceeds of such insurance
and/or condemnation award;
(l) To sell the Mortgage Loan at a fair market value; and
(m) Generally to do and take any and all actions which, but
for this Assignment, the Assignor would be entitled to do and take
under or with respect to the applicable Mortgage Loan Documents; it
being understood and agreed that this Assignment does not confer upon
the Assignee any greater rights with respect to the Mortgage Loan
Documents than granted to Assignor or expand or extend such rights, the
purpose of this Assignment being, inter alia, to assign, transfer and
allocate such rights and not to create new rights against any mortgagor
under the applicable Mortgage Loan, or to limit the rights or expand
the obligations of any such mortgagor, and in the event of any conflict
between the provisions of this Assignment and the provisions of the
Mortgage Loan Documents, the provisions of the Mortgage Loan Documents,
shall control.
5. Possession of Mortgage Loan Documents. From and after the
date of this Assignment, the Bank shall no longer hold the duly executed
originals of the Mortgage Loan Documents on its own behalf or as custodian for
Assignor, but shall hold the same as custodian for Assignee, pursuant to the
terms of (i) the custodial agreement dated as of September 3, 1997 by and
between the Bank and Assignee and (ii) the Servicing Agreement dated as of
September 3, 1997 by and between the Bank and Assignor, as assigned to Assignee
pursuant to an Assignment of Servicing Agreement dated as of September 3, 1997.
6. Further Assurances. (a) Assignor agrees that at any time
and from time to time, at the expense of Assignor, Assignor will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be necessary or desirable, or that Assignee may reasonably
request, to effectuate the purpose or provisions of this Assignment or to
confirm or perfect any transaction described or contemplated herein or to enable
Assignee or its agents to exercise and enforce its rights and remedies hereunder
with respect to any Mortgage Loan Document. Assignor and Assignee agree that
Borrower shall reasonably cooperate (i) in preparing, executing, delivering or
having prepared, delivered and executed by January 1, 1998 such documents or
instruments which are necessary or desirable to register legal title to each
Mortgage Loan in the name of Lender in the appropriate land registry or other
office of public record, and (ii) in registering legal title to each Mortgage
Loan in the name of Lender in the event the credit rating of the Bank (or such
other agent as may hold the Mortgage Loans on behalf of Assignee) will fall
below
<PAGE>
8
either "BBB-" by Standard & Poor's Rating Services or "Baa" by Moody's Investor
Service, Inc.
(b) Assignor hereby authorizes Assignee or its agents to file
and record one or more financing or continuation statements and amendments
thereto, relative to all or any part of the Loan Documents without the signature
of Assignor where permitted by law.
7. Assignment. This Assignment shall be binding upon and shall
inure to the benefit of the parties and their respective successors and assigns.
8. Notices. All notices and other communications provided for
hereunder shall be in writing (including telegraphic, telecopy or telex
communication) and mailed, telegraphed, telecopied, telexed or delivered, if to
Assignor, at its address at c/o Conyers Dill & Pearman, Clarendon House, 2
Church Street, Hamilton, HM 11, Bermuda, Attention: Roger Burgess; and if to
Assignee, at its address at 125 West 55th Street, New York, New York 10019,
Attention: Roger Smock; or as to each other party, at such other address as
shall be designated by such party in a written notice to Assignee and Assignor.
All such notices and communications shall, when mailed, telegraphed, telecopied
or telexed, be effective when deposited in the mails, delivered to the telegraph
company, transmitted by telecopier or confirmed by telex answerback,
respectively.
9. Governing Law. This Assignment and Agreement shall be
governed by and construed in accordance with the laws of Bermuda.
10. Jurisdiction. (a) Each of the parties hereto hereby
irrevocably and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of any court sitting in Bermuda, and any appellate
court thereof, in any action or proceeding arising out of or relating to this
Assignment, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in any such
Bermuda court. Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Assignment shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Assignment in the courts
of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Assignment in any
Bermuda court. Each of the parties hereto hereby irrevocably waives, to the
fullest extent permitted by law, the defense of an inconvenient forum to the
maintenance of such action or proceeding in any such court. Assignee hereby
<PAGE>
9
irrevocably appoints Conyers Dill & Pearman, Clarendon House, Church Street,
Hamilton HM CX, Bermuda ("Assignee's Process Agent"), as its agent to receive,
on behalf of Assignee, service of copies of the summons and complaint and any
other process which may be served in any such action or proceeding. Any such
service may be made by mailing or delivering a copy of such process, if to
Assignee, in care of Assignee's Process Agent at Assignee's Process Agent's
above address. Assignee hereby irrevocably authorizes and directs its respective
process agent to accept such service on its behalf.
11. Counterparts. This Assignment may be executed in one or
more counterparts, each of which shall be considered an original. Delivery of an
executed counterpart of a signature page to this Assignment by telecopier shall
be effective as delivery of a manually executed counterpart of this Assignment.
Any delivery of a counterpart signature by telecopier shall, however, be
promptly followed by delivery of a manually executed counterpart.
12. Change and Modifications. This Assignment may not be
changed, terminated or modified orally or in any manner other than by an
agreement in writing signed by the party sought to be charged therewith.
13. No Waiver. No waiver by any party of any provision of this
Assignment or any right, remedy or option hereunder shall be controlling, nor
shall it prevent or estop such party from thereafter enforcing such provision,
right, remedy or option, and the failure or refusal of any party hereto to
insist in any one or more instances upon the strict performance of any of the
terms or provisions of this Assignment by any other party hereto shall not be
construed as a waiver or relinquishment for the future of any such term or
provision, but the same shall continue in full force and effect, it being
understood and agreed that the rights, remedies and options of Assignee or the
Bank, acting as servicer on behalf of Assignee, hereunder are and shall be
cumulative and in addition to all other rights, remedies and options of Assignee
or the Bank, acting as servicer on behalf of Assignee, in law or in equity or
under any other agreement.
14. Recitals. All of the recitals hereinabove set forth are
incorporated in this Assignment by reference.
15. Paragraph Headings, etc. The headings of paragraphs
contained in this Assignment are provided for convenience only. They form no
part of this Assignment and shall not affect its construction or interpretation.
All references to paragraphs or subparagraphs of this Assignment refer to the
corresponding paragraphs and subparagraphs of this Assignment. All words used
herein shall be construed to be of such gender or number as the circumstances
require. This "Assignment" shall each mean this Assignment as a whole and as the
same may from time to time hereafter be amended or modified. The words "herein,"
"hereby," "hereof," "hereto," "hereinabove" and "hereinbelow," and words of
<PAGE>
10
similar import, refer to this Assignment as a whole and not to any particular
paragraph, clause or other subdivision hereof, unless otherwise specifically
noted.
16. Termination. Upon satisfaction in full of all obligations
of Assignor under the Loan Documents, this Assignment shall terminate and be of
no further force and effect and Assignee shall execute documents evidencing the
assignment of any outstanding Mortgage Loans to Assignor (without recourse),
provided however, that in the event an Event of Default under any Mortgage Loan
occurs, Assignee's obligation to assign such defaulted Mortgage Loan back to
Assignor as provided in this Section shall terminate, provided, further,
however, that to the extent any amounts collected by Lender with respect to such
defaulted Mortgage Loan exceed an amount equal to the sum of (i) the amount by
which the principal amount of the Loan secured by such defaulted Mortgage Loan
was reduced pursuant to Section 2.04(b)(B) of the Loan Agreement, (ii) any
interest accrued on such amount at the applicable Interest Rate (as defined in
the Loan Agreement) compounded monthly, and (iii) the amount of any collection
expenses (including legal fees), such excess shall be applied against the Excess
Loan Amount and any remaining amount shall be remitted to Borrower.
19. Partial Invalidity. In case any provision in this
Assignment shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
20. National Housing Act. Subject to the terms and provisions
of the Servicing Agreement, the Mortgage Loans hereby assigned will be
administered and serviced by the Bank, as agent of Assignee, in accordance with
the National Housing Act (Canada) and National Housing Regulations (Canada).
<PAGE>
IN WITNESS WHEREOF, the Assignor and each other party hereto
has duly executed this Mortgage Loan Assignment Agreement as of the 3rd day of
September, 1997,
ASSIGNOR
NB FINANCE, LTD.
By: /s/ Francois Bourassa
---------------------------
Francois Bourassa
Secretary
[SIGNATURE PAGE CONTINUES ON NEXT PAGE]
<PAGE>
ASSIGNEE
NB CAPITAL CORPORATION
By: /s/ Real Raymond
---------------------------
Real Raymond
Chief Financial Officer &
Treasurer
BANK
NATIONAL BANK OF CANADA
By: /s/ Real Raymond
---------------------------
Real Raymond
Senior Vice-President-Treasury
and Financial Markets
<PAGE>
PROVINCE OF QUEBEC )
) ss.:
DISTRICT OF MONTREAL )
On the 3rd day of September 1997, before me personally came
Francois Bourassa, to me known, who, being by me duly sworn, did depose and say
that he resides at ______________________________________________, that he is a
Secretary of NB Finance, Ltd., the corporation described in and which executed
the foregoing instrument; and that he signed his name thereto by authority of
the board of directors of said corporation.
/s/ [signature and seal] #95089
--------------------------------
Commissary of Oath for Province of Quebec, No.
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 3rd day of September 1997, before me personally came
Real Raymond, to me known, who, being by me duly sworn, did depose and say that
he resides at ______Vervun 11 O'Reilly Quebec______, that he is a Chief
Financial Officer & Treasurer of NB Capital Corporation, the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by authority of the board of directors of said corporation.
/s/ Edith L. Kinsley
--------------------------------
Notary Public
[stamp of
Edith Kinsley
Notary Public, State of New York
No. 31-5042974
Qualified in New York County
Commission Expires May 1, 1999]
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 3rd day of September 1997, before me personally came
Real Raymond, to me known, who, being by me duly sworn, did depose and say that
he resides at ______Vervun 11 O'Reilly Quebec______, that he is a Senior Vice
President-Treasury and Financial Markets of National Bank of Canada, the bank
described in and which executed the foregoing instrument; and that he signed his
name thereto by authority of the board of directors of said corporation.
/s/ Edith L. Kinsley
--------------------------------
Notary Public
[stamp of
Edith Kinsley
Notary Public, State of New York
No. 31-5042974
Qualified in New York County
Commission Expires May 1, 1999]
<PAGE>
Exhibit A
Mortgage Loans
THIS ASSIGNMENT OF THE SERVICING AGREEMENT dated as of September 3, 1997.
BY AND BETWEEN: NB FINANCE, LTD., a corporation duly
incorporated under the laws of Bermuda;
(hereinafter called the "Assignor");
PARTY OF THE FIRST PART;
AND: NB CAPITAL CORPORATION, a corporation
duly incorporated under the laws of
Maryland;
(hereinafter called the "Assignee");
PARTY OF THE SECOND PART.
AND: NATIONAL BANK OF CANADA, a Chartered
Bank duly incorporated under the laws of
Canada;
(hereinafter called the "Bank")
WHEREAS the Assignor and the Bank have entered into concurrently herewith a
servicing agreement pursuant to which the Bank agrees to service and administer
the Mortgage Loans (as this expression is defined in the said servicing
agreement) on behalf of the Assignor under the terms and conditions set forth
therein (the "Servicing Agreement");
WHEREAS the Assignor has agreed to assign all its right, title and interest in
the Servicing Agreement to the Assignee and the Bank has agreed to such
assignment.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. ASSIGNMENT
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Assignor hereby assigns and transfers to the
Assignee, hereto accepting, and subrogates the Assignee in all of the Assignor's
rights, title and interest in and to the Servicing Agreement (the "Assignment")
and the Bank hereby acknowledges and accepts the Assignment.
2. ASSUMPTION
The Assignee hereby assumes to the complete and entire exoneration of
the Assignor all obligations of the Assignor accruing as and from the date
hereof under the terms of or in
<PAGE>
2
connection with the Servicing Agreement (the "Assumption") and the Bank hereby
acknowledges and accepts the Assumption.
3. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
the laws of Bermuda and the obligations, rights and remedies hereunder shall be
determined in accordance with the substantive laws of Bermuda.
Each of the parties hereto irrevocably and unconditionally submits, for
itself and its property, to the non exclusive jurisdiction of any court of
Bermuda, and any appellate court thereof, in any action or proceeding arising
out of or relating to this Agreement, or for recognition or enforcement of any
judgment, and each of the parties hereto irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such court. Each of the parties hereto agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall effect any right that any party
may otherwise have to bring any action or proceeding relating to this Agreement
in the courts of any jurisdiction. Each of the parties hereto irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection they may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement in the
courts of Bermuda. Each of the parties hereto hereby irrevocably waives, to the
fullest extent permitted by law, the defence of an inconvenient forum to the
maintenance of such action or proceeding in any such court. The Assignee and the
Bank hereby irrevocably appoint Conyers, Dill and Pearman, Clarendon House,
Church Street, Hamilton HM CX, Bermuda ("Assignee's Process Agent"), as its
agent to receive, on behalf of the Assignee and the Bank, service of copies of
the summons and complaint and in any other process that may be served in any
such action or proceeding. Any such service may be made by mailing or delivering
a copy of such process, in care of the Assignee's Process Agent at the
Assignee's Process Agent's above address. The Assignee and the Bank hereby
irrevocably authorizes and directs its agent to accept such service on its
behalf. The parties hereto hereby agree that the final judgment in any such
action or proceeding shall be conclusive and may be in force in any other
jurisdiction by suit on the judgment or in any other manner provided by law.
<PAGE>
3
EXECUTED by the parties hereto, as of the date first hereinabove
mentioned.
NB FINANCE, LTD.
per:
-------------------------
NB CAPITAL CORPORATION
per:
-------------------------
NATIONAL BANK OF CANADA
per:
-------------------------
[Letterhead of Deloitte & Touche]
Independent Auditors' Consent
We consent to the use in and incorporation by reference in this Amendment No. 4
to Form S-4 Registration Statement Nos. 333-41009-01, 333-41009 and 333-41009-02
of National Bank of Canada, NB Capital Corporation and NB Finance, Ltd. of the
following:
1. Our Independent Auditors' Report dated February 10, 1998, relating to
financial statements of NB Capital Corporation for the period August 20, 1997
(date of incorporation) to December 31, 1997, appearing in the preliminary
prospectus, which is part of such Registration Statements;
2. Our Auditors' report dated February 10, 1998, relating to the financial
statements of NB Finance, Ltd. for the four-month period ended December 31,
1997, appearing in the preliminary prospectus, which is part of such
Registration Statements.
3. The reference to us under the heading "Experts" included in such
prospectuses.
Chartered Accountants
Montreal, Canada
March 2, 1998
