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Filed Pursuant to Rule 424(b)3
Registration No. 333-41009
NB CAPITAL CORPORATION
NB FINANCE, LTD.
NATIONAL BANK OF CANADA
OFFER TO EXCHANGE
8.35% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A,
OF NB CAPITAL CORPORATION FOR UP TO 238,400 SHARES OF SUCH STOCK
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 currently consist of (i) sixteen "hypothecation"
loans (the "Initial Mortgage Assets") issued to the Company by NB Finance, Ltd.,
a wholly owned subsidiary of the Bank ("NB Finance"), that are recourse only to
the "Initial Mortgage Loans" and (ii) cash. 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, 11,692 "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 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY POTENTIAL HOLDERS OF NEW PREFERRED SHARES,
INCLUDING THE FOLLOWING:
- 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 derived from 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.
- 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.
- 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, Ontario and New
Brunswick. 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.
- 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.
- 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.
- 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.
- The Company may not qualify as a REIT for United States federal income tax
purposes. Consequently, the Company may be subject to United States
federal income tax at normal corporate tax rates.
- The 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 on the holders of New
Preferred Shares may be negative.
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- 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.
- 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.
- 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.
- 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.
- The assignment of the Initial Mortage Loans to the Company has not been
registered. Consequently, a bona fide purchaser who completes all
necessary registration formalities prior to the Company would be
recognized as the owner of the Initial Mortage Loans.
- 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, 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.
- 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 Preferred Shares represent an obligation of the Company and do not
represent an obligation of NB Finance or, prior to an Exchange Event, the Bank.
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 Stock, 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 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
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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 April 9, 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.
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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 SHORT 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 10, 1998.
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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.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus that 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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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 December 31, 1997, the Canadian
dollar exchange rate was C$1.4313 = 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 (i) sixteen hypothecation loans
(the "Initial Mortgage Assets"), in an aggregate amount at December 31, 1997 of
US$457 million, issued to the Company by NB Finance that are recourse only to
the "Initial Mortgage Loans" and (ii) cash. The Initial Mortgage Loans consist
of sixteen pools of, at December 31, 1997, 11,692 "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$97 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.
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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 that 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 the 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 that, 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 will not be less than 8% of risk-weighted assets and
risk-weighted off-balance sheet items, unless a higher ratio is prescribed by
the Superintendent. The Capital Guideline prescribes risk-weighting and the
treatment of off-balance sheet items. The ratio of total capital to
risk-weighted off-balance sheet items is the "risk-based capital ratio" and is
based upon standards adopted by the Bank for International Settlement. The
Capital Guideline recognizes two tiers of capital. Tier 1 capital comprises the
highest quality capital elements based upon the attributes of permanence,
freedom from mandatory fixed charges against earnings and subordination to the
rights of depositors and other creditors. Tier 2 capital contributes to the
overall strength of a bank as a going concern, but falls short in meeting the
first two capital attributes described for Tier 1 capital. Tier 2 capital
differentiates between Tier 2A hybrid (debt/equity) instruments and Tier 2B
limited life instruments. Tier 1 capital elements consist of common
shareholders' equity, qualifying noncumulative perpetual
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preferred shares and qualifying noncontrolling 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. When the share or instrument provides for redemption by the issuer
after five years with supervisory approval, the Superintendent would not
normally prevent such redemption by a healthy and viable bank when 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 noncumulative 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
Superintendent, 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 the Initial 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.
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ORGANIZATIONAL DIAGRAM
The following diagram outlines the relationship between the Bank and the
Company relevant to the Exchange Offer:
[LOGO]
- ------------------------
1 Subject to automatic exchange for the Bank Preferred Shares in certain
circumstances.
2 CMHC-insured residential first mortgages originated by the Bank or acquired
by the Bank from other NHA-Approved Lenders (as defined).
3 Secured by residential real property and recourse only to the Initial
Mortgage Loans.
SUMMARY RISK FACTORS
The Preferred Shares offered hereby are subject to certain risks. See "Risk
Factors." Among such risks are the following:
- 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 derived from 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.
- 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.
- 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, Ontario and New
Brunswick. 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.
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- 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.
- 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.
- 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.
- The Company may not qualify as a REIT for United States federal income tax
purposes. Consequently, the Company may be subject to United States
federal income tax at normal corporate tax rates.
- The 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 on the holders of New
Preferred Shares may be negative.
- 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.
- 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.
- 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
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.
- 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.
- The assignment of the Initial Mortgage Loans to the Company has not been
registered. Consequently, a bona fide purchaser who completes all
necessary registration formalities prior to the Company would be
recognized as the owner of the Initial Mortgage Loans.
- 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, the
Old Preferred Shares may not be offered or sold, unless registered under
the Securities Act, except
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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,
- The Company is under no obligation, and currently has no intention, to
list the New Preferred Shares on a national exchange. Additionally, there
is no existing market for the New Preferred Shares and there can be no
assurance as to the liquidity of any markets that may develop, the ability
of holders to sell their New Preferred Shares or the sale price thereof.
Consequently, holders of New Preferred Shares may find it difficult to
sell their New Preferred shares or to sell their New Preferred Shares at a
price equivalent to the purchase price thereof.
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold, finance and
manage Mortgage Assets that will generate net income for distribution to
stockholders. The Mortgage Assets of the Company currently consist of (i) the
Initial Mortgage Assets (sixteen hypothecation loans, in an aggregate amount at
December 31, 1997 of US$457 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, 11,692 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)) and (ii) cash. 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
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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."
The Board of Directors of NB Finance is composed of seven members, two of
whom are Independent Directors. NB Finance currently has no employees and does
not anticipate that it will require any 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 Company. 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 adjustments. The most significant of such adjustments are (i) no
deduction is allowed for dividends received, (ii) a deduction is allowed for
dividends paid (other than the portion of any dividend attributable to net
income from foreclosure property) and for taxes imposed for failing to satisfy
certain statutory REIT requirements, and (iii) net income from foreclosure
property and net income derived from prohibited transactions is excluded from
the determination. Notwithstanding its election to be taxable as a REIT, the
Company may be subject to federal, state and/or local tax. See "Risk
Factors--Tax Risks" and "United States Federal Income Tax Considerations."
7
<PAGE>
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."
<TABLE>
<S> <C>
The Exchange Offer........... The Company is offering to exchange pursuant to the Exchange
Offer up to 238,400 shares of its New Preferred Shares for
up to 238,400 of its outstanding Old Preferred Shares at a
rate of one New Preferred Share for each Old Preferred
Share. The form and terms of the New Preferred Shares
(including the dividend rate, liquidation preference and
redemption rights) are identical in all material respects to
the form and terms of the Old Preferred Shares, except that
the New Preferred Shares have been registered under the
Securities Act, and therefore, will not bear legends
restricting their transfer. Further, the holders of New
Preferred Shares will not be entitled to the registration
rights of holders of Old Preferred Shares under the
Registration Rights Agreement, which rights with respect to
the Old Preferred Shares will terminate upon consummation of
the Exchange Offer. The issuance of the New Preferred Shares
is intended to satisfy certain obligations of the Company
contained in the Registration Rights Agreement. Subject to
certain conditions, a holder of Old Preferred Shares who
wishes to tender must transmit a properly completed and duly
executed Letter of Transmittal to The Bank of Nova Scotia
Trust Company of New York (the "Exchange Agent") on or prior
to the Expiration Date. For procedures related to tendering,
see "The Exchange Offer." As of the date hereof, 300,000
shares of Old Preferred Stock were outstanding. The Initial
Purchaser currently holds 61,600 Old Preferred Shares as an
unsold allotment.
Minimum Condition............ The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Preferred Shares being
tendered for exchange.
Expiration Date;
Withdrawal................... The Exchange Offer will expire at 5:00 p.m., New York City
time, on the "Expiration Date." As used herein, the term
Expiration Date means 5:00 p.m., New York City time, on
April 9, 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.
</TABLE>
8
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<TABLE>
<S> <C>
Conditions to the Exchange
Offer........................ The Exchange Offer is subject to certain customary
conditions that may be waived by the Company. The Company
currently expects that each of these conditions will be
satisfied and that no waivers will be necessary. See "The
Exchange Offer--Certain Conditions to the Exchange Offer."
The Company reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration Date upon
the occurrence of any such condition.
Procedure for Tendering Old
Preferred Shares............. Each holder of Old Preferred Shares wishing to accept the
Exchange Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, together with
the Old Preferred Shares and any other required
documentation, to the Exchange Agent at the address set
forth herein. See "The Exchange Offer--Procedures for
Tendering Old Preferred Shares" and "Plan of Distribution."
Use of Proceeds.............. There will be no proceeds to the Company from the exchange
of Old Preferred Shares pursuant to the Exchange Offer.
Special Procedures for
Beneficial Owners............ Any beneficial owner whose Old Preferred Shares are
registered in the name of a broker, dealer, commercial bank,
trust company or other nominee who wishes to tender should
contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's own
behalf. If such beneficial owner wishes to tender on such
beneficial owner's own behalf, such beneficial owner must,
prior to completing and executing the Letter of Transmittal
and delivering the Old Preferred Shares, either make
appropriate arrangements to register ownership of the Old
Preferred Shares in such beneficial owner's name or obtain a
properly completed stock power from the registered holder.
The transfer of registered ownership may take considerable
time. See "The Exchange Offer-- Procedure for Tendering Old
Preferred Shares."
Guaranteed Delivery
Procedures................... Holders of Old Preferred Shares who wish to tender their Old
Preferred Shares and whose Old Preferred Shares are not
entirely available or who cannot deliver their Old Preferred
Shares, the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender their Old Preferred
Shares according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Procedure for Tendering Old
Preferred Shares."
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 that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Preferred Shares issued pursuant to
the Exchange Offer will be delivered
</TABLE>
9
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<TABLE>
<S> <C>
promptly following the Expiration Date. See "The Exchange
Offer-- Procedures for Tendering Old Preferred Shares."
Effect on the Holders of Old
Preferred Shares............. As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Preferred Shares
pursuant to the terms of the Exchange Offer, the Company
will have fulfilled the covenant contained in the
Registration Rights Agreement and, accordingly, there will
be no liquidated damages pursuant to the terms of the
Registration Rights Agreement, and the holders of the Old
Preferred Shares will have no further registration or other
rights under the Registration Rights Agreement. Holders of
the Old Preferred Shares who do not tender their Old
Preferred Shares in the Exchange Offer will continue to hold
such Old Preferred Shares without any rights under the
Registration Rights Agreement that, by their terms,
terminate or cease to have further effectiveness as a result
of the making of, and the acceptance for exchange of all
validly tendered Old Preferred Shares pursuant to, the
Exchange Offer. To the extent that the Old Preferred Shares
are tendered and accepted in the Exchange Offer, the trading
market for untendered Old Preferred Shares could be
adversely affected.
Consequence of Failure to
Exchange Securities
Offered...................... Holders of Old Preferred Shares who do not exchange for New
Preferred Shares pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of
such Old Preferred Shares as set forth in the legend thereon
as a consequence of the offer or sale of the Old Preferred
Shares pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the
Securities Act and the applicable state securities laws. The
Company does not currently anticipate that it will register
any Old Preferred Shares that are not exchanged pursuant to
the Exchange Offer under the Securities Act after the
Expiration Date.
<CAPTION>
THE NEW PREFERRED SHARES
<S> <C>
Issuer....................... NB Capital Corporation, a Maryland corporation.
Securities Offered........... Up to 238,400 Noncumulative Exchangeable Preferred Stock,
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
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
holders of Preferred Shares. Except for the Senior Preferred
Stock, additional shares of Preferred Stock ranking senior
to the New Preferred Shares may not be issued without the
approval of holders of at least two-thirds of the New
Preferred Shares. Additional shares of Preferred Stock
ranking on a parity with the New Preferred Shares may not be
issued without the approval of a majority of the Board of
Directors and a majority of the Independent Directors.
Dividends.................... Dividends on the New Preferred Shares are payable at the
rate of 8.35% per annum of the liquidation preference (an
amount equal to US$83.50 per annum per share, calculated by
multiplying the annual dividend rate of 8.35% by the
liquidation preference of US$1,000 per share, assuming
authorization and declaration by the Board of Directors of
four quarterly dividends), if, when and as authorized and
declared by the Board of Directors. If authorized and
declared, dividends are payable quarterly in arrears on the
30th day of March, June, September and December in each
year, commencing June 30, 1998. With respect to the dividend
period in which the Exchange Offer is consummated, dividends
on each New Preferred Share will accrue from the first day
of the dividend period. Thereafter, dividends accrue in each
quarterly period from the first day of such period, whether
or not authorized, declared or paid with respect to New
Preferred Shares for the prior quarterly period. Dividends
on the New Preferred Shares are not cumulative and,
accordingly, if no dividend is authorized and declared on
the New Preferred Shares by the Board of Directors for a
quarterly dividend period, holders of the New Preferred
Shares will have no right to receive a dividend for that
period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are
authorized, declared and paid for any future period with
respect to either the New Preferred Shares or the Common
Stock. If no dividend is paid on the New Preferred Shares
for a quarterly dividend period, the payment of dividends on
the Common Stock will be prohibited for that period and at
least the following three quarterly dividend periods. See
"Description of New Preferred Shares--Dividends."
Liquidation Preference....... The liquidation preference for each of the New Preferred
Shares is US$1,000. Upon liquidation, holders of the New
Preferred Shares will also be entitled to receive an amount
equal to the quarterly accrued and unpaid dividend, if any,
thereon to the date of liquidation. See "Description of New
Preferred Shares--Rights Upon Liquidation."
Registration Rights
Agreement.................... The Old Preferred Shares were sold by the Company on
September 3, 1997 pursuant to a Purchase Agreement, dated as
of August 22, 1997, among the Company, the Bank and the
Initial Purchaser (the "Purchase Agreement"). Pursuant to
the Purchase Agreement, the Company and the Initial
Purchaser entered into the Registration Rights Agreement.
This Exchange Offer is intended to satisfy certain rights
under the Registration Rights Agreement, which terminate
upon the consummation of the Exchange Offer. The holders of
the New Preferred Shares are not entitled to any exchange or
registration
</TABLE>
11
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<TABLE>
<S> <C>
rights with respect to the New Preferred Shares. The Old
Preferred Shares are subject to the payment of additional
interest under certain circumstances if the Company is not
in compliance with its obligations under the Registration
Rights Agreement. See "Exchange Offer; Registration Rights."
Description of the New
Preferred Shares............. The form and terms of the New Preferred Shares are the same
as the form and terms of the Old Preferred Shares except
that (i) the New Preferred Shares will be registered under
the Securities Act and, therefore, the New Preferred Shares
will not bear legends restricting the transfer thereof and
(ii) holders of the New Preferred Shares will not be
entitled to the registration rights available to holders of
Old Preferred Shares under the Registration Rights
Agreement, which registration rights with respect to Old
Preferred Shares will terminate upon the consummation of the
Exchange Offer. See "Description of the New Preferred
Shares."
Redemption................... The New Preferred Shares are not redeemable prior to
September 3, 2007 (except upon the occurrence of a Tax
Event, as defined in "Description of New Preferred
Shares--Redemption," on or after September 3, 2002). On and
after September 3, 2007, the New Preferred Shares may be
redeemed for cash at the option of the Company, in whole or
in part, at any time and from time to time, at the
redemption prices set forth herein, plus the quarterly
accrued and unpaid dividend, if any, thereon to the date of
redemption. Upon the occurrence of a Tax Event, on or after
September 3, 2002, the Company will have the right to redeem
the New Preferred Shares in whole (but not in part) at a
redemption price equal to the Make-Whole Amount (as defined
in "Description of New Preferred Shares--Redemption"), plus
the quarterly accrued and unpaid dividend, if any, thereon
to the date of redemption. Any redemption is subject to the
prior written approval of the Superintendent. See
"Description of New Preferred Shares--Redemption." The New
Preferred Shares are not subject to any sinking fund or
mandatory redemption and are not convertible into any other
securities of the Company.
Automatic Exchange........... Each of the New Preferred Shares will be exchanged
automatically for one Bank Preferred Share upon the
occurrence of an Exchange Event. See "Description of New
Preferred Shares--Automatic Exchange."
Voting Rights................ Holders of the New Preferred Shares will not have any voting
rights, except as expressly provided herein. On any matter
on which holders of the New Preferred Shares may vote, each
of the New Preferred Shares will be entitled to one vote.
See "Description of New Preferred Shares--Voting Rights."
Ownership Limits............. Beneficial ownership by any individual of more than 5% of
any outstanding series of Preferred Stock, including the New
Preferred Shares offered hereby, is restricted in order to
preserve the Company's status as a REIT for United States
federal income tax
</TABLE>
12
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<S> <C>
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 Considerations......... Each holder of the New Preferred Shares will, by exchanging
its Old Preferred Shares for New Preferred Shares, be deemed
to have directed the Company to invest in the Initial
Mortgage Assets issued by NB Finance (as well as the other
assets held by the Company and identified at the time of
purchase) and represented and agreed that either (A) no part
of the assets to be used by it to acquire and hold such New
Preferred Shares constitutes the assets of any (I) employee
benefit plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA")) subject to Title I of ERISA, (II) plan (as
defined in section 4975(e)(1) of the Code) or (III) entity
whose underlying assets include "plan assets" under
Department of Labor Regulation 29 C.F.R. Section 2510.3-101
(collectively, "Plans") or (B) one or more prohibited
transaction, statutory or class exemptions apply such that
the use of such plan assets to acquire and hold such New
Preferred Shares will not constitute a nonexempt prohibited
transaction under ERISA or the Code.
In addition, in the event that the New Preferred Shares are
not treated as "publicly offered securities" (within the
meaning of the above-referenced regulations) as of the date
on which the Exchange Offer is consummated, or (if no
Exchange Offer is consummated) the shelf registration
statement, which the Company is required to file, pursuant
to the Registration Rights Agreement, in lieu of or in
addition to the Registration Statement in the event (i) the
Company is not permitted to effect the Exchange Offer, (ii)
for any reason, the Registration Statement is not declared
effective within 180 days of the Issue Date, or (iii) in
certain other circumstances (the "Shelf Registration
Statement"), is declared effective, then during the period
commencing on 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
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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.
</TABLE>
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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 that, 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 FINANCE, LTD.
NB CAPITAL CORPORATION SEPTEMBER 3, 1997
AUGUST 20, 1997 (DATE OF INCEPTION)
(DATE OF INCEPTION) TO TO
DECEMBER 31, 1997 DECEMBER 31, 1997
---------------------- -------------------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenue.............................................................. US$ 12,993,939 US$ 14,364,680
Operating expenses................................................... 1,000,846 14,208,947
---------------------- -------------------
Operating profit................................................... 11,993,093 155,733
Income tax........................................................... US$ 80,000 US$ --
---------------------- -------------------
Net income........................................................... US$ 11,913,093 US$ 155,733
Ratio of Earnings to Fixed Charges and Preferred Dividends........... 1.4 --
BALANCE SHEET DATA:
Total assets......................................................... US$ 481,022,332 US$ 593,532,430
Total liabilities.................................................... 885,857 461,029,139
8.35% Noncumulative Exchangeable Preferred Stock,
Series A........................................................... 3,000 --
Common stock......................................................... 1 12,000
Contribution Surplus................................................. 476,431,381 132,335,558
Retained Earnings.................................................... 3,702,093 155,733
</TABLE>
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RISK FACTORS
Prospective exchanging stockholders should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before exchanging Old Preferred Shares for the New Preferred Shares
in the Exchange Offer. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include those discussed below.
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 that 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 June 30, 1997, the exchange rate of the
Canadian dollar to the United States dollar has ranged from C$1.3111 to US$1.00
on January 21, 1994 to C$1.4234 to US$1.00 on January 20, 1995, with an average
for such period of C$1.3686 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,
Ontario and New Brunswick, and the real property
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securing additional Mortgage Assets acquired by the Company is also expected to
be geographically concentrated in Canada. Consequently, any actions taken by or
on behalf of the Company with respect to such real property will be dependent
upon the laws of the jurisdictions in which such real property is located.
In addition, from time to time Canada may experience weaker economic
conditions and housing markets than the United States that 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 that may be time consuming and can cause delays in the receipt of such
payments. In addition, the CMHC insurance will cease to be in force if any such
Initial Mortgage Loan is sold to a person other than a lender approved by CMHC,
unless such Initial Mortgage Loan continues to be administered by CMHC or a
lender approved by CMHC. The regulations of the CMHC stipulate that the terms of
repayment of Mortgage Loans shall not be altered and that no derogation from the
rights of the mortgagee against the mortgaged property by way of postponement,
partial discharge or otherwise shall be granted without first obtaining the
approval of the CMHC. Consequently, even though the Mortgage Loans are CMHC
insured, payments of principal and interest in respect of any Mortgage Loan in
default may not be available from CMHC or, if available, receipt thereof may be
delayed.
TAX RISKS
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company operates so as to qualify as a REIT under the Code. Although the
Company believes that it will be owned and organized and will operate in such a
manner, and Shearman & Sterling has rendered an opinion, described under "United
States Federal Income Tax Considerations" below, that, commencing with the
Company's taxable year ending December 31, 1997, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code, no transaction closely
comparable to that contemplated herein has been the subject of any
administrative pronouncement or judicial decision and no assurance can be given
that the Company will be able to operate in such a manner so as to qualify as a
REIT or to remain so qualified. Qualification as a REIT involves the application
of highly technical and complex Code provisions for which there are only limited
judicial and administrative interpretations. The determination of various
factual matters and circumstances not entirely within the Company's control, and
not 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
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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."
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."
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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% rate. Consequently, the Company, as
withholding agent, would be liable for the payment of such tax, which would
reduce the amount available to pay dividends on the New Preferred Shares.
DIVIDENDS NOT CUMULATIVE
Dividends on the New Preferred Shares are not cumulative. The Board of
Directors may determine, in its business judgment, that it would be in the best
interests of the Company to pay less than the full amount of the stated dividend
on the New Preferred Shares or no dividend for any quarterly dividend period,
notwithstanding that funds are available to pay such dividend. Factors that may
be considered by the Board of Directors in making this determination are the
Company's financial condition and capital needs, legal or regulatory
requirements, economic conditions and such other factors as the Board may deem
relevant. Consequently, if the Board of Directors does not authorize and declare
a dividend on the New Preferred Shares for a quarterly dividend period, the
holders of the New Preferred Shares would not be entitled to recover such
dividend, even if funds are, or subsequently become, available for payment
thereof. Notwithstanding the foregoing, to remain qualified as a REIT, the
Company must distribute annually at least 95% of its "REIT 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
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unsafe and unsound banking practice, the Superintendent has the authority to
restrict the ability of the Company or NB Finance to transfer assets, to engage
in transactions with the Bank, to make distributions to their stockholders
(including dividends to the holders of the New Preferred Shares, as described
below) or to redeem shares of Preferred Stock. The Superintendent could also
require the Bank to sever its relationship with or divest its ownership of the
Company. Consequently, such actions could potentially result in the Company's
failure to pay dividends in respect of the New Preferred Shares or failure to
qualify as a REIT, and, therefore, result in the Company being (i) subject to
United States income tax in the same manner as a regular, domestic corporation
and (ii) unless entitled to relief, disqualified from treatment as a REIT for
four taxable years following the year during which such qualification was lost.
Failure to qualify as a REIT would not necessarily give the Company the right to
redeem the New Preferred Shares or give the holders thereof the right to have
the New Preferred Shares redeemed. See "--Tax Risks." In addition, as
subsidiaries of the Bank, the Company and NB Finance are subject to supervision
by U.S. bank regulators.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and operating
policies and strategies of the Company, certain of which are described in this
Prospectus. These policies may be amended or revised from time to time at the
discretion of the Board of Directors (in certain circumstances subject to the
approval of a majority of the Independent Directors) without a vote of the
Company's stockholders, including holders of the New Preferred Shares.
Consequently, holders of the New Preferred Shares cannot preclude the Board of
Directors from revising such policies and strategies and the ultimate effect of
such revision in the policies and strategies of the Company on a holder of the
New Preferred Shares may be negative. See "Business and Strategy--Management
Policies and Programs."
BALLOON PAYMENTS
The Initial Mortgage Loans do not provide for the complete 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 principal payment thereon will be due on each Initial Mortgage Loan at
its maturity date. The ability of the borrower to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related mortgaged property. In attempting to do so, the borrower will be
affected by a number of factors, including the level of available mortgage rates
at the time of attempted sale or refinancing, the mortgagor's equity in the
mortgaged property, and prevailing economic conditions and the availability of
credit for residential real estate generally. Consequently, Mortgage Loans
requiring balloon payments may involve a greater degree of risk than fully
amortizing loans.
NO THIRD PARTY VALUATION OF THE MORTGAGE ASSETS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and the Bank believe that the fair market value of the Initial
Mortgage Assets issued by NB Finance at acquisition was at least equal to the
amount that the Company paid for the Initial Mortgage Assets issued by NB
Finance (approximately US$477 million). However, no third party valuations were
obtained for purposes of the 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 in which 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
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future acquisitions or dispositions of Mortgage Assets will not differ from the
fair market value of such Mortgage Assets.
RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock and
administers the day-to-day activities of the Company under the Advisory
Agreement. The Bank also services Mortgage Loans on behalf of the Company under
the Servicing Agreement. In addition, other than the Independent Directors, all
of the officers and directors of the Company are also officers and/or directors
of the Bank and/or affiliates of the Bank. As the holder of all of the
outstanding voting stock of the Company, the Bank will have the right to elect
all directors of the Company, including the Independent Directors.
The Bank and its affiliates may have interests which are not identical to
those of the Company. Consequently, conflicts of interest may arise with respect
to transactions, including, without limitation, the issuance of the Initial
Mortgage Assets; future acquisitions of Mortgage Assets from the Bank and/or
affiliates of the Bank; servicing of Mortgage Loans (including the Initial
Mortgage Loans); future dispositions of Mortgage Assets to the Bank or
affiliates of the Bank; and the renewal, termination or modification of the
Advisory Agreement or the Servicing Agreement. It is the intention of the
Company and the Bank that any agreements and transactions between the Company,
on the one hand, and the Bank and/or its affiliates, on the other hand, be fair
to all parties and consistent with market terms, including the prices paid and
received for Mortgage Assets or in connection with the servicing of Mortgage
Loans. The requirement in the Company's charter (the "Charter") that certain
actions of the Company be approved by a majority of the Independent Directors is
also intended to ensure fair dealings between the Company and the Bank and its
affiliates. However, there can be no assurance that such agreements or
transactions will be on terms as favorable to the Company as those that could
have been obtained from unaffiliated third parties. See "Business and
Strategy--Management Policies and Programs--Conflict of Interest Policies."
DEPENDENCE UPON THE BANK
Pursuant to the Advisory Agreement, the Bank administers the day-to-day
operations of the Company. Pursuant to the Servicing Agreement, the Bank
services the Initial Mortgage Loans on behalf of, and as agent for, the Company.
Consequently, (i) the Company is dependent for the selection, structuring and
monitoring of its Mortgage Assets on the diligence and skill of the officers and
employees of the Bank and (ii) the Company is dependent upon the expertise of
the Bank for the servicing of Mortgage Loans. The Bank may subcontract all or a
portion of its obligations under the Advisory Agreement, and the Bank may
subcontract all or a portion of its obligations under the Servicing Agreement,
to one or more affiliates, and under certain conditions to non-affiliates,
involved in the business of managing Mortgage Assets. Consequently, in the event
the Bank subcontracts its obligations in such a manner, the Company will be
dependent upon the subcontractor to provide services. See "Management--The Bank"
and "Business and Strategy--Servicing."
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
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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 an exemption from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws and (ii) will not be entitled to the
registration rights available pursuant to the Registration Rights Agreement
which will terminate upon completion of the Exchange Offer. In addition, any
holder of Old Preferred Shares who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Preferred Shares will be required
to comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Preferred Shares for its own account in exchange for Old
Preferred Shares, where such Old Preferred Shares were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Preferred Shares. The Company has agreed that, for a
period of six months after the date of this Prospectus, it will make this
Prospectus, as it may be amended or supplemented, available to any broker-dealer
for use in connection with any such resales and will update this Prospectus, as
required, during such six-month period.
ABSENCE OF PUBLIC MARKET
The Company is under no obligation, and currently has no intention, to list
the New Preferred Shares on a national exchange. Additionally, there is no
existing market for the New Preferred Shares and there can be no assurance as to
the liquidity of any markets that may develop for the New Preferred Shares, the
ability of the holders to sell their New Preferred Shares or at what price
holders of the New Preferred Shares will be able to sell their New Preferred
Shares. Future liquidity and trading prices of the New Preferred Shares will
depend on many factors including, among other things, prevailing interest rates,
the Company's operating results, the market for similar securities and whether
the New Preferred Shares are listed on a national exchange. The Initial
Purchaser has informed the Company that the Initial Purchaser may make a market
in the Series A Preferred Shares. However, the Initial Purchaser is not
obligated to do so and any such market making activity may be terminated at any
time without notice to the holders of the New Preferred Shares. In addition,
such market making activity will be subject to the limits of the Securities Act
and may be limited during the pendency of the Registration Statement or the
Shelf Registration Statement. Consequently, holders of New Preferred Shares may
find it difficult to sell their New Preferred Shares or to sell their New
Preferred Shares at a price equivalent to the purchase price thereof.
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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.
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
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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.
THE BANK, THE COMPANY AND NB FINANCE
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 (i) 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, 11,692
Mortgage Loans (the "Initial Mortgage Loans") and (ii) cash. 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
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<PAGE>
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, 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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
<S> <C>
(IN THOUSANDS,
EXCEPT
SHARE DATA)
Debt
Total long-term debt................................................................... --
-------------------
Stockholders' Equity
Preferred Stock, US$.01 par value per share; 10,000,000 shares authorized, 300,000
shares issued and outstanding, actual and as adjusted................................ US$3
Common Stock, US$.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 million plus the Initial
Purchaser's discount of US$6 million ("Initial Purchaser's Discount") and
the expenses of issuing the Old Preferred Shares and the formation of the
Company. 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
million 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$11,913,093 minus dividends paid on the Old
Preferred shares of US$8,211,000.
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<PAGE>
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.
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$457 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
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<PAGE>
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$828 million (US$596 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, 2000 to July, 2001 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.
NB Finance's revenues are derived from its Mortgage Loans. As of December
31, 1997, the US$457 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
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.
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to 238,400 New Preferred
Shares for a like number of Old Preferred Shares properly tendered
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<PAGE>
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 March 10, 1998, to all holders of
Old Preferred Shares known to the Company. The Company's obligation to accept
Old Preferred Shares for exchange pursuant to the Exchange Offer is subject to
certain conditions set forth under "--Certain Conditions to the Exchange Offer"
below. The Company currently expects that each of the conditions will be
satisfied and that no waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Preferred Shares were issued on September 3, 1997 in a transaction
exempt from the registration requirements of the Securities Act. Accordingly,
the Old Preferred Shares may not be reoffered, resold, or otherwise transferred
unless registered under the Securities Act or any applicable securities law or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Preferred Shares, the
Company entered into the Registration Rights Agreement, which requires (i) the
Company to file with the Commission a registration statement relating to the
Exchange Offer not later than 150 days after the date of issuance of the Old
Preferred Shares, (ii) the Company to use its best efforts to cause the
registration relating to the Exchange Offer to become effective under the
Securities Act not later than 180 days after the date of issuance of the Old
Preferred Shares and (iii) the Exchange Offer to be consummated not later than
30 days after the date of the effectiveness of the Registration Statement (or,
if the Company is not permitted to effect the Exchange Offer, to use its best
efforts to cause to become effective as promptly as practicable the Shelf
Registration Statement with respect to resales of the Old Preferred Shares). A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement 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 Shares 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.
29
<PAGE>
The Company is making the Exchange Offer in reliance on the position of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letters, and there can be no assurance that the Commission would
make a similar determination with respect to the New Preferred Shares. Based on
these interpretations by the staff of the Commission, the Company believes that
New Preferred Shares issued pursuant to the Exchange Offer in exchange for Old
Preferred Shares may be offered for sale, resold and otherwise transferred by
any holder of such New Preferred Shares (other than any such holder that is a
broker-dealer or an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Preferred Shares are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such New Preferred Shares and neither such
holder nor any other such person is engaging in or intends to engage in a
distribution of such New Preferred Shares. Since the Commission has not
considered the Exchange Offer in the context of an interpretive letter, there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. See "--Resale of New Preferred
Shares" and "Plan of Distribution."
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.
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 fourth business day following the Expiration Date.
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<PAGE>
PROCEDURES FOR TENDERING OLD PREFERRED SHARES
The tender to the Company of Old Preferred Shares by a holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Preferred Shares may tender the same by (i) properly
completing and signing the Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to the Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Old Preferred Shares being tendered
and any required signature guarantees and any other documents required by the
Letter of Transmittal, to the Exchange Agent at its address set forth below on
or prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
The method of delivery of Old Preferred Shares, Letters of Transmittal and
all other required documents is at the election and risk of the holders. If such
delivery is by mail, it is recommended that registered mail, properly insured,
with return receipt requested, be used. In all cases, sufficient time should be
allowed to insure timely delivery. No Old Preferred Shares or Letters of
Transmittal should be sent to the Company.
If tendered Old Preferred Shares are registered in the name of the signer of
the Letter of Transmittal and the New Preferred Shares to be issued in exchange
therefor are to be issued (and any untendered Old Preferred Shares are to be
reissued) in the name of the registered holder (which term, for the purposes
described herein, shall include any participant in The Depository Trust Company
("DTC," also referred to as a "book-entry transfer facility") whose name appears
on a security listing as the owner of Old Preferred Shares), the signature of
such signer need not be guaranteed. In any other case, the tendered Old
Preferred Shares must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Company and duly executed by the registered
holder, and the signature on the endorsement or instrument of transfer must be
guaranteed by a bank, broker, dealer, credit union, savings association,
clearing agency or other institution (each an "Eligible Institution") that is a
member of a recognized signature guarantee medallion program within the meaning
of Rule 17Ad-15 under the Exchange Act. If the New Preferred Shares and/or Old
Preferred Shares not exchanged are to be delivered to an address other than that
of the registered holder appearing on the preferred stock register for the Old
Preferred Shares, the signature in the Letter of Transmittal must be guaranteed
by an Eligible Institution.
The Exchange Agent will establish accounts with respect to the Old Preferred
Shares at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make 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
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<PAGE>
overnight courier) from an Eligible Institution setting forth the name and
address of the tendering holder, the names in which the Old Preferred Shares are
registered and, if possible, the certificate numbers of the Old Preferred Shares
to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Preferred Shares in proper form for transfer (or a confirmation of book-entry
transfer of such Old Preferred Shares into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Old Preferred Shares being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of the notice of guaranteed delivery ("Notice
of Guaranteed Delivery") which may be used by Eligible Institutions for the
purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly executed Letter of Transmittal
accompanied by the Old Preferred Shares is received by the Exchange Agent, or
(ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Preferred Shares in exchange
for Old Preferred Shares tendered pursuant to a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Preferred
Shares (or a confirmation of book-entry transfer of such Old Preferred Shares
into the Exchange Agent's account at the book-entry transfer facility).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Letters of Transmittal or Old Preferred Shares
tendered for exchange will be determined by the Company in its sole discretion,
which determination shall be final and binding. The Company reserves the
absolute right to reject any and all tenders of any particular Old Preferred
Shares not properly tendered and not to accept any particular Old Preferred
Shares for exchange which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities as to any particular Old Preferred Shares or
conditions of the Exchange Offer either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Preferred Shares in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Preferred Shares for exchange must be cured within such reasonable period
of time as the Company shall determine. None of the Company, the Exchange Agent
nor any other person shall be under any duty to give notification of any defect
or irregularity with respect to any tender of Old Preferred Shares for exchange,
nor shall any of them incur any liability for failure to give such notification.
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
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<PAGE>
the distribution of such New Preferred Shares and (c) neither the holder nor any
such other person is an "affiliate" of the Company as defined under Rule 405 of
the Securities Act, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. Any holder of Old Preferred Shares using the Exchange Offer
to participate in a distribution of the New Preferred Shares (i) cannot rely on
the position of the staff of the Commission enunciated in its interpretive
letter with respect to Exxon Capital Holdings Corporation (available April 13,
1989) or similar letters and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction.
Each broker-dealer that receives New Preferred Shares for its own account in
exchange for Old Preferred Shares where such Old Preferred Shares were acquired
by such broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of such New Preferred Shares. The Company has agreed that, for a
period of six months after the date of this Prospectus, it will make this
Prospectus, as it may be amended or supplemented, available to any broker-dealer
for use in connection with any such resale and will update this Prospectus, as
required, during such six-month period. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Preferred Shares for exchange (the "Transferor")
exchanges, assigns and transfers the Old Preferred Shares to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Old Preferred Shares to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Old
Preferred Shares and to acquire New Preferred Shares issuable upon the exchange
of such tendered Old Preferred Shares, and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
Old Preferred Shares, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Preferred Shares or
transfer ownership of such Old Preferred Shares on the account books maintained
by a book-entry transfer facility. The Transferor further agrees that acceptance
of any tendered Old Preferred Shares by the Company and the issuance of New
Preferred Shares in exchange therefor shall constitute performance in full by
the Company of certain of its obligations under the Registration Rights
Agreement. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor, and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
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
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Preferred Shares received in exchange for Old Preferred Shares where such Old
Preferred Shares were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company will, for a
period of up to six months after the date of this Prospectus, make copies of
this Prospectus available to any broker-dealer for use in connection with any
such resale and will update this Prospectus, as required, during such six-month
period.
WITHDRAWAL RIGHTS
Tenders of Old Preferred Shares may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Preferred Shares to be withdrawn (the
"Depositor"), (ii) identify the Old Preferred Shares to be withdrawn (including
the certificate number), (iii) specify the number of Old Preferred Shares to be
withdrawn, (iv) include a statement that such holder is withdrawing his election
to have such Old Preferred Shares exchanged, (v) be signed by the holder in the
same manner as the original signature on the Letter of Transmittal by which such
Old Preferred Shares were tendered or as otherwise described above (including
any required signature guarantees) and (vi) specify the name in which any such
Old Preferred Shares are to be registered, if different from that of the
Depositor. The Exchange Agent will return the properly withdrawn Old Preferred
Shares promptly following receipt of notice of withdrawal. If Old Preferred
Shares have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at the
book-entry transfer facility to be credited with the withdrawn Old Preferred
Shares or otherwise comply with the book-entry transfer facility procedure. All
questions as to the validity of notices of withdrawals, including time of
receipt, will be determined by the Company and such determination will be final
and binding on all parties.
Any Old Preferred Shares so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old
Preferred Shares which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Old Preferred Shares tendered by book-entry
transfer into the Exchange Agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described above, such Old
Preferred Shares will be credited to an account with such book-entry transfer
facility specified by the holder) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Preferred Shares may be retendered by following one of the procedures described
under "--Procedures for Tendering Old Preferred Shares" above at any time on or
prior to the Expiration Date.
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 gives 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
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Shares are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Old Preferred Shares are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Old Preferred Shares will be returned without expense to the
tendering holder thereof (or, in the case of Old Preferred Shares tendered by
book-entry transfer into the Exchange Agent's account at the book-entry transfer
facility pursuant to the book-entry transfer procedures described above, such
non-exchanged Old Preferred Shares will be credited to an account maintained
with such book-entry transfer facility) as promptly as practicable after the
expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue New Preferred Shares in exchange for, any Old Preferred Shares and
may terminate or amend the Exchange Offer (by oral or written notice to the
Exchange Agent or by a timely press release) if at any time before the
acceptance of such Old Preferred Shares for exchange or the exchange of the New
Preferred Shares for such Old Preferred Shares, any of the following events
occur:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Preferred Shares or the
New Preferred Shares or that may materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, does 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
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may adversely affect the ability of the Company to complete the transactions
contemplated by the Exchange Offer, (iii) a declaration of a banking
moratorium or any suspension of payments in respect of banks by Federal or
state authorities in the United States (whether or not mandatory), (iv) a
commencement of a war, armed hostilities or other international or national
crisis directly or indirectly involving the United States, (v) any
limitation (whether or not mandatory) by any governmental authority on, or
other event having a reasonable likelihood of affecting, the extension of
credit by banks or other lending institutions in the United States, or (vi)
in the case of any of the foregoing existing at the time of the commencement
of the Exchange Offer, a material acceleration or worsening thereof.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Preferred Shares upon the occurrence of any of
the foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Preferred Shares). In
addition, the Company may amend the Exchange Offer at any time prior to the
Expiration Date if any of the conditions set forth above occur. Moreover,
regardless of whether any of such conditions has occurred, the Company may amend
the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to holders of the Old Preferred Shares.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right, and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. If the Company waives or amends the
foregoing conditions, it will, if required by law, extend the Exchange Offer for
a minimum of five business days from the date that the Company first gives
notice, by public announcement or otherwise, of such waiver or amendment, if the
Exchange Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Preferred
Shares tendered, and no New Preferred Shares will be issued in exchange for any
such Old Preferred Shares, if at such time any stop order shall be threatened or
in effect with respect to the Registration Statement of which this Prospectus
constitutes a part. In any such event, the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
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 of New York 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:
<TABLE>
<S> <C>
By Hand/Overnight Courier: By Mail:
The Bank of Nova Scotia The Bank of Nova Scotia
Trust Company of New York Trust Company of New York
One Liberty Plaza, 23rd Floor One Liberty Plaza, 23rd Floor
New York, New York 10006 New York, New York 10006
Attn: Reorganization Section Attn: Reorganization Section
By Facsimile: (212) 225-5436
By Telephone: (212) 225-5438
</TABLE>
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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$650,000, which includes fees and expenses of the Exchange
Agent, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Preferred Shares in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Old Preferred Shares in such jurisdiction. In any jurisdiction in
which the securities laws or blue sky laws of which require the Exchange Offer
to be made by a licensed broker or dealer, the Exchange Offer is being made on
behalf of the Company by one or more registered brokers or dealers which are
licensed under the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Preferred Shares pursuant to the Exchange Offer. If, however,
certificates representing New Preferred Shares are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the Old
Preferred Shares tendered, or if tendered Old Preferred Shares are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the exchange of Old
Preferred Shares pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
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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.
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
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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.
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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 (i) 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, 11,692 CMHC-insured residential first mortgages
secured by real property located in Canada (the "Initial Mortgage Loans") and
(ii) cash. 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.
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$457 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 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
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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 in accordance with Bermuda law.
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: 95%. The Company's investments currently
consist principally of the Initial Mortgage Assets (i.e., sixteen hypothecation
loans, in the aggregate amount at December 31, 1997 of US$457 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.
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The Servicing Agreement entered into between the Bank and the Company
provides that the Bank, on behalf of the Company, would foreclose on the
properties in accordance with the National Housing Act and normal mortgage
servicing practices of prudent mortgage lending institutions.
The Company's current investment policy is to invest at least 90% of its
portfolio in the Initial Mortgage Assets issued by NB Finance and obligations
that are comparable to the Initial Mortgage Assets issued by NB Finance. The
maturities of the Initial Mortgage Assets issued by NB Finance range from
January 2000 to July 2001. Accordingly, after July 2001, the Company's portfolio
will not include any Initial Mortgage Assets issued by NB Finance.
MORTGAGE LOANS
PERCENTAGE OF CURRENT PORTFOLIO: 0%. While no Mortgage Loans are included
in the Initial Mortgage Assets issued by NB Finance and while the Company has no
current intention to acquire Mortgage Loans, the Company may from time to time
acquire individual residential Mortgage Loans or pools of residential Mortgage
Loans from the Bank or other NHA-Approved Lenders. All Mortgage Loans will
consist of CMHC-insured residential first mortgages and, accordingly, the credit
risk associated therewith should be considerably mitigated. The properties
underlying such Mortgage Loans are expected to be located in Canada. See
"--Description of the Initial Mortgage Loans." Potentially, up to 10% of the
Company's portfolio could be comprised of Mortgage Loans.
When a CMHC-insured residential first mortgage is in arrears for more than
90 days or when information has been obtained by the Bank indicating that the
global financial soundness of the borrower has declined, such mortgage may be
transferred to the Bank's collection department. Once transferred, the Bank can
foreclose on the property, legally sell the property or initiate a personal
lawsuit against the borrower. In the event of a foreclosure proceeding, the
property securing such mortgage is offered for sale for 90 days. If during the
90 day period the property is not sold, the CMHC will purchase the property for
the amount of the 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
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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 an NHA Mortgage-Backed Security ("NHA MBS") that evidences an undivided
interest in a pool of first mortgages originated by certain approved financial
institutions in Canada and insured by CMHC. There are four different types of
NHA MBS pools. The "exclusive homeowner" pools are classified as prepayable
because the borrowers within this type of pool have the option to prepay their
mortgage (often at a penalty) in accordance with the specific terms of the
mortgage. Depending upon the specific exclusive homeowner pool, the appropriate
penalty may or may not be passed through to the investors. The "mixed" pools are
comprised of a combination of homeowner, multiple family or social housing
mortgages. The "multi-family" pools are comprised exclusively of multiple family
loans and are generally not prepayable. Also, there is a special category of NHA
MBS pool created to allow exclusive pools of "social housing mortgages"
(mortgages issued to finance low-cost housing for senior citizens, the disabled
and economically disadvantaged). The key feature of social housing pools is the
absence of prepayment at the option of the borrower on the underlying mortgages;
this makes them more attractive to investors who seek predictable cash flow. A
portion of any NHA MBS that the Company purchases may have been originated by
the Bank by exchanging pools of Mortgage Loans for the Mortgage-Backed
Securities. The Company does not intend to acquire any interest-only,
principal-only or similar speculative Mortgage-Backed Securities. Potentially,
up to 10% of the Company's portfolio could be comprised of Mortgage-Backed
Securities. Additionally, the Company could potentially acquire all of the
Mortgage-Backed Securities of any one issuer; provided that such acquisition
does not exceed 10% of the Company portfolio.
Timely payment of both principal and interest on NHA MBSs 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 an 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
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incentive to prepay and (b) almost all mortgages are relatively short-term
(typically, 6 month to 5 years) balloon mortgages, also reducing the impact of
prepayments.
COMMERCIAL MORTGAGE LOANS
PERCENTAGE OF CURRENT PORTFOLIO: 0%. While no Commercial Mortgage Loans are
included in the Initial Mortgage Assets issued by NB Finance and while the
Company has no current intention to acquire any Commercial Mortgage Loans, the
Company may from time to time acquire Commercial Mortgage Loans secured by
industrial and warehouse properties, recreational facilities, office buildings,
retail space and shopping malls, hotels and motels, nursing homes or senior
living centers. The Company's current policy is not to acquire any interest in a
Commercial Mortgage Loan if Commercial Mortgage Loans would constitute more than
5% of the total book value of the Company's Mortgage Assets immediately
following such acquisition. Also, Commercial Mortgage Loans sold to the Company
must have a Bank (as of the time of the sale) credit score of five or better.
See "--Residential Mortgage Loans." Unlike Mortgage Loans and Residential
Mortgage Loans, Commercial Mortgage Loans generally lack standardized terms.
Commercial Mortgage Loans may also not be fully amortizing, meaning that they
may have a significant principal balance or "balloon" payment due on maturity.
Moreover, commercial properties, particularly industrial and warehouse
properties, are generally subject to relatively greater environmental risks than
non-commercial properties, generally giving rise to increased costs of
compliance with environmental laws and regulations. There is no requirement
regarding the percentage of any commercial real estate property that must be
leased at the time the Company acquires a Commercial Mortgage Loan secured by
such commercial real estate property, and there is no requirement that
Commercial Mortgage Loans have third party guarantees.
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.
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OTHER ASSETS
PERCENTAGE OF CURRENT PORTFOLIO: 5%. 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. The Company's
investments currently include cash generated from operations and not yet
distributed to stockholders. 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 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
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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 the proposed
acquisition.
CAPITAL AND LEVERAGE POLICIES
To the extent that the Board of Directors determines that additional funding
is required, the Company may raise such funds through additional equity
offerings, or retention of cash flow (after consideration of the provisions of
the Code requiring the distribution by a REIT of a certain percentage of its
income annually and taking into account taxes that would be imposed on the
Company's undistributed taxable income), or a combination of these methods. The
Company will have no debt outstanding following consummation of the Exchange
Offer and has no intention of incurring any indebtedness in the future.
In order to qualify as a REIT, the capital stock of the Company must be held
by at least 100 holders during approximately 90% or more of the taxable year
beginning in the Company's second taxable year and in each subsequent taxable
year. See "United States Federal Income Tax Considerations--Stock Ownership
Tests." The Company has issued the Senior Preferred Shares with an aggregate
liquidation preference of up to US$450,000 and limited transferability to ensure
that it meets, and will continue to meet, the 100 person ownership requirement
for REIT status without having to constantly monitor the number of holders of
Preferred Shares. 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.
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CONFLICT OF INTEREST POLICIES
Because of the nature of the Company's relationship with the Bank and its
affiliates, it is likely that conflicts of interest will arise with respect to
certain transactions, including, without limitation, the Company's acquisition
of Mortgage Assets from, or disposition of Mortgage Assets to, the Bank or its
affiliates and the renewal, termination or modification of the Advisory
Agreement or the Servicing Agreement. It is the Company's policy that the terms
of any dealings with the Bank and its affiliates will be consistent with those
available from third parties. In addition, neither the Advisory Agreement nor
the Servicing Agreement may be renewed, terminated or modified by the Company
without the approval of a majority of the Independent Directors.
Conflicts of interest between the Company and the Bank and its affiliates
may also arise in connection with making decisions that bear upon the credit
arrangements that the Bank or one of its affiliates may have with a borrower.
Conflicts could also arise in connection with actions taken by the Bank as a
controlling stockholder in the Company. It is the intention of the Company and
the Bank that any agreements and transactions between the Company, on the one
hand, and the Bank or its affiliates, on the other hand, including, without
limitation, the Servicing Agreement, be fair to all parties and consistent with
market terms for such types of transactions. The Servicing Agreement provides
that foreclosures and dispositions in connection with Mortgage Loans will be
performed with a view toward maximizing the recovery by the Company of amounts
due on its Mortgage Assets and the Bank will be required to service Mortgage
Loans solely with a view toward the interests of the Company, and without regard
to the interests of the Bank or any of its other affiliates. The requirement in
the terms of the New Preferred Shares that certain actions of the Company be
approved by a majority of the Independent Directors is also intended to ensure
fair dealings between the Company and the Bank and its affiliates. However,
there can be no assurance that any such dealings will be on terms as favorable
to the Company as would have been obtained from unaffiliated third parties.
There are no provisions in the Charter limiting any officer, director,
security holder or affiliate of the Company from having any direct or indirect
pecuniary interest in any Mortgage Asset to be acquired or disposed of by the
Company or in any transaction in which the Company has an interest or from
engaging in acquiring, holding and managing Mortgage Assets. As described
herein, the Bank and its affiliates have direct interests in transactions with
the Company (including, without limitation, the issuance of Mortgage Assets to
the 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."
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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.
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.
Pursuant to the OSFI Order, 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$457 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, 11,692 Mortgage Loans in an aggregate amount of approximately C$793
million (US$554 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,
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1997, US$97 million. The Company acquired the Initial Mortgage Assets issued by
NB Finance pursuant to the terms of a loan agreement with NB Finance.
Each Initial Mortgage Asset issued by NB Finance is recourse only to the
Initial Mortgage Loans securing such Initial Mortgage Asset. Each pool of
Initial Mortgage Loans is comprised of between 130 and 2,493 CMHC-insured
residential first mortgages. See "Description of the Initial Mortgage Loans."
Each Initial Mortgage Asset issued by NB Finance is further secured by the
residential real properties underlying such CMHC-insured first mortgages. Such
residential real properties are located primarily in Quebec, Ontario and New
Brunswick. The Initial Mortgage Loans are insured. Accordingly, there can be no
loss of principal or interest. However, CMHC insurance does not guarantee timely
payment of interest and principal. See "Risk Factors--Limited Recourse Nature of
Certain Mortgage Assets; Limitation on CMHC Insurance." The Initial Mortgage
Assets have maturities ranging from January 2000 to July 2001. The Initial
Mortgage Assets pay interest at rates ranging from 6.90% to 9.77%, with an
average rate of approximately 8.40% per annum.
The following table summarizes the Initial Mortgage Assets:
INITIAL MORTGAGE ASSETS
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
MONTHLY
OUTSTANDING MATURITY INTEREST INTEREST
AMOUNT DATE RATE* PAYMENTS
- ------------------ ----------- --------- ---------------
<S> <C> <C> <C>
US$ 22,973,074 Jan. 2000 6.895% US$ 132,000
22,127,652 Jan. 2000 7.471% 137,763
46,024,516 Jan. 2000 8.047% 308,633
15,149,915 Jan. 2000 8.622% 108,852
42,358,584 July 2000 6.895% 243,385
28,781,426 July 2000 7.471% 179,188
6,988,364 July 2000 8.622% 50,211
9,058,050 July 2000 8.047% 60,742
31,672,206 Jan. 2001 9.198% 242,768
45,099,747 Jan. 2001 9.774% 367,337
5,025,096 Jan. 2001 8.047% 33,698
6,039,981 Jan. 2001 8.622% 43,397
21,279,838 July 2001 8.047% 142,699
101,528,571 July 2001 8.622% 729,483
21,768,582 July 2001 9.198% 166,856
30,638,223 July 2001 9.774% 249,548
- ------------------ --------- ---------------
US$456,513,825 8.404% US$3,196,560
</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
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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. If the residential mortgage loan is CMHC-insured (i) a cash
down payment of between 5% and 24.9% is required, (ii) the monthly payment for
capital, interest, taxes and heating must not exceed 32% of the gross monthly
revenue of the borrower and (iii) the monthly payment for capital, interest,
taxes, heating and all other monthly payments (including, without limitation,
personal loans, lease payments and credit card debt service) must not exceed 40%
of the net monthly revenue of the borrower. Additionally, for all mortgage
loans, an external credit check must be positive. When a loan is insured, an
additional amount may be added to the principal amount of the mortgage loan
representing the premium related thereto. The premium rates vary in accordance
with the principal amount of the loan. Generally, the greater the loan to value
ratio, the greater the premium rate.
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
December 31, 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.
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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 2,493 CMHC-insured
residential first mortgages and is secured by the underlying residential real
properties located in Canada. Approximately 95% of such properties are located
in the provinces of Quebec, Ontario 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, 11,692
CMHC-insured residential first mortgages comprise the sixteen pools. Generally,
the CMHC-insured residential first mortgages comprising any individual pool are
less than C$100,000. Accordingly, no individual CMHC-insured residential first
mortgage is material to the Company, its operation or its business.
Payments on the Initial Mortgage Loans are due monthly in arrears on the 1st
day of each month through July 2001 or such earlier date on which payment in
full of the Initial Mortgage Loans is made (the "Final Payment Date") or, if the
1st day of a month is not a business day, on the first business day following
the 1st day of such month (a "Monthly Payment Date"). Payments of interest and
principal on the Initial Mortgage Loans are made in Canadian dollars.
The Initial Mortgage Loans mature monthly beginning in 1999 and bear
interest at rates ranging from approximately 6.0% to 8.99% with an average
interest rate of 7.53% per annum. The Final Payment Date may occur at an earlier
date if final payment on the Initial Mortgage Loans occurs earlier than such
date, because of unscheduled prepayments.
The following tables summarize the Initial Mortgage Loans as of December 31,
1997:
INITIAL MORTGAGE LOANS
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
ORIGINATION DATE
POOL SMALLEST LARGEST --------------------------
NUMBER OUTSTANDING AMOUNT* LOAN LOAN EARLIEST LATEST
- --------- -------------------- ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1 $ 39,915,715 $ 8,724 $ 674,130 Jun. 1986 Jan. 1997
2 38,446,796 14,458 1,118,190 Jun. 1984 Jan. 1997
3 79,892,171 13,249 352,320 Aug. 1983 Jan. 1997
4 26,322,977 9,708 314,697 Sep. 1983 Dec. 1996
5 73,598,039 5,604 688,958 Apr. 1986 Jul. 1997
6 50,007,728 4,908 612,452 May 1985 Jul. 1997
7 12,142,282 11,937 889,759 Mar. 1985 Jul. 1997
8 15,669,136 6,931 323,941 Apr. 1984 Jul. 1997
9 8,731,105 15,875 182,475 Feb. 1985 Aug. 1997
10 10,494,468 7,844 208,617 Feb. 1985 Jul. 1997
11 55,030,457 6,369 455,474 Jun. 1987 May 1997
12 78,190,020 5,202 580,003 Oct. 1984 Jul. 1997
13 36,904,741 6,825 236,869 Apr. 1986 Jul. 1997
14 176,229,308 5,856 2,270,055 Feb. 1986 Jul. 1997
15 37,770,870 10,045 729,680 May 1985 Jun. 1997
16 53,233,913 4,938 344,467 May 1986 Jun. 1997
--------------------
$ 792,579,726
</TABLE>
- ------------------------
* All amounts quoted in Canadian $
51
<PAGE>
INTEREST RATES
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
INTEREST RATE* REMAINING TERM (MONTHS)
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
POOL
NUMBER MATURITY MIN. MAX. AVG. MIN. MAX. AVG.
- --------- ----------- --------- --------- --------- --------- --------- ---------
1 Jan. 2000 6.000% 6.499% 6.223% 20.00 25.00 24.12
2 Jan. 2000 6.500% 6.999% 6.765% 20.00 25.00 23.68
3 Jan. 2000 7.000% 7.499% 7.165% 20.00 25.00 23.34
4 Jan. 2000 7.500% 7.999% 7.785% 20.00 25.00 21.29
5 Jul. 2000 6.000% 6.499% 6.197% 26.00 31.00 28.85
6 Jul. 2000 6.500% 6.999% 6.632% 26.00 31.00 29.35
7 Jul. 2000 7.500% 7.999% 7.606% 26.00 31.00 28.00
8 Jul. 2000 7.000% 7.499% 7.189% 26.00 31.00 26.88
9 Jan. 2001 7.000% 7.499% 7.231% 32.00 37.00 35.46
10 Jan. 2001 7.500% 7.999% 7.804% 32.00 37.00 35.34
11 Jan. 2001 8.000% 8.499% 8.262% 32.00 37.00 34.68
12 Jan. 2001 8.500% 8.999% 8.707% 32.00 37.00 34.08
13 Jul. 2001 7.000% 7.499% 7.304% 38.00 43.00 40.82
14 Jul. 2001 7.500% 7.999% 7.759% 38.00 43.00 40.85
15 Jul. 2001 8.000% 8.499% 8.199% 38.00 43.00 41.15
16 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
</TABLE>
- ------------------------
* All rates quoted on a 30/360 semiannual basis
REMAINING AMORTIZATION
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
WEIGHTED AVG.
REMAINING
POOL NUMBER OF WEIGHTED AVG. WEIGHTED AVG. AMORTIZATION
NUMBER LOANS INTEREST ADJ. DATE MATURITY DATE (IN MONTHS)
- --------- ----------- ----------------------- ---------------------- -------------
<S> <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 1,276 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
8 240 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 1,221 October 10, 1995 October 3, 2000 245.53
13 406 May 22, 1996 April 25, 2001 261.98
14 2,493 April 16, 1996 April 27, 2001 256.25
15 519 May 14, 1996 May 5, 2001 230.78
16 1,037 May 24, 1996 May 27, 2001 215.87
-----------
11,692
</TABLE>
52
<PAGE>
LOCATION OF REAL PROPERTY
SECURING THE INITIAL MORTGAGE LOANS
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
QUEBEC ONTARIO NEW BRUNSWICK ALL OTHER LOAN TYPE
-------------------- ---------------------- ---------------------- ---------------------- -----------
NO. OF PRIN. NO. OF PRIN. NO. OF PRIN. NO. OF PRIN.
POOL LOANS AMT. LOANS AMT. LOANS AMT. LOANS AMT. HOMEOWNER
NUMBER (%) (%) (%) (%) (%) (%) (%) (%) (%)
- ------------- --------- --------- --------- ----------- ----------- --------- ----------- --------- -----------
<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 93.87
2 89.56 87.02 7.59 10.58 1.52 0.83 1.33 1.57 93.75
3 89.97 88.76 6.19 7.80 2.66 2.01 1.18 1.43 98.60
4 91.16 89.57 3.64 4.66 3.38 3.24 1.82 2.53 95.28
5 93.72 92.72 3.61 4.69 1.43 1.16 1.24 1.43 95.95
6 95.68 93.82 2.04 3.80 1.44 1.19 0.84 1.19 97.72
7 88.73 87.96 6.88 9.18 3.13 1.81 1.26 1.05 88.75
8 90.84 85.92 5.00 8.18 1.25 1.13 2.91 4.77 95.12
9 85.48 78.99 11.29 14.77 -- -- 3.23 6.24 100.00
10 74.61 66.28 20.00 26.59 0.77 0.36 4.62 6.77 96.75
11 70.66 64.96 19.01 24.97 4.04 3.45 6.29 6.67 93.98
12 82.97 82.39 6.96 9.20 6.06 4.37 4.01 4.04 92.90
13 71.91 64.85 21.67 27.30 0.74 0.74 5.68 7.11 97.26
14 91.13 88.87 5.90 8.09 1.81 1.40 1.16 1.64 95.50
15 82.28 77.52 13.10 17.55 2.31 2.54 2.31 2.39 92.68
16 90.63 90.09 3.76 4.56 4.15 3.46 1.46 1.89 97.36
<CAPTION>
MULTI-
POOL FAMILY
NUMBER (%)
- ------------- -----------
<S> <C>
1 6.13
2 6.25
3 1.40
4 4.72
5 4.05
6 2.28
7 11.25
8 4.88
9 --
10 3.25
11 6.02
12 7.10
13 2.74
14 4.50
15 7.32
16 2.64
</TABLE>
53
<PAGE>
PRINCIPAL VALUE REMAINING
(AS OF DECEMBER 31, 1997)
(US $)
<TABLE>
<CAPTION>
REMAINING AMORTIZATION OF PRINCIPAL IN MONTHS
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
POOL 0 TO 29 30 TO 59 60 TO 89 90 TO 119 120 TO 149 150 TO 179
------------ ------------ ------------ ------------- ------------ ------------
<CAPTION>
NUMBER 180 TO 209 210 TO 239 240 TO 269 270 TO 299 300 TO 329 330 AND OVER TOTAL*
- --------------- ------------ ------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 -- 631,930 1,672,703 2,771,923 3,153,772 4,411,464
3,752,863 6,838,055 6,624,655 9,977,591 -- 80,757 39,915,715
2 -- 259,109 565,608 1,490,435 2,013,597 3,558,123
3,971,170 9,416,253 9,454,801 7,464,555 88,685 164,460 38,446,796
3 -- 434,196 2,013,850 4,884,167 6,301,187 8,058,138
10,477,023 14,730,624 19,004,858 13,933,591 -- 54,536 79,892,171
4 -- 110,015 348,583 880,554 1,313,403 1,783,533
1,948,738 2,782,027 9,120,828 7,842,293 -- 193,005 26,322,977
5 -- 376,848 1,734,931 2,578,558 2,812,552 5,404,868
3,964,751 14,367,793 11,551,338 30,456,725 141,659 208,015 73,598,039
6 -- 272,330 1,334,394 2,536,406 2,140,481 5,151,045
4,649,354 9,140,080 11,922,459 12,664,779 151,660 44,539 50,007,728
7 -- 60,572 271,308 286,340 123,814 892,258
1,782,446 1,599,468 2,945,385 4,180,692 -- -- 12,142,282
8 -- 19,965 269,259 629,144 1,289,057 1,931,345
2,670,569 1,366,954 4,869,906 2,460,578 -- 115,423 15,669,136
9 -- 17,745 372,976 437,730 529,526 977,038
1,099,181 1,290,694 1,635,740 2,305,886 64,588 -- 8,731,105
10 -- 79,971 126,143 265,152 23,117 714,705
863,581 1,758,575 1,115,102 5,548,122 -- -- 10,494,468
11 -- 240,066 520,117 467,927 1,001,484 2,686,445
2,204,331 6,921,736 5,999,939 34,638,585 62,872 286,955 55,030,457
12 -- 422,355 974,831 1,430,224 991,305 4,547,878
3,040,496 12,562,700 5,987,812 47,725,834 58,892 447,694 78,190,020
13 -- 105,548 188,573 218,670 362,288 1,054,151
1,815,498 3,935,949 1,970,023 27,254,041 -- -- 36,904,741
14 -- 788,148 1,515,702 1,871,316 3,355,079 7,188,016
10,412,734 18,838,740 13,188,423 118,400,709 60,487 609,956 176,229,308
15 -- 318,237 708,731 2,195,136 1,856,813 2,965,522
2,773,732 6,999,300 1,814,888 17,810,161 -- 328,350 37,770,870
16 -- 1,112,658 1,940,766 4,285,235 3,326,033 6,215,365
3,153,246 9,116,099 2,032,036 22,052,474 -- -- 53,233,913
</TABLE>
- ------------------------
*Minor differences may result from rounding.
54
<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 principal amount 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 once annually 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
support the payment of dividends on the New Preferred Shares. Because the rate
at which dividends on the
55
<PAGE>
New Preferred Shares, if, when and as authorized and declared, are payable is
fixed, there can be no assurance that an interest rate environment in which
there is a significant decline in interest rates would not adversely affect the
Company's ability to pay dividends on the New Preferred Shares. Further, it is
possible that a significant decline in interest rates could effect a prepayment
of Mortgage Loans. Assuming all Mortgage Loans provide similar limitations on
prepayments as the Initial Mortgage Loans, the effect on earnings will be, to a
certain extent, mitigated. However, such prepayments could adversely affect the
Company's assets.
A significant increase in interest rates would not be expected to adversely
affect the assets or the earnings of the Company.
SERVICING
The Initial Mortgage Loans, and certain other Mortgage Loans, are serviced
by the Bank pursuant to the terms of the Servicing Agreement. The Bank receives
a fee equal to 0.25% per annum on the principal balances of the loans serviced.
Payment of such fees is subordinated to payments of dividends on the New
Preferred Shares.
The Servicing Agreement requires the Bank to service Mortgage Loans in a
manner generally consistent with normal mortgage servicing practices of prudent
mortgage lending institutions which service mortgage loans of the same type as
the Mortgage Loans, with any servicing guidelines promulgated by the Company and
with relevant government agency guidelines and procedures. The Servicing
Agreement requires the Bank to service Mortgage Loans solely with a view toward
the interests of the Company and without regard to the interests of the Bank or
any of its other affiliates (including NB Finance). The Bank collects and remits
principal and interest payments, administers mortgage escrow accounts, submits
and pursues mortgage insurance claims and supervises foreclosure proceedings on
any Mortgage Loans it services. The Bank also provides accounting and reporting
services with respect to such Mortgage Loans. The Servicing Agreement requires
the Bank to follow such collection procedures as are customary in normal
mortgage servicing practices of prudent mortgage lending institutions which
service mortgage loans of the same type as the Mortgage Loans. The Bank may from
time to time subcontract all or a portion of its servicing obligations under the
Servicing Agreement to a third party subject to the prior written approval of
the Company. The Bank will not, in connection with subcontracting any of its
obligations under the Servicing Agreement, be discharged or relieved in any
respect from its obligation to the Company to perform its obligations under the
Servicing Agreement.
The Bank is required to pay all expenses related to the performance of its
duties under the Servicing Agreement. The Bank is required to make advances of
taxes and required insurance premiums that are not collected from mortgagors
with respect to any Mortgage Loan serviced by it, unless it determines that such
advances are nonrecoverable from the mortgagor, insurance proceeds or other
sources with respect to such Mortgage Loan. If such advances are made, the Bank
generally will be reimbursed prior to the Company being reimbursed out of the
payments with respect to such Mortgage Loan. The Bank also is entitled to
reimbursement for expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans serviced by it and in connection with the restoration
of mortgaged property. The Bank is responsible to the Company for any loss
suffered as a result of the Bank's failure to make and pursue timely claims or
as a result of actions taken or omissions made by the Bank which cause the
policies to be cancelled by the insurer. Subject to approval by the Company, the
Bank may institute foreclosure proceedings, exercise any power of sale contained
in any Mortgage Loan or deed of trust, obtain a deed in lieu of foreclosure or
otherwise acquire title to a mortgaged property underlying a Mortgage Loan by
operation of law or otherwise in accordance with the terms of the Servicing
Agreement. The Bank does not, however, have the authority to conclude contracts
in the name of the Company.
The Company may terminate the Servicing Agreement upon the occurrence of one
or more events specified in the Servicing Agreement. Such events relate
generally to the Bank's proper and timely
56
<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 no 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
57
<PAGE>
share of the Bank for such mortgages in Quebec is approximately 18% compared
with a significantly greater market share for Caisses Populaires Desjardins.
LEGAL PROCEEDINGS
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.
58
<PAGE>
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 the Common Stock
in determining whether any proposed action requiring their approval is in the
best interests of the Company. The Company currently has six employees and does
not anticipate that it will require additional employees. See "Business and
Strategy--Employees."
As of January 30, 1998, the persons who are directors and executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME POSITION AND OFFICES HELD
- -------------------------------------------- ------------------------------------------------
<S> <C>
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
</TABLE>
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
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
59
<PAGE>
management committee in the United States. Mr. Richter has been Chairman of the
Board; Chief Executive Officer; President of the Company since January 30, 1998.
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 Finance
currently has four officers and no employees. NB Finance 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:
<TABLE>
<CAPTION>
NAME POSITION AND OFFICE HELD
- ----------------------------------------------------------------- ---------------------------
<S> <C>
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
</TABLE>
Wayne Morgan (Assistant Secretary) is the only other officer 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.
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:
60
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS --------------
------------------------------------------ SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS(#) COMPENSATION
- ------------------------------------ --------- ------------- ------------ ------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Roger Smock, President--NB Capital
Corporation(1) 1997 US$ 183,287 0 US$ 14,555(2) 0
Martin Ouellet, President--NB
Finance, Ltd.(1) 1997 C$ 123,500 C$ 295,000 C$ 742(3) 8,000 0
</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 US$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$4,555 annual car
allowance.
(3) Consists of a taxable benefit on a reduced interest loan.
SAR GRANTS IN LAST FISCAL YEAR
The following table provides information about stock appreciation rights
("SARs") awarded to Mr. Ouellet during the fiscal year ended December 31, 1997:
SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL
---------------------------------------- REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL
SECURITIES SARS RATES OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
SARS EMPLOYEES BASE FOR SAR TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION --------------------------
NAME (#) YEAR (C$/SH) DATE 5% (C$) 10% (C$)
- ------------------------------------------- ------------- --------------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Martin Ouellet, President--NB Finance, Ltd. 8,000 0.7% C$ 24.50 12/31/2007 C$ 123,280 C$ 312,560
</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.
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<PAGE>
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$) (2)
SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) (C$)(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>
- ------------------------
(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
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
CANADIAN DOLLARS ----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <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
62
<PAGE>
Plan whose benefits are reduced pursuant to limitations on pensions imposed by
the Income Tax Act (Canada). Employees covered by the excess benefit plan
receive a benefit equal to the amount of benefit disallowed under the Pension
Plan due to such limitations.
INDEPENDENT DIRECTORS
The terms of the New Preferred Shares require that, as long as any New
Preferred Shares are outstanding, certain actions by the Company must be
approved by a majority of the Independent Directors. See "Description of New
Preferred Shares--Independent Director Approval." Mr. Hanley and Mr. Michel are
Independent Directors. As long as there are only two Independent Directors, any
action that requires the approval of a majority of Independent Directors must be
approved by both the Independent Directors.
If at any time the Company fails to declare and pay a quarterly dividend on
the New Preferred Shares, the number of directors then constituting the Board of
Directors will be increased by at least two at the Company's next annual meeting
and the holders of the New Preferred Shares, voting together as a single class
with the holders of any other outstanding series of Preferred Stock entitled to
vote on the matter, including the Senior Preferred Shares, will be entitled to
elect two additional directors to serve on the Board of Directors.
Any member of the Board of Directors elected by holders of Preferred Stock
will be deemed to be an Independent Director for purposes of the actions
requiring the approval of a majority of the Independent Directors. The Company
expects that the Bank will elect a majority of the Board of Directors. See
"Description of New Preferred Shares--Voting Rights."
AUDIT COMMITTEE
The Board of Directors of the Company will establish an audit committee
which will review the engagement of independent accountants and their
independence. The audit committee will also review the adequacy of the Company's
internal accounting controls. The audit committee will be 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 INDEPENDENT DIRECTORS
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$4,500 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.
63
<PAGE>
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his or her status as a present or
former director or officer of the Company. The Bylaws of the Company (the
"Bylaws") obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL requires the Company, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company and (b) a written statement
by or on his behalf to repay the amount paid or reimbursed by the Company if it
shall ultimately be determined that the standard of conduct was not met.
The 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 or 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.
64
<PAGE>
THE BANK AS ADVISOR
The Company entered into the Advisory Agreement with the Bank to administer
the day-to-day operations of the Company. The Bank is responsible for (i)
monitoring the credit quality of Mortgage Assets held by the Company, (ii)
advising the Company with respect to the reinvestment of income from and
payments on, and with respect to the acquisition, management, financing and
disposition of, Mortgage Assets held by the Company, (iii) holding documents
relating to the Company's Mortgage Assets as custodian, (iv) monitoring the
Company's compliance with the requirements necessary to qualify as a REIT and
(v) maintaining its status as a NHA Approved Lender. The Bank may, with the
approval of a majority of the Board of Directors as well as a majority of the
Independent Directors, subcontract all or a portion of its obligations under the
Advisory Agreement to one or more related or unrelated third parties. The Bank
will not, in connection with the subcontracting of any of its obligations under
the Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement. 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 services
provided by it to the Company. Payment of such fee 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."
65
<PAGE>
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. With respect to the dividend period in which the Exchange
Offer is consummated, dividends on each New Preferred Share will accrue from the
first day of such dividend period. Thereafter, dividends in each quarterly
dividend period will accrue from the first day of such period, whether or not
authorized, declared or paid with respect to New Preferred Shares for the prior
quarterly period. Each authorized and declared dividend shall be payable to
holders of record as they appear at the close of business on the stock register
of the Company on such record dates, not exceeding 45 calendar days nor less
than 10 calendar days preceding the payment dates thereof, as shall be fixed by
the Board of Directors. Dividends payable on the New Preferred Shares for any
dividend period greater or less than a full dividend period shall be computed on
the basis of twelve 30-day months, a 360-day year and the actual number of days
elapsed in the period; provided, however, that in the event of the Automatic
Exchange, any accrued and unpaid dividends on the New Preferred Shares as of the
Time of Exchange (as defined) shall be deemed to be accrued and unpaid dividends
on the Bank Preferred Shares.
The right of holders of the New Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to authorize or
declare a dividend on the New Preferred Shares for a
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<PAGE>
quarterly dividend period, then holders of the New Preferred Shares will have no
right to receive a dividend for that period, and the Company will have no
obligation to pay a dividend for that period, whether or not dividends are
authorized and declared and paid for any future period with respect to either
the Preferred Stock or the Common Stock authorized. If the Company fails to pay
or authorize and set aside for payment a quarterly dividend on the New Preferred
Shares, holders of Preferred Stock, including the New Preferred Shares and the
Senior Preferred Shares, will be entitled to elect two directors. See "--Voting
Rights."
If full dividends on the New Preferred Shares for any dividend period shall
not have been authorized, declared and paid, or authorized, declared and a sum
sufficient for the payment thereof set apart for such payments, no dividends
shall be authorized, declared or paid or set aside for payment with respect to
the Common Stock or any other stock of the Company ranking junior to or on a
parity with the New Preferred Shares as to dividends or amounts upon
liquidation, nor shall any Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the New Preferred Shares as to
dividends or amounts upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any monies to be paid to or made available
for a sinking fund for the redemption of any such stock) by the Company (except
by conversion into or exchange for other stock of the Company ranking junior to
the New Preferred Shares as to dividends and amounts upon liquidation), until
such time as dividends on all outstanding New Preferred Shares have been (i)
authorized, declared and paid for three consecutive dividend periods and (ii)
authorized, declared and paid or authorized, declared and a sum sufficient for
the payment thereof has been set apart for payment for the fourth consecutive
dividend period.
When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the New Preferred Shares and the shares of any
other series of stock ranking on a parity as to dividends with the New Preferred
Shares, all dividends authorized and declared upon the New Preferred Shares and
any other series of stock ranking on a parity as to dividends with the New
Preferred Shares shall be authorized and declared proportionately so that the
amount of dividends authorized and declared per New Preferred Share and such
other series of stock shall in all cases bear to each other the same ratio that
full dividends, for the then-current dividend period, per New Preferred Share
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods) and full dividends, including required or permitted
accumulations, if any, on such other series of stock bear to each other.
For a discussion of the tax treatment of distributions to stockholders, see
"United States Federal Income Tax Considerations--Taxation of United States
Stockholders" and "--Taxation of Foreign Stockholders," and for a discussion of
certain potential regulatory limitations on the Company's ability to pay
dividends, see "Risk Factors--Dividend and Other Regulatory Restrictions on
Operations of the Company."
AUTOMATIC EXCHANGE
Each New Preferred Share will be exchanged automatically for one newly
issued Bank Preferred Share (i) immediately prior to such time, if any, at which
the Bank fails to declare and pay or set aside for payment when due any dividend
on any issue of its cumulative First Preferred Shares or the Bank fails to pay
or set aside for payment when due any declared dividend on any of its
non-cumulative First Preferred Shares, (ii) in the event that the Bank has a
Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital
ratio of less than 8.0%, (iii) in the event that the Superintendent takes
control of the Bank pursuant to the Bank Act or proceedings are commenced for
the winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange. Upon an Exchange 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
67
<PAGE>
redeemed by the Company prior to the Time of Exchange (as defined below) shall
be deemed not to be outstanding and shall not be subject to the Automatic
Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the date
for such exchange set forth in the requirements of the Superintendent or, if
such date is not set forth in such requirements, as of 8:00 a.m. on the earliest
possible date such exchange could occur consistent with such requirements (the
"Time of Exchange"), as evidenced by the issuance by the Bank of a press release
prior to such time. As of the Time of Exchange, all of the New Preferred Shares
will be deemed cancelled without any further action by the Company, all rights
of the holders of the New Preferred Shares as stockholders of the Company will
cease, and such persons shall thereupon and thereafter be deemed to be and shall
be for all purposes holders of Bank Preferred Shares. The Company will mail
notice of the occurrence of an Exchange Event to each holder of the New
Preferred Shares within 30 days of such event, and the Bank will deliver to each
such holder certificates for the Bank Preferred Shares upon surrender of such
holder's certificates for the New Preferred Shares. The Charter provides that,
immediately after the delivery of such notice, the existence of the Company
shall terminate and the Company will be liquidated and its affairs wound up in
accordance with the procedures of the MGCL relating to forfeiture of the charter
of a corporation and expiration of corporate existence. Until such replacement
stock certificates are delivered (or in the event such replacement certificates
are not delivered), certificates previously representing the New Preferred
Shares shall be deemed for all purposes to represent the Bank Preferred Shares.
All corporate action necessary for the Bank to issue the Bank Preferred Shares
has been taken by the Bank. Accordingly, once an Exchange Event occurs, no
action will be required to be taken by holders of the New Preferred Shares, by
the Bank or by the Company in order to effect the Automatic Exchange as of the
Time of Exchange.
Holders of the New Preferred Shares, by purchasing such New Preferred
Shares, will be deemed to have agreed to be bound by the unconditional
obligation to exchange such New Preferred Shares for the Bank Preferred Shares
upon the occurrence of an Exchange Event. The obligation of the holders of the
New Preferred Shares to surrender such shares and the obligation of the Bank to
issue the Bank Preferred Shares in exchange for the New Preferred Shares shall
be enforceable by the Bank and such holders, respectively, against the other.
Absent the occurrence of an Exchange Event, no Bank Preferred Shares will be
issued. Upon the occurrence of an Exchange Event, the Bank Preferred Shares to
be issued as part of the Automatic Exchange would constitute a newly issued
series of First Preferred Shares of the Bank ranking senior to all shares of
common stock of the Bank then issued and outstanding and equally with all other
series of First Preferred Shares of the Bank then issued and outstanding. As of
October 31, 1997, 170,461,483 shares of common stock of the Bank were issued and
outstanding. The Bank Preferred Shares would constitute 100% of the issued and
outstanding Bank Preferred Shares. The Bank Preferred Shares would have a
liquidation preference of US$1,000 and be subject to redemption on the same
terms as the New Preferred Shares (except that there would be no redemption for
a Tax Event). Any accrued and unpaid dividends on the New Preferred Shares as of
the Time of Exchange would be accounted for as accrued and unpaid dividends on
the Bank Preferred Shares. The Bank Preferred Shares would rank equally, in
terms of dividend payments and liquidation preference, with, or senior to, any
outstanding First Preferred Shares of the Bank. The Bank Preferred Shares would
not entitle the holders to vote except in certain circumstances. Dividends on
the Bank Preferred Shares would be non-cumulative and payable at the rate of
8.45% per annum of the liquidation preference, if, when and as declared by the
Board of Directors of the Bank. The Bank does not intend to apply for listing of
the Bank Preferred Shares on any national securities exchange or for quotation
of the Bank Preferred Shares through the National Association of Securities
Dealers Automated Quotation System. Absent the occurrence of an Exchange Event,
however, the Bank will not issue any Bank Preferred Shares, although 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.
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<PAGE>
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 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 (ii) in the case of the removal of any such director, the
vacancy may be filled by the vote of the holders of the outstanding New
Preferred Shares and Parity Stock entitled to vote, voting together as a single
class with the holders of all other series of Preferred Stock entitled to vote
on the matter, at the same meeting at which such removal shall be voted.
The affirmative vote or consent of the holders of at least two-thirds of the
outstanding shares of each series of Preferred Stock, including the New
Preferred Shares, will be required (a) to create any class or series of stock
(other than the Senior Preferred Stock) which shall, as to dividends or
distribution of assets,
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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) to 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:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ------------------------------------------------------------- -----------
<S> <C>
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
</TABLE>
and thereafter at a redemption price of US$1,000 per share, plus the quarterly
accrued and unpaid dividend to the date of redemption, if any, thereon.
In the event that fewer than all the outstanding New Preferred Shares are to
be redeemed, the number of New Preferred Shares to be redeemed shall be
determined by the Board of Directors, and the shares to be redeemed shall be
determined by lot or proportionately as may be determined by the Board of
Directors or by any other method as may be determined by the Board of Directors
in its sole discretion to be equitable, provided that such method satisfies any
applicable requirements of any securities exchange on which the New Preferred
Shares are then listed.
Any such redemption must comply with applicable capital distribution
regulations of the Superintendent, which may prohibit a redemption and will
require the Superintendent's prior written approval. Unless full dividends on
the New Preferred Shares have been, or contemporaneously are, authorized,
declared and paid or authorized and declared and a sum sufficient for the
payment thereof set apart for payment for the then-current dividend period, no
New Preferred Shares shall be redeemed unless all outstanding New Preferred
Shares are redeemed and the Company shall not purchase or otherwise acquire any
New Preferred Shares; provided, however, that the Company may purchase or
acquire New Preferred Shares pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding New Preferred Shares.
Furthermore, the Company may, at its option, on or after September 3, 2002
and prior to September 3, 2007, redeem the New Preferred Shares, in whole but
not in part, at any time upon a Tax Event, at a
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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 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
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or pronouncement that provides for a position with respect to such
Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification or change
is effective or such pronouncement or decision is announced on or after the date
of this Prospectus, there is more than an insubstantial risk that (a) dividends
paid or to be paid by the Company with respect to the stock of the Company are
not, or will not be, fully deductible by the Company for United States federal
income tax purposes or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges, and shall
include an assessment by the Internal Revenue Service that (a) dividends paid or
to be paid by the Company with respect to the stock of the Company are not, or
will not be, fully deductible by the Company for United States federal income
tax purposes or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the New Preferred Shares at the time
outstanding will be entitled to receive out of assets of the Company legally
available for distribution to stockholders under applicable law, before any
distribution of assets is made to holders of Common Stock or any other class of
stock ranking junior to the New Preferred Shares upon liquidation, and subject
to the rights of the holders of any class or series of equity securities having
preference with respect to distribution upon liquidation and the rights of the
Company's general creditors, liquidating distributions in the amount of US$1,000
per share, plus the quarterly accrued and unpaid dividend thereon, if any, to
the date of liquidation, without interest.
After payment of the full amount of the liquidation distributions to which
they are entitled, the holders of the New Preferred Shares will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all the outstanding New Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of stock
of the Company ranking on a parity with the New Preferred Shares in the
distribution of assets upon any liquidation, dissolution or winding up of the
affairs of the Company, then the holders of the New Preferred Shares and such
other classes or series of stock shall share ratably in any such distribution of
assets in proportion to the full liquidation distributions to which they would
otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
liquidation, dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The terms of the New Preferred Shares require that, as long as any New
Preferred Shares are outstanding, certain actions by the Company be approved by
a majority of the Independent Directors. Mr. Hanley and Mr. Michel are the
Independent Directors. See "Management--Independent Directors." As long as there
are only two Independent Directors, any action that requires the approval of a
majority of the Independent Directors must be approved by both Independent
Directors. In order to be considered "independent," a director 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
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in respect of the Common Stock for any year if, after taking into account any
such proposed distribution, total distributions on the New Preferred Shares and
the Common Stock would exceed an amount equal to the sum of 105% of the
Company's "REIT taxable income" (excluding capital gains) for such year plus net
capital gains of the Company for that year, (iii) the acquisition of Mortgage
Assets other than obligations which are comparable to the Initial Mortgage
Assets issued by NB Finance, Mortgage Loans, interests in Mortgage Loans and
Partnership Interests, (iv) the redemption of any shares of Common Stock, (v)
the renewal, termination or modification of the Advisory Agreement or the
Servicing Agreement or the subcontracting of any duties thereunder to third
parties unaffiliated with the Bank, and (vi) the determination to revoke the
Company's REIT status. The Charter requires that, in determining whether any
proposed action requiring their approval is in the best interests of the
Company, the Independent Directors will consider the interests of holders of
both the Common Stock and the Preferred Stock, including, without limitation,
holders of the New Preferred Shares.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Bank entered into the Registration Rights Agreement for
the benefit of the holders of the Old Preferred Shares wherein the Company and
the Bank agreed, for the benefit of the holders of the Old Preferred Shares, (i)
to use their best efforts to file with the Commission within 150 days after the
Issue Date the Registration Statement relating to the Exchange Offer for the New
Preferred Shares, and (ii) to use their best efforts to cause the Registration
Statement to be declared effective under the Securities Act within 180 days
after the Issue Date. Promptly after the Registration Statement has been
declared effective, the Company will exchange the New Preferred Shares for
surrender of the Old Preferred Shares. The Company will keep the Exchange Offer
open for not less than 30 days (or longer if required by applicable law) after
the date notice of the Exchange Offer has been mailed to the holders of the Old
Preferred Shares. For each Old Preferred Share validly tendered to the Company
pursuant to the Exchange Offer and not validly withdrawn by the holder thereof,
the holder of such Old Preferred Share will receive a New Preferred Share having
a liquidation preference equal to the liquidation preference of the tendered Old
Preferred Share. Dividends on each New Preferred Share will accrue from the
first day of the dividend period in which the Exchange Offer is consummated.
Based on existing interpretations of the Securities Act by the Staff set
forth in several no-action letters to third parties, and subject to the
immediately following sentence, the Company believes that the New Preferred
Shares issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by the holders thereof (other than holders who are
broker-dealers) without further compliance with the registration and prospectus
delivery provisions of the Securities Act. However, any prospective holder of
New Preferred Shares who is an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New
Preferred Shares, or any broker-dealer who purchased the Old Preferred Shares
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (i) will not be able to rely on the
interpretation of the Staff set forth in the above-mentioned no-action letters,
(ii) will not be entitled to tender its Old Preferred Shares in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Old Preferred Shares unless such sale or transfer is made pursuant to an
exemption from such requirements. The Company does not intend to seek its own
no-action letter and there can be no assurance that the Staff would make a
similar determination with respect to the New Preferred Shares as it has in such
no-action letters to third parties.
Each holder of the Old Preferred Shares (other than certain specified
holders) who wishes to exchange the Old Preferred Shares for New Preferred
Shares in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) the New Preferred Shares to be received by it
were acquired in the ordinary course of its business and (iii) at the time of
the Exchange Offer, it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Preferred
Shares. In addition, in connection with any resales of New Preferred Shares, any
broker-dealer (a "Participating Broker-Dealer") who acquired the New Preferred
Shares for its own account as a result of market-making or other trading
activities must deliver a prospectus meeting the requirements of the Securities
Act. The Company has agreed that, for a period of six months after the date of
this Prospectus, it will make this Prospectus, as it may be amended or
supplemented, available to any broker-dealer for use in connection with any such
resale and will update this Prospectus, as required, during such six-month
period. The Commission has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to the New
Preferred Shares (other than a resale of an unsold allotment from the original
sale of the Old Preferred Shares) with this Prospectus. Under the Registration
Rights Agreement, the Company is required to allow Participating Broker-Dealers
and other persons, if any, subject to similar prospectus delivery requirements
to use this Prospectus in connection with the resale of such New Preferred
Shares for a period of up to six months.
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If, because of any change in law or in the applicable interpretations of the
Staff, the Company is not permitted to effect the Exchange Offer on the terms
set forth herein, or if for any reason the Registration Statement is not
declared effective within 180 days of the Issue Date, or in certain other
circumstances, including upon the request of the Initial Purchaser, then in
addition to or in lieu of effecting the registration of the New Preferred Shares
pursuant to the Registration Statement, the Company will, at the Company's sole
expense, (a) as promptly as practicable, file the Shelf Registration Statement
covering resales of the Old Preferred Shares (and underlying interests in the
Bank Preferred Shares), (b) use its best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) use its best
efforts to keep effective the Shelf Registration Statement until the earlier of
two years after the Issue Date (six months in the case of a Shelf Registration
Statement filed at the request of the Initial Purchaser) or such time as all of
the Old Preferred Shares have been sold thereunder or otherwise cease to be
registrable securities within the meaning of the Registration Rights Agreement.
The Company will, in the event that a Shelf Registration Statement is filed,
provide to each holder copies of the prospectus that is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Old Preferred Shares. A holder that sells Old
Preferred Shares pursuant to the Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a holder (including certain indemnification rights and
obligations). In addition, if required by the Staff, each holder of Old
Preferred Shares will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their Old
Preferred Shares included in the Shelf Registration Statement and to benefit
from the provisions of the second succeeding paragraph.
Each Old Preferred Share contains a legend to the effect that the holder
thereof, by its acceptance thereof, is deemed to have agreed to be bound by the
provisions of the Registration Rights Agreement. In that regard, each holder is
deemed to have agreed that, upon receipt of notice from the Company of the
occurrence of any event which makes such statement in the prospectus which is
part of the Shelf Registration Statement (or, in the case of Participating
Broker-Dealers, this Prospectus) untrue in any material respect or which
requires the making of any changes in such prospectus in order to make the
statements therein not misleading, or of certain other events specified in the
Registration Rights Agreement, such holder (or Participating Broker-Dealer, as
the case may be) will suspend the sale of Old Preferred Shares pursuant to such
prospectus until the Company has amended or supplemented such prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such holder (or Participating Broker-Dealer, as the
case may be) or the Company has given notice that the sale of the Old Preferred
Shares may be resumed, as the case may be.
If the Company shall give such notice to suspend the sale of the Old
Preferred Shares, it shall extend the relevant period referred to above during
which the Company is required to keep effective the Shelf Registration Statement
(or the period during which Participating Broker-Dealers are entitled to use
this Prospectus in connection with the resale of New Preferred Shares) by the
number of days during the period from and including the date of the giving of
such notice to and including the date when holders shall have received copies of
the supplemented or amended prospectus necessary to permit resales of the Old
Preferred Shares, or to and including the date on which the Company has given
notice that the sale of Old Preferred Shares may be resumed, as the case may be.
If the Company fails to comply with the Registration Rights Agreement or if
the Registration Statement or the Shelf Registration Statement fails to become
effective, then an additional amount ("Liquidated Damages") shall become payable
in respect of the Old Preferred Shares as follows:
(i) if (A) neither the Registration Statement nor a Shelf Registration
Statement is filed with the Commission on or prior to the 150th day after
the Issue Date or (B) notwithstanding that the
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Company has consummated or will consummate the Exchange Offer, the Company
is required to file a Shelf Registration Statement and such Shelf
Registration Statement is not filed on or prior to the date required by the
Registration Rights Agreement, then commencing on the day after either such
required filing date, Liquidated Damages shall be payable to the holders of
the Old Preferred Shares at a rate of 0.25% per annum (US$2.50 per share);
or
(ii) if (A) neither the Registration Statement is declared effective by
the Commission on or prior to the 180th day after the Issue Date nor a Shelf
Registration Statement is declared effective by the Commission on or prior
to the later of the 30th day after the applicable required filing date or
the 180th day after the Issue Date or (B) notwithstanding that the Company
has consummated or will consummate the Exchange Offer, the Company is
required to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or prior to the
later of the 30th day after the date such Shelf Registration Statement was
required to be filed or the 180th day after the Issue Date, then, commencing
on the 181st day after the Issue Date with respect to the Registration
Statement or the 31st day after the applicable required filing date (or the
181st day after the Issue Date, if later), Liquidated Damages shall be
payable to the holders of the Old Preferred Shares at a rate of 0.25% per
annum (US$2.50 per share); or
(iii) if (A) the Company has not exchanged New Preferred Shares for all
Old Preferred Shares validly tendered in accordance with the terms of the
Exchange Offer on or prior to the 45th day after the date on which the
Registration Statement was declared effective or (B) if applicable, the
Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be available for use by holders of the Old
Preferred Shares at any time prior to the second anniversary of the Issue
Date (other than after such time as all Old Preferred Shares have been
disposed of thereunder or otherwise cease to be registrable securities
within the meaning of the Registration Rights Agreement), and such event
continues for a period exceeding 30 consecutive days or 90 days in any
360-day period, whether or not consecutive, then Liquidated Damages shall be
payable to the holders of the New Preferred Shares at a rate of 0.25% per
annum (US$2.50 per share) commencing on (x) the 31st day after such
effective date, in the case of (A) above, or (y) the 31st consecutive day or
91st day in any 360-day period following the day such Shelf Registration
Statement ceases to be available in the case of (B) above;
provided, however, that the Liquidated Damages rate on the liquidation
preference of the Old Preferred Shares may not exceed in the aggregate 0.25% per
annum; provided further, however, that (1) upon the filing of the Registration
Statement or a Shelf Registration Statement (in the case of clause (i) above),
(2) upon the effectiveness of the Registration Statement or a Shelf Registration
Statement (in the case of clause (ii) above), or (3) upon the exchange of New
Preferred Shares for all Old Preferred Shares tendered (in the case of clause
(iii)(A) above), or upon the availability of the Shelf Registration Statement
which had ceased to be available (in the case of clause (iii)(B) above),
Liquidated Damages as a result of such clause (or the relevant subclause
thereof) shall cease to accrue.
Any amounts of Liquidated Damages due pursuant to clause (i), (ii) or (iii)
above will be payable in cash quarterly on the 30th day of March, June,
September and December of each year to the holders of record on the immediately
preceding 15th day of such month.
The Company 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.
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DESCRIPTION OF CAPITAL STOCK
The following summaries 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 Bylaws of the Company,
and (ii) Bermuda law and the Memorandum of Association (the "Memorandum") and
Bye-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)
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 the 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
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conditions of redemption of the shares of any such class or series, and such
other subjects or matters as may be fixed by resolution of the Board of
Directors.
Shares of Preferred Stock, upon issuance against full payment of the
purchase price therefor and in the manner authorized by the Board of Directors,
will be fully paid and nonassessable. The specific terms of a particular class
or series of Preferred Stock are described in the Charter.
The terms of the Charter relating to each class or series of Preferred Stock
set forth the preferences and other terms of such class or series, including,
without limitation, the following, as applicable: (1) the designation of such
class or series; (2) the number of shares of such class or series offered and
the liquidation preference per share of such class or series; (3) the dividend
rate(s), period(s), and/or payment date(s) or method(s) of calculation thereof
for such class or series; (4) whether dividends on such class or series of
Preferred Stock are cumulative or not and, if cumulative, the date from which
dividends on such class or series shall accumulate; (5) the provision for a
sinking fund, if any, for such class or series; (6) the terms and conditions of
redemption, if applicable, of such class or series; (7) any limitations on
direct or beneficial ownership and restrictions on transfer, in each case as may
be appropriate to preserve the status of the Company as a REIT or as otherwise
deemed appropriate by the Board of Directors; (8) the relative ranking and
preferences of such class or series as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; (9) any
limitations on issuance of any class or series of Preferred Stock ranking senior
to or on a parity with such class or series of Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company; (10) any other specific terms, preferences, rights, limitations or
restrictions of such class or series; and (11) any voting powers of such class
or series.
SENIOR PREFERRED STOCK. The shares of the Senior Preferred Stock are
validly issued, fully paid and nonassessable and will entitle the holders
thereof to cumulative, quarterly dividends. The shares of the Senior Preferred
Stock are redeemable, at any time in whole, but not in part, at the option of
the Company at a price equal to the liquidation preference thereof plus accrued
and unpaid dividends thereon through the redemption date. On the December 30th
following each ten year anniversary of the issuance of the Senior Preferred
Stock, each holder of Senior Preferred Stock may require the Company to purchase
such holder's Senior Preferred Stock at the liquidation preference thereof plus
accrued and unpaid dividends thereon through the date of redemption. The Senior
Preferred Stock ranks 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
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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 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
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series of Preferred Stock, and thus subject such stock to the applicable
Ownership Limit. Direct or constructive ownership in excess of the Ownership
Limit would cause ownership of the shares in excess of the limit to be
transferred to the trustee.
The Ownership Limit will not be automatically removed even if the REIT
Provisions (as defined herein) are changed so as to eliminate any ownership
concentration limitation or if the ownership concentration limitation is
increased. The foregoing restrictions on transferability and ownership will not
apply, however, if the Board of Directors determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to qualify,
as a REIT.
The Charter requires that any person who beneficially owns 0.5% (or such
lower percentage as may be required by the Code or the Treasury Regulations) of
the outstanding shares of any class or series of Preferred Stock must provide
certain information to the Company within 30 days of June 30 and December 31 of
each year. In addition, each such stockholder shall upon demand be required to
disclose to the Company in writing such information as the Company may request
in order to determine the effect, if any, of such stockholder's actual and
constructive ownership on the Company's status as a REIT and to ensure
compliance with the Ownership Limit.
SUPERMAJORITY DIRECTOR APPROVAL
The Charter requires approval by two-thirds of the Board of Directors in
order for the Company to file a voluntary petition of bankruptcy.
BUSINESS COMBINATIONS
Under MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns, directly or indirectly, 10% or
more of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of such an Interested Stockholder are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be (i)
approved by the board of directors of such corporation and (ii) approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding voting shares of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting shares other than voting shares held by
the Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the statute) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Bank beneficially
owns more than 10% of the Company's voting shares and would, therefore, together
with its affiliates, be subject to the business combination provision of the
MGCL. However, pursuant to the statute, the Company has exempted any business
combinations involving the Bank and any present or future affiliate thereof and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between any of them and the Company. As
a result, the Bank and any present or future affiliate thereof may be able to
enter into business combinations with the Company that may not be in the best
interest of its stockholders without compliance by the Company with the
super-majority vote requirements and the other provisions of the statute.
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CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares owned by the acquiror and officers and directors
who are employees of the corporation. "Control shares" are shares which, if
aggregated with all other shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of the outstanding shares. Control shares do not include shares that
the acquiring person is entitled to vote on the basis of prior stockholder
approval. A "control share acquisition" means the acquisition of control shares
subject to certain exemptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or excepted by the charter or bylaws of
the corporation prior to a control share acquisition.
The Bylaws of the Company contain a provision exempting from the control
share statute any shares of stock owned by the Bank or any affiliate of the
Bank.
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.
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.
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FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The New Preferred Shares will be issued only as fully registered securities
registered in the name of Cede & Co. (as nominee for DTC). One or more fully
registered global New Preferred Share certificates (the "Global Certificate")
representing the New Preferred Shares exchanged for Old Preferred Shares will be
deposited with DTC for credit to an account of a direct or indirect participant
in DTC as described below.
Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee, and such transfer shall be effective only when reflected in the
securities register maintained by or on behalf of the Company. Beneficial
interests in the Global Certificate may not be exchanged for the New Preferred
Shares in certificated form.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Certificate, DTC will credit the accounts of
Participants designated by the Exchange Agent with portions of the liquidation
preference of the Global Certificate and (ii) ownership of such interests in the
Global Certificate will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global Certificate).
Investors in the Global Certificate may hold their interests therein
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system. All interests in
the Global Certificate may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery in
certificated form of securities that they own. Consequently, the ability to
transfer beneficial interests in the Global Certificate to such persons will be
limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in the Global Certificate to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests. For certain
other restrictions on the transferability of the New Preferred Shares, see
"Certificated New Preferred Shares."
Except as described below, owners of interests in the Global Certificate
will not have New Preferred Shares registered in their name, will not receive
physical delivery of New Preferred Shares in certificated form and will not be
considered the registered owners or holders thereof for any purpose.
Payments in respect of the Global Certificate registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered holder.
The transfer agent will treat the persons in 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,
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neither the transfer agent nor any agent thereof has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Certificate, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Certificate or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the New Preferred Shares, is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in liquidation preference, of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of New Preferred Shares will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the transfer agent, or the Company. Neither the Company nor the transfer
agent will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the New Preferred Shares, and the Company
and the transfer agent may conclusively rely on and will be protected in relying
on instructions from DTC or its nominee for all purposes.
Secondary market trading activity in interests in the Global Certificates
will settle in immediately available funds, subject in all cases to the rules
and procedures of DTC and its participants. Transfers between Participants in
DTC will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Preferred Shares only at the direction of one or more
Participants to whose account with DTC interests in the Global Certificate are
credited and only in respect of such portion of the liquidation preference of
the New Preferred Shares as to which such Participant or Participants has or
have given such direction.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that the Company believes to be reliable, but the
Company does not take responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interest in the Global Certificates among participants in DTC, they are under
no obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the transfer
agent will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NEW PREFERRED SHARES
The Global Certificate is exchangeable for New Preferred Shares in
registered certificated form if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as Depositary for the Global Certificate and the
Company thereupon fails to appoint a successor Depositary within 90 days or (y)
has ceased to be a clearing agency registered under the Exchange Act or (ii) the
Company in its sole discretion elects to cause the issuance of the New Preferred
Shares in certificated form. In all cases, certificated New Preferred Shares
delivered in exchange for the Global Certificate or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the Depositary (in accordance with its customary
procedures).
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States federal income tax
considerations with respect to the Exchange Offer is for general information
only and is not tax advice. The discussion set forth below, to the extent that
it constitutes a summary of legal matters or legal conclusions, has been
reviewed by Shearman & Sterling, and it is such firm's opinion that such
discussion is accurate in all material respects. In rendering such opinion,
Shearman & Sterling has relied on Desjardins Ducharme Stein Monast, with respect
to certain matters of Quebec law, Osler Hoskin & Harcourt, with respect to
certain matters of Ontario law, and Conyers Dill & Pearman, with respect to
certain matters of Bermuda law. The discussion below is based on the Code,
existing and proposed Treasury Regulations issued thereunder, and administrative
and judicial interpretations thereof, all as of the date hereof and all of which
are subject to change, possibly with retroactive effect. The discussion below
does not address all aspects of taxation that may be relevant in the particular
circumstances of each stockholder or to certain types of stockholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, persons that hold stock in the Company other than as a capital
asset, foreign corporations and persons who are not citizens or residents of the
United States, except to the extent discussed), subject to special treatment
under the United States federal income tax laws.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS 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
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Offering Memorandum and certain legal opinions provided by Canadian and
Bermudian counsel to the Bank. Such qualification and taxation as a REIT,
moreover, depends upon the Company's ability to meet, through actual annual
operating results, distribution levels, diversity of stock ownership and the
REIT Requirements discussed below, the satisfaction of which will not be
reviewed by Shearman & Sterling on a continuing basis. No assurance can be given
that the actual results of the Company's operation for any one taxable year will
satisfy such requirements. See "Tax Risks--Adverse Consequences of Failure to
Qualify as a REIT."
There can be no assurance that the Company will continue to qualify as a
REIT in any particular taxable year, given the highly complex nature of the
rules governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in the circumstances of the Company. If the
Company were not to qualify as a REIT in any particular year, it would be
subject to United States federal income tax as a regular, domestic corporation
and its stockholders would be subject to tax in the same manner as stockholders
of such a corporation. In this event, the Company would likely be subject to a
substantial United States federal income tax liability in respect of each
taxable year that it fails to qualify as a REIT and the income available for
distribution to the holders of the 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 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
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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 reelecting REIT status for the
four taxable years following the year during which it became disqualified.
TAX TREATMENT OF AUTOMATIC EXCHANGE
Upon the occurrence of an Exchange Event, the outstanding New Preferred
Shares will be automatically exchanged on a one-for-one basis for the Bank
Preferred Shares. See "Description of New Preferred Shares--Automatic Exchange."
The Automatic Exchange will be a taxable exchange with respect to which each
holder of the New Preferred Shares will recognize a gain or loss, as the case
may be, measured by the difference between the adjusted basis of such holder in
its New Preferred Shares and the fair market value of the Bank Preferred Shares
received in the Automatic Exchange. Assuming that such holder's New Preferred
Shares were held as capital assets prior to the Automatic Exchange, any such
gain or loss will be capital gain or loss. The basis of a holder in the Bank
Preferred Shares received in the Automatic Exchange will be their fair market
value at the time of the Automatic Exchange.
TAXATION OF NEW PREFERRED SHARES
Distributions (including constructive distributions) made to holders of the
New Preferred Shares, other than tax-exempt entities, will generally be subject
to United States federal income tax as ordinary income to the extent of the
Company's current and accumulated earnings and profits as determined for United
States federal income tax purposes. If the amount distributed to a holder of the
New Preferred Shares exceeds the holder's allocable share of such earnings and
profits, the excess will be treated first as a nontaxable return of capital to
the extent of such holder's adjusted basis in the New Preferred Shares and,
thereafter, as a gain from the sale or exchange of a capital asset.
Distributions designated by the Company as capital gain dividends will
generally be subject to tax as long-term capital gain to the extent that the
distribution does not exceed the Company's actual net capital gain for the
taxable year (although corporations may be required to treat up to 20% of
certain capital gain dividends as ordinary income). Distributions by the
Company, whether characterized as ordinary income or as capital gain, are not
eligible for the corporate dividends-received deduction. In the event that the
Company realizes a loss for a taxable year, holders of the New Preferred Shares
will not be permitted to deduct any share of that loss. Future Treasury
Regulations may require that holders of the New Preferred Shares take into
account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the Company.
Dividends declared during the last quarter of a calendar year and actually
paid during January of the following year will generally be treated as having
been received by the holders of New Preferred Shares on December 31 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
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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 longterm 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 the difference
between the amount realized on the sale or exchange and the holders' 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
accumulated earnings and profits will be treated first as a nontaxable return of
capital to the
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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.
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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.
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."
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ERISA CONSIDERATIONS
ERISA and the Code impose certain restrictions on (a) employee benefit plans
(as defined in Section 3(3) of ERISA) subject to Title I of ERISA, (b) plans
described in Section 4975(e)(1) of the Code, including individual retirement
accounts or Keogh plans, (c) any entities whose underlying assets include "plan
assets" under the Plan Asset Regulation (as defined below) (each a "Plan") and
(d) persons and entities who have certain specified relationships to such Plans
("Parties-in-Interest" under ERISA and "Disqualified Persons" under the Code).
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank, 114 S. Ct. 517
(1993), an insurance company's general account may be deemed to include assets
of the Plans investing in the general account (e.g., through the purchase of an
annuity contract), and the insurance company might be treated as a
Party-in-Interest or Disqualified Person with respect to a Plan by virtue of
such investment. ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA, and ERISA and the Code prohibit certain
transactions between a Plan and Parties-in-Interest or Disqualified Persons with
respect to such Plan.
STATUS UNDER PLAN ASSET REGULATIONS
The Department of Labor has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulation"). The Plan Asset Regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan purchases an
equity interest will be deemed for purposes of ERISA and Section 4975 of the
Code to be assets of the investing Plan unless certain exceptions apply. Under
one such exception, the assets of such an entity are not considered to be Plan
assets where a Plan makes an investment in an equity interest that is a
"publicly-offered security." As described in more detail below, the Company
anticipates that the 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
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commencing on such date and ending on the date on which the New Preferred Shares
become "publicly-offered securities," appointed the Independent Fiduciary (an
entity unaffiliated with and independent of the Bank and the Company) as a
fiduciary of such Plan to exercise any discretionary authority reserved to the
Company, to the extent that the duties of such entity involve discretionary
authority or control respecting transactions with the Bank or the Bank's
affiliates. The Independent Fiduciary will be identified by the Company prior to
any such transaction and will be subject to removal and replacement by a
majority of the holders of the New Preferred Shares.
The Company may from time to time invest the proceeds received in connection
with the repayment or disposition of the Initial Mortgage Assets issued by NB
Finance, the issuance of additional shares of Preferred Stock or additional
capital contributions with respect to the Common Stock. To the extent that the
investment of such proceeds occurs prior to the consummation of the Exchange
Offer or the effectiveness of a Shelf Registration Statement, such proceeds will
be invested in Canadian or U.S. government guaranteed, mortgage-backed
certificates and other Canadian or U.S. government obligations, which will be
purchased on the open market or 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."
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EXEMPTIONS FROM PROHIBITED TRANSACTIONS
Any purchaser that is an insurance company using the assets of an insurance
company general account should note that the Small Business Job Protection Act
of 1996 added new Section 401(c) of ERISA relating to the status of the assets
of insurance company general accounts under ERISA and Section 4975 of the Code.
Pursuant to Section 401(c), the Department of Labor is required to issue final
regulations (the "General Account Regulations") with respect to insurance
policies issued on or before December 31, 1998 that are supported by an
insurer's general account. The General Account Regulations, which were issued in
proposed form on December 22, 1997, are to provide guidance on which assets held
by the insurer constitute "Plan Assets" for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code. Section 401(c)
also provides that, except in the case of avoidance of the General Account
Regulations and actions brought by the Secretary of Labor relating to certain
breaches of fiduciary duties that also constitute breaches of state or federal
criminal law, until the date that is 18 months after the General Account
Regulations become final, no liability under the fiduciary responsibility and
prohibited transaction provisions of ERISA and Section 4975 of the Code may
result on the basis of a claim that the assets of the general account of an
insurance company constitute Plan Assets. The Plan Asset status of insurance
company separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the assets of any such Plan
invested in a separate account except to the extent provided in the Plan Asset
Regulation.
In addition, if the Bank, or in certain circumstances an obligor with
respect to a Mortgage Asset or other debt instrument held by the Company, is a
Party-in-Interest or Disqualified Person with respect to an investing Plan, such
Plan's investment could be deemed to constitute a transaction prohibited under
Title I of ERISA or Section 4975 of the Code (e.g., the extension of credit or
sale of property between a Plan and a Party-in-Interest or Disqualified Person).
Such transactions may, however, be subject to a statutory or administrative
exemption such as Prohibited Transaction Class Exemption ("PTCE") 90-1, which
exempts certain transactions involving insurance company pooled separate
accounts; PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; PTCE 91-38, which exempts certain transactions
involving bank collective investment funds; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; and PTCE 96-23, which exempts certain transactions effected on behalf
of a Plan by an "in-house asset manager"; or pursuant to any other available
exemption. Such exemptions may not, however, apply to all of the transactions
that could be deemed prohibited transactions in connection with such Plan's
investment.
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."
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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 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. The United States federal
income tax considerations with respect to the Exchange Offer will be passed upon
by Shearman & Sterling, New York, New York. The Canadian federal income tax
consequences that would be generally applicable to a holder of Bank Preferred
Shares in the event of an Exchange Event will be passed upon by Desjardins
Ducharme Stein Monast, Montreal, Canada.
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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<PAGE>
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 OR 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.
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.
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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.
EXPIRATION DATE: The expiration date of the Exchange Offer, which shall be
5:00 p.m. New York City time on April 9, 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.
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<PAGE>
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, 11,692
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 US$6 million Initial Purchaser's discount
in connection with the purchase of the Old Preferred Shares by the Initial
Purchaser on August 22, 1997.
INTERESTED STOCKHOLDER: Any person who beneficially owns, directly or
indirectly, 10% or more of the voting power of a corporation's shares or an
affiliate of such corporation who, at any time within the two-year period prior
to the date of a "business combination" under the MGCL, was the beneficial owner
of 10% or more of the voting power of the then outstanding voting stock of such
corporation.
IRS: The Internal Revenue Service.
ISSUE DATE: September 3, 1997.
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.
MEMORANDUM: The Memorandum of Association of NB Finance.
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MGCL: The Maryland General Corporation Law.
MONTHLY PAYMENT DATE: The 1st day of each month through July 2001 or such
earlier date on which payment in full of the Initial Mortgage Loans is made or,
if the 1st day of a month is not a business day, on the first business day
following the 1st day of such month.
MORTGAGE ASSETS: Assets consisting of obligations secured by real property,
as well as other qualifying REIT assets.
MORTGAGE LOAN ASSIGNMENT AGREEMENT: The Mortgage Loan Assignment Agreement
dated September 3, 1997 between the Company and NB Finance.
MORTGAGE LOANS: CMHC-insured residential first mortgages that are secured
by real property located in Canada.
NB FINANCE: NB Finance, Ltd., a Bermuda corporation.
NEW PREFERRED SHARES: 8.35% Noncumulative Exchangeable Preferred Stock,
Series A, par value US$.01 per share, of NB Capital Corporation issued under the
Registration Statement.
NHA: National Housing Act.
NHA-APPROVED LENDER: A lender approved under the NHA.
NHA MBS: A NHA Mortgage-Backed Security.
95% GROSS INCOME TEST: At least 95% of the Company's gross income must
consist of income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain interest
rate swap and cap agreements entered into to hedge variable rate debt incurred
to acquire Qualified REIT Real Estate Assets) not held for sale in the ordinary
course of business.
NON-UNITED STATES HOLDER: An exchanging stockholder that, for United States
federal income tax purposes, is not a "United States person."
NOTICE OF GUARANTEED DELIVERY: The notice of guaranteed delivery available
to holders of Old Preferred Shares in connection with the Exchange Offer.
NYBL: The banking laws of the State of New York.
OFFERING: The offering of Old Preferred Shares by the Company on the Issue
Date.
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.
OSFI ORDER: The order of the Superintendent approving the acquisition of
the common stock of NB Finance by the Bank.
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
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<PAGE>
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
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 March 10, 1998 with respect to the
Exchange Offer.
PTCE: Prohibited Transaction Class Exemption.
PURCHASE AGREEMENT: The Purchase Agreement, dated August 22, 1997, among NB
Capital Corporation, the Bank and the Initial Purchaser.
QUOTATION AGENT: The Reference Treasury Dealer appointed by the Company.
REDEMPTION DATE: The date fixed for redemption for a 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 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.
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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 Form S-4/ F-9 dated March 2, 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.
REIT TAXABLE INCOME: Taxable income, as determined in accordance with the
Code, with certain adjustments. The most significant of such adjustments are (i)
no deduction is allowed for dividends received, (ii) a deduction is allowed for
dividends paid (other than the portion of any dividend attributable to net
income from foreclosure property) and for taxes imposed for failure to satisfy
certain statutory REIT requirements, and (iii) net income from foreclosure
property and net income derived from prohibited transactions is excluded from
the determination.
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.
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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 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 IRS 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).
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.
UNSOLD ALLOTMENT: The 61,600 shares of the Company's 8.35% Noncumulative
Exchangeable Preferred Shares, Series A, held by the Initial Purchaser and
concurrently offered by the Initial Purchaser for resale.
US$ OR U.S. DOLLARS: U.S. dollars.
USRPI: United States real property interests.
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INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
Auditors' report..................................................................... F-10
Balance sheet........................................................................ F-11
Statement of income and retained earnings............................................ F-12
Statement of changes in financial position........................................... F-13
Notes to the financial statements.................................................... F-14
</TABLE>
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 Stockholders of NB Capital Corporation
We have audited the accompanying balance sheet of NB Capital Corporation as
of December 31, 1997 and the related 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)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Cash........................................................................ $20,003,943
Due from an affiliated company.............................................. 4,504,564
Promissory notes............................................................ 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, $0.01 par value per share; 10,000,000 shares authorized,
300,000 Series A shares issued and paid................................... 3,000
Common stock, $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
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF INCOME
FOR THE PERIOD AUGUST 20, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
(IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenue
Interest income
Short-term investments..................................................... $ 133,403
Promissory notes........................................................... 12,760,418
Bank interest.............................................................. 100,118
----------
12,993,939
----------
Expenses
Legal fees................................................................... 226,144
Other professional fees...................................................... 226,405
Servicing 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
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
<PAGE>
NB CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 20, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
(IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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......................................... -- -- -- $ 11,913,093 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)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Operating activities
Net income.................................................................. $ 11,913,093
Items not affecting cash resources
Due from an affiliated company............................................ (4,504,564)
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 stock....................................................... 183,338,454
Issue of preferred stock, 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
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
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 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 and are expressed
in U.S. dollars.
INCOME TAXES
The Company upon filing its initial tax return will elect to be taxable as a
Real Estate Investment Trust ("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.
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.
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 (CONTINUED)
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.
<TABLE>
<S> <C>
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
-----------
-----------
</TABLE>
The scheduled principal repayments are as follows:
<TABLE>
<S> <C>
1998........................................... $39,347,000
1999........................................... 92,192,175
2000........................................... 182,467,610
2001........................................... 142,507,040
</TABLE>
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 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
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)
- --------------------------------------------------------------------------------
5. TRANSACTIONS WITH THE PARENT COMPANY (CONTINUED)
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.
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-9
<PAGE>
<TABLE>
<S> <C> <C>
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
</TABLE>
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.
DELOITTE & TOUCHE
Chartered Accountants
Montreal, Canada
February 10, 1998
F-10
<PAGE>
NB FINANCE, LTD.
BALANCE SHEET
AS AT DECEMBER 31, 1997
(IN U.S. DOLLARS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
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
-----------
-----------
- -------------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
NB FINANCE, LTD.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOUR-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN U.S. DOLLARS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
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
----------
----------
- -------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
NB FINANCE, LTD.
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOUR-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN U.S. DOLLARS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
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
------------
------------
- -------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
NB FINANCE, LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOUR-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF OPERATIONS
NB Finance, Ltd. (the "Company") is a wholly-owned subsidiary of 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.
PREMIUM PAID ON MORTGAGE LOANS
The premium paid on mortgage loans is amortized on a straight-line basis
over a three-year period.
F-14
<PAGE>
NB FINANCE, LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOUR-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
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 from January 2000 to July
2001. These loans bear interest at rates ranging from approximately 6.0% to
8.99% with an average rate of 7.53% 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.
<TABLE>
<CAPTION>
<S> <C>
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
-----------
-----------
</TABLE>
The scheduled principal repayments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998................ $ 47,791,271
1999................ 111,977,563
2000................ 221,627,034
2001................ 173,090,515
</TABLE>
The mortgage loans are insured by the Canada Mortgage and Housing
Corporation so that 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.
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
F-15
<PAGE>
NB FINANCE, LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOUR-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
5. PROMISSORY NOTES (CONTINUED)
The scheduled principal repayments for the next four years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.......................................................... $39,347,000
1999.......................................................... 92,192,175
2000.......................................................... 182,467,610
2001.......................................................... 142,507,040
</TABLE>
6. TRANSACTIONS WITH AN AFFILIATED COMPANY
During the four-month period, the Company incurred interest expense to 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
<TABLE>
<CAPTION>
Authorized
<S> <C>
12,000 common shares, $1 par value
Issued and fully paid
12,000 common shares............................................. $ 12,000
</TABLE>
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.
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-16
<PAGE>
ANNEX I
NEW ISSUE
U.S.$300,000,000
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.
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
<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.
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,
I-2
<PAGE>
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.
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.
I-3
<PAGE>
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.
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.
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<PAGE>
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.
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.
THE OFFERING
<TABLE>
<S> <C>
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
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 The Old Preferred Shares were sold by the Company on
Agreement:.................... 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 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
</TABLE>
I-6
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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<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
--------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED (1)
--------------- ---------------
<CAPTION>
(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
------- -------
61,940 61,940
------- -------
Non-controlling interest..................................................... 466 43
------- -------
Bank debentures.............................................................. 1,069 1,069
------- -------
Shareholders' equity
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.
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<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.
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
I-9
<PAGE>
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.
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:
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<PAGE>
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
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
</TABLE>
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.
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.
I-11
<PAGE>
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.
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.
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
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<PAGE>
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.
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
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in concert with that person (as contemplated by the Bank Act) exceeds 10% of all
of the outstanding shares of that class of shares of the Bank.
In addition, these restrictions do not permit Schedule I banks, including
the Bank, to issue or transfer shares of any class to Her Majesty in right of
Canada or of a province, an agent of Her Majesty or a foreign government or any
agent of a foreign government.
Purchasers of the Series Z Preferred Shares may be required to furnish
declarations relative to certain of the foregoing matters in a form prescribed
by the Bank.
REGULATION
CANADA
THE BANK ACT
The Bank is a Schedule 1 bank under the Bank Act, and the Bank Act is its
charter. See "The Canadian Banking Industry". In accordance with the Bank Act,
the Bank may engage in and carry on such business generally as appertains to the
business of banking. The Bank Act grants banks broad powers of investment in the
securities of other corporations and entities, but imposes limits upon banks'
substantial investments. A bank has a substantial investment in a body corporate
when (i) the voting shares beneficially owned by the Bank and by entities
controlled by the Bank exceed 10% of the outstanding voting shares of the body
corporate or (ii) the total of the shares of any class of the body corporate
that are beneficially owned by the Bank and entities controlled by the Bank
exceed 25% of the total shareholders' equity of the body corporate. A bank is
entitled to have a substantial investment in a body corporate that is one of the
following, provided that the Bank controls the body corporate and, in certain
cases, the Bank obtains the prior approval of the Minister of Finance of Canada:
a financial institution; a factoring corporation; a financial leasing
corporation; a specialized financing corporation; and a financial holding
corporation, provided that the financial holding corporation does not have a
substantial investment that the Bank may not have. In addition, a bank may have
a substantial investment which can, but need not be, a controlling interest in
the following types of corporations or in any corporation that engages in any
combination of the following: an information services corporation; an investment
counseling and portfolio management corporation; a mutual fund corporation; a
mutual fund distribution corporation; a real property brokerage corporation; a
real property corporation; a service corporation; and a body corporate whose
activities are ancillary to the business of the Bank or of a financial
institution that is a subsidiary of the Bank. Unlike under the former banking
legislation, the investments of Schedule 1 banks in foreign bodies corporate are
now generally subject to the same rules applicable to investments in Canadian
bodies corporate. A bank may not, without the prior approval of the
Superintendent, create a security interest in any of its property to secure an
obligation of the Bank.
INSPECTION
The Bank Act also contemplated the appointment of the Superintendent who
administers the Bank Act under the authority granted to him by the Minister of
Finance of Canada. Among other things, the Superintendent is required under the
Bank Act, at least once in each calendar year, to examine and inquire into the
business and affairs of each bank to the extent necessary or expedient to
determine that the provisions of the 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.
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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.
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
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federal receiver applying United States federal law, which provides that claims
arising out of transactions with any branch or agency of the Bank located in any
State in the United States shall be paid out of all the properties and assets of
the Bank in the United States.
In addition to being subject to New York State laws and regulations, the
Bank and the Branch are also subject to federal regulation under the IBA and the
Bank is subject to federal regulation under the Bank Holding Company Act of 1956
(the "BHCA"). Under the IBA, United States branches of foreign banks, such as
the Branch, are subject to reserve requirements on deposits held by such
branches and to restrictions on the payment of interest on demand deposits
pursuant to regulations of the Board of Governors of the Federal Reserve System
(the "Board"). Because the Branch engages in a wholesale banking business, its
deposits are not insured by the Federal Deposit Insurance Corporation.
Under the IBA and BHCA, the Bank is subject to certain restrictions with
respect to opening new U.S. domestic deposit-taking branches in states outside
its "home state," which is New York. Recently enacted U.S. Federal law has
generally removed restrictions on acquisitions of banks outside the home state
of the acquiring bank or holding company. These laws and related regulations
also contain certain restrictions on the Bank's ability to engage, directly or
through subsidiaries, in non-banking activities in the United States.
The BHCA also generally prohibits the Bank from, directly or indirectly,
acquiring more than 5% of the voting shares of any company engaged in
non-banking activities in the United States unless the Board has determined, by
order or regulation, that such proposed activities are so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
addition, the BHCA requires the Bank to obtain the prior approval of the Board
before acquiring, directly or indirectly, the ownership or control of more than
5% of the voting shares of any United States bank or bank holding company.
Federal law also imposes limitations on the ability of the Bank and its
subsidiaries to engage in certain aspects of the securities business in the
United States.
The Foreign Bank Supervision Enhancement Act of 1991 (the "FBSEA"), enacted
December 19, 1991, increased the degree of United States Federal bank regulation
of and supervision over United States branches of foreign banks. The FBSEA
provides, among other things, that the Board may examine such a branch and
provides that each branch of a foreign bank shall be examined at least once
during each 12-month period in an on-site examination. The FBSEA also provides
that the Board may order a foreign bank that operates a state branch to
terminate the activities of such branch if the Board finds that the foreign bank
is not subject to comprehensive supervision or regulation on a consolidated
basis by the appropriate authorities in its home country, or that there is
reasonable cause to believe that such foreign bank, or any affiliate of such
foreign bank, has committed a violation of law or engaged in an unsafe or
unsound banking practice in the United States, and, as a result of such
violation or practice, the continued operation of the branch would not be
consistent with the public interest or with the IBA, the BHCA or the Federal
Deposit Insurance Act. A foreign bank so required to terminate activities
conducted at a branch in the United States must comply with the requirements of
applicable United States Federal and state law with respect to procedures for
the closure or dissolution thereof. The FBSEA also provides that a state branch
of a foreign bank may not engage in any type of activity that is not permissible
for a United States Federal branch of a foreign bank unless the Board has
determined that such activity is consistent with sound banking practice.
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
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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
----------------
<S> <C> <C>
(UNAUDITED)
(IN MILLIONS OF
CANADIAN
DOLLARS)
Total Assets....................................................................... $ 66,235
Deduct: Deposit liabilities........................................................ $ 43,270
Other liabilities........................................................... 19,136
Deferred income taxes....................................................... 172
Goodwill.................................................................... 154
--------
(62,732)
Net Tangible Assets................................................................ 3,503
Add: Proceeds of the automatic exchange............................................ --
Adjusted net tangible assets before deduction of debentures........................ 3,503
Deduct: Debentures................................................................. (1,069)
--------
Adjusted net tangible assets available for First Preferred Shares.................. $ 2,434
--------
--------
</TABLE>
The adjusted net tangible assets available for the outstanding First
Preferred Shares of the Bank amounted to approximately 3.1 times the aggregate
issue price for the outstanding First Preferred Shares (including the proceeds
of the automatic exchange in the case of the Series Z Preferred Shares). The
adjusted net tangible assets (before deduction of debentures) amounted to 1.9
times the sum of the principal amount of such debentures and the aggregate issue
price of the First Preferred Shares.
DIVIDEND AND INTEREST COVERAGE
Based on an annual dividend rate on the Series Z Preferred Shares of 8.45%
and assuming an average prime rate of 5.75%, the annual dividend requirement of
the Series Z Preferred Shares, of the First Preferred Shares Series 5 (286,610
shares), Series 7 (422,633 shares), Series 8 (789,638 shares), Series 10
(3,680,000 shares), Series 11 (4,000,000 shares) and Series 12 (5,000,000
shares) outstanding of the Bank (collectively, the "First Preferred Shares"),
would amount to $62.3 million. The Bank's net income, after income taxes and
non-controlling interest, for the twelve months ended October 31, 1997 was $342
million. This amount is 5.5 times such annual dividend requirement.
The annual interest requirement on all debentures of the Bank outstanding as
at October 31, 1997 amounts to $76.5 million, assuming a six month London
interbank offered rate (LIBOR, of 5.8125% on floating rate debentures and
assuming the following exchange rates: Cdn. $1.4084 per US$1.00; Cdn. $0.0117
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.
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<PAGE>
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.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE BANK OR NB FINANCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
UNTIL JUNE 8, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW PREFERRED
SHARES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... iv
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 16
The Bank, the Company and NB Finance...................................... 24
Use of Proceeds........................................................... 25
Capitalization............................................................ 26
Management's Discussion and Analysis of Liquidity and Capital Resources... 27
The Exchange Offer........................................................ 28
Business and Strategy..................................................... 40
Management................................................................ 59
Description of New Preferred Shares....................................... 66
Exchange Offer; Registration Rights....................................... 74
Description of Capital Stock.............................................. 77
United States Federal Income Tax Considerations........................... 84
Canadian Federal Income Tax Considerations................................ 91
ERISA Considerations...................................................... 92
Ratings................................................................... 95
Plan of Distribution...................................................... 95
Legal Matters............................................................. 95
Experts................................................................... 95
Glossary.................................................................. 96
Financial Statements...................................................... F-1
Annex I--Bank Short Forms Prospectus...................................... I-1
</TABLE>
NB CAPITAL CORPORATION
NB FINANCE, LTD.
NATIONAL BANK OF CANADA
OFFER TO EXCHANGE
UP TO 238,400
SHARES OF
8.35% NONCUMULATIVE
EXCHANGEABLE PREFERRED STOCK,
SERIES A
(LIQUIDATION PREFERENCE
US$1,000 PER SHARE)
FOR
UP TO 238,400
SHARES OF
8.35% NONCUMULATIVE
EXCHANGEABLE PREFERRED STOCK,
SERIES A
(LIQUIDATION PREFERENCE
US$1,000 PER SHARE)
MARCH 10, 1998
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