As filed with the Securities and Exchange Commission on October 4, 1996
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
under THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
PROVIDENT PREFERRED CAPITAL CORP.
(Exact Name of Registrant as Specified in its Governing Instruments)
MARK E. MAGEE, ESQ.
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2801
(Name, Address and Telephone Number of
Registrant's Principal Executive offices and Agent for Service)
J. David Rosenberg, Esq. Richard F. Kadlick, Esq.
Keating, Muething & Klekamp Skadden, Arps, Slate, Meagher & Flom
1800 Provident Tower 919 Third Avenue
One East Fourth Street New York, New York 10022
Cincinnati, Ohio 45202 Telephone: (212) 735-3000
Telephone: (513) 579-6400 Facsimile: (212) 735-2000
Facsimile: (513) 579-6457
Approximate date of commencement of the proposed sale of the
securities to the public: As soon as practicable after the effective date
of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
===============================================================================
Proposed Proposed
Maximum Maximum
Offering Aggregate
Title of Securities Amount Being Price Per Offering Amount of
Being Registered Registered Share(1) Price Registration Fee
- -------------------------------------------------------------------------------
% Non Cumulative
Preferred Stock, 2,000,000 $25.00 $50,000,000 $15,151.52
Series A
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(1) Estimated solely for purposes of determining the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission acting
pursuant to said Section 8(a), may determine.
PROVIDENT PREFERRED CAPITAL CORP.
CROSS-REFERENCE SHEET
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ITEM LOCATION IN
NUMBER CAPTION PROSPECTUS
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1. Forepart of Registration Statement and Forepart of Registration Statement
Outside Front Cover Page of Prospectus and Outside Front Cover Page
- ---------------------------------------------------------------------------------------
2. Inside Front and Outside Back Cover Inside Front and Outside Back Pages
Pages of Prospectus
- ----------------------------------------------------------------------------------------
3. Summary Information, Risk Factors and Prospectus Summary; The Company; Risk
Ratio of Earnings to Fixed Charges Factors; Business and Strategy;
Certain Transactions Constituting the
Formation
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4. Determination of Offering Price Not Applicable
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5. Dilution Not Applicable
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6. Selling Security Holders Not Applicable
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7. Plan of Distribution Underwriting
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8. Use of Proceeds Use of Proceeds
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9. Selected Financial Data Not Applicable
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10. Management's Discussion and Analysis of Not Applicable
Financial Condition and Results of
Operations
- -----------------------------------------------------------------------------------------
11. General Information as to Registrant Prospectus Summary; The Company;
Management; Business and Strategy;
Certain Transactions Constituting the
Formation
- -----------------------------------------------------------------------------------------
12. Policy with Respect to Certain Prospectus Summary; Risk Factors;
Activities Business and Strategy; Description of
Capital Stock; Federal Income Tax
Considerations
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13. Investment Policies of Registrant Prospectus Summary; Risk Factors;
Business and Strategy; Description of
Capital Stock; Federal Income Tax
Considerations
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14. Description of Real Estate Prospectus Summary; Business and
Strategy
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15. Operating Data Capitalization; Business and Strategy
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16. Tax Treatment of Registrant and its Prospectus Summary; Federal Income
Security Holders Tax Considerations
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17. Market Price of and Dividends on the Business and Strategy Dividend
Registrant's Common Equity and Related Policy; Certain Transactions
Stockholder Matters Constituting the Formation
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18. Description of Registrant's Securities Summary of the Offering; Description
of Capital Stock
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19. Legal Proceedings Business and Strategy--Legal
Proceedings
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20. Security Ownership of Certain Beneficial Risk Factors; Management; Certain
Owners and Management Transactions Constituting the
Formation
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21. Directors and Executive Officers Management
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22. Executive Compensation Management
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23. Certain Relationships and Related Summary of the Offering; Risk
Transactions Factors; Use of Proceeds; Business
and Strategy; Certain Transactions
Constituting the Formation
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24. Selection, Management and Custody of Risk Factors; Use of Proceeds;
Registrant's Investments Business and Strategy General
Description of Mortgage Loans;
Investment Policy; Certain
Transactions Constituting the
Formation
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25. Policies with Respect to Certain Risk Factors; Use of Proceeds;
Transactions Business and Strategy--General
Description of Mortgage Loans;
Investment Policy; Certain
Transactions Constituting the
Formation
- -------------------------------------------------------------------------------------------
26. Limitation of Liability Management--Limitation on Liability of
Directors and Officers
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27. Financial Statements and Information Index to Financial Statements
- -------------------------------------------------------------------------------------------
28. Interests of Named Experts and Counsel Certain Legal Matters; Experts
- -------------------------------------------------------------------------------------------
29. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
===========================================================================================
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not
be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor
shall there by any sale of these securities in any state in which such
offer, solicitation or the sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
DATED OCTOBER 4, 1996
2,000,000 SHARES
PROVIDENT PREFERRED CAPITAL CORP.
[ ]% NON-CUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
Provident Preferred Capital Corp. (the "Company") is hereby
offering 2,000,000 shares of its % non-cumulative Preferred
Stock, Series A, par value $25.00 per share (the "Series A Preferred
Shares"). Dividends on the Series A Preferred Shares of the Company
will be payable quarterly, if, when and as declared by the Board of
Directors of the Company, on the last day of March, June, September
and December of each year or if such day is not a business day, the
next succeeding day, commencing , 1996, at the rate of
% per annum of the liquidation preference (an amount equal to $25.00
per share).
The Series A Preferred Shares are not redeemable prior to ,
20[01] (except upon the occurrence of a Tax Event as described
herein). On and after , 20[01], the Series A Preferred Shares
may be redeemed for cash at the option of the Company, in whole or in
part, at a redemption price of $25.00 per share, plus declared and
unpaid dividends, if any, to the redemption date, without interest
and, without duplication, an additional amount equal to the amounts of
dividends that would be payable on the Series A Preferred Shares from
the first day of the dividend period in which the date fixed for
redemption occurs to the date fixed for redemption (assuming all such
dividends were to be declared). The Series A Preferred Shares are
perpetual and will not be subject to any sinking fund or mandatory
redemption and will not be convertible into any other securities of
the Company. Because dividends are non-cumulative, if no dividend is
declared on the Series A Preferred Shares by the Board of Directors of
the Company for a quarterly dividend period, holders of the Series A
Preferred Shares will have no right to receive, and the Company will
have no obligation to pay a dividend for that period, whether or not
dividends on the Series A Preferred Shares are declared by the Board
of Directors of the Company for any future period. The Company
intends to maintain its status as a real estate investment trust
("REIT") and plans to distribute at least 95% of its REIT taxable
income to its stockholders. See "Federal Income Tax Considerations."
The Company has been formed for the purpose of acquiring,
holding and managing single family residential and commercial
real estate mortgage loans, mortgage-backed securities and cash
("Mortgage Assets"). The Company expects that its Mortgage
Assets will be acquired from The Provident Bank, a state
chartered commercial bank (the "Bank"), affiliates of the Bank
and third parties. All of the shares of the Company's common
stock, no par value (the "Common Stock"), are owned by the Bank.
The Bank has agreed that, so long as any Series A Preferred
Shares are outstanding, it will maintain direct or indirect
ownership of at least 80% of the outstanding Common Stock of the
Company.
The Company expects to qualify as a REIT for federal income
tax purposes, commencing with its initial taxable year ending
December 31, 1996. With limited exceptions, no person or persons
acting as a group is permitted to beneficially own more than
% in the aggregate of the lesser of the number of issued and
outstanding shares of preferred stock of the Company, including
the Series A Preferred Shares, or the value of all of the issued
and outstanding shares of the Company. See "Description of
Capital Stock Restrictions on Ownership and Transfer."
Prior to the offering, there has been no market for the
Series A Preferred Shares. Application will be made to list the
Series A Preferred Shares on the New York Stock Exchange.
See "Risk Factors" for a description of certain risks that
should be considered in connection with an investment in the
Series A Preferred Shares.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER DEBT OBLIGATIONS OF A BANK AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, ANY OTHER
GOVERNMENTAL AGENCY OR OTHERWISE
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE
UNDERWRITING
INITIAL PUBLIC DISCOUNTS AND PROCEEDS TO
OFFERING PRICE (1) COMMISSIONS (2)(3) COMPANY (4)
----------------- ------------------ ------------
Per Series A
Preferred Share $25.00 $ $
Total (5) . . $50,000,000 $ $
________________
(1) Plus accrued dividends, if any, from , 1996.
(2) The Company and the Bank have agreed to indemnify the
Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(3) As compensation for arranging the offering (the "Underwriters'
Compensation"), the Company has agreed to pay to the Underwriters
% per Series A Preferred Share, except for Series A
Preferred Shares sold to certain institutions for which the
Underwriters' Compensation will be % per Series A Preferred
Share.
(4) Before deducting expenses payable by the Company estimated at
$ .
(5) The Company has granted the Underwriters an option for 30 days to
purchase up to an additional Series A Preferred
Shares at the initial public offering price per Series A
Preferred Share, less underwriting discounts, solely to cover
over-allotments. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds
to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The Series A Preferred Shares are offered by the Underwriters, as
specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is
expected that the Series A Preferred Shares will be ready for delivery
through the facilities of The Depository Trust Company in New York,
New York on or about , 1996.
LEHMAN BROTHERS
The date of this Prospectus is , 1996.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE
MARKET PRICE OF THE SERIES A PREFERRED SHARES OFFERED HEREBY AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THE OFFERING. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement (of which
this Prospectus is a part) on Form S-11 (the "Registration
Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Series A Preferred Shares
offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document
are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further
information regarding the Company and the Series A Preferred
Shares offered hereby, reference is made to the Registration
Statement and the exhibits thereto.
The Registration Statement and the exhibits forming a part
thereof filed by the Company with the Commission can be inspected
at and copies can be obtained from the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following regional offices of the Commission: 7 World
Trade Center, 13th Floor, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, 14th Floor, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
The Articles of Incorporation establish the rights,
preferences and limitations of the Series A Preferred Shares and
provide that the Company shall maintain its status as a reporting
company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), for so long as any of the Series A
Preferred Shares are outstanding and pursuant thereto will
furnish shareholders with annual reports containing audited
financial statements.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus. See
"Glossary" commencing at page 63 for the definitions of certain
terms used in this Prospectus. The offering of approximately
2,000,000 shares of % Non-Cumulative Preferred Stock, Series
A, par value $25.00 per share (the "Series A Preferred Shares"),
is referred to herein as the "Offering." Unless otherwise
indicated, all information in this Prospectus assumes that the
over-allotment option described in "Underwriting" is not
exercised.
THE OFFERING
For a more complete description of the terms of the Series A
Preferred Shares specified in the following summary, see
"Description of Series A Preferred Shares."
Issuer . . . . . Provident Preferred Capital Corp., an Ohio
corporation (the "Company"), is a
corporation created for the purpose of
acquiring, holding and managing single
family residential and commercial real
estate mortgage loans, mortgaged-backed
securities and cash.
Securities
Offered . . . . 2,000,000 Series A Preferred Shares.
Ranking . . . . . The Series A Preferred Shares will rank
senior to the Company's common stock, no
par value (the "Common Stock"). With
respect to the payment of dividends and
other amounts upon liquidation, dissolution
or winding up of the Company, additional
shares of preferred stock of the Company
(the "Preferred Stock") ranking senior to
the Series A Preferred Shares may not be
issued without the approval of holders of
at least 66 2/3% of the Preferred Stock,
including the Series A Preferred Shares.
Additional shares of Preferred Stock
ranking on a parity with the Series A
Preferred Shares may not be issued without
the approval of a majority of the
Independent Directors (as hereinafter
defined).
Use of Proceeds . The net proceeds to the Company from the
Offering, together with proceeds received
in connection with the sale of shares of
Common Stock to The Provident Bank, a state
chartered commercial bank and the parent of
the Company (the "Bank") (currently
estimated by the Company to be
approximately $ in the
aggregate), will be used to purchase the
Company's initial portfolio of Mortgage
Assets and to pay the expenses of the
Offering and the formation of the Company.
See "Use of Proceeds."
Dividends . . . . Cash dividends on the Series A Preferred
Shares are non-cumulative and will be
payable at an annual rate of % per
share if, when and as declared by the Board
of Directors of the Company (the "Board of
Directors"). If the Board of Directors
does not declare a dividend with respect to
any quarterly dividend period (each, a
"Dividend Period"), holders of the Series A
Preferred Shares will have no right to
receive a dividend on the Series A
Preferred Shares in respect of such
Dividend Period and the Company will have
no obligation to pay a dividend for that
period, whether or not dividends are
declared and paid in any future period.
Dividends are payable quarterly in equal
amounts (prorated for any Dividend Period
that is other than three full months based
on a 360-day year of 12 30-day months) on
March 31, June 30, September 30 and
December 31 or, if any such day is not a
business day, on the next business day.
See "Description of Series A Preferred
Shares Dividends."
Liquidation
Preference . . The liquidation preference for each Series A
Preferred Share is $25.00 plus an amount equal
to declared and unpaid dividends, if any,
thereon. See "Description of Series A
Preferred Shares Rights Upon Liquidation."
Redemption . . . The Series A Preferred Shares are not
redeemable prior to , 20[01] (except
upon the occurrence of a Tax Event as
defined in "Description of Series A
Preferred Shares Redemption"). On and after
, 20[01], the Series A Preferred
Shares may be redeemed for cash at the
option of the Company, in whole or in part,
at any time and from time to time, at a
redemption price of $25.00 per share, plus
declared and unpaid dividends, if any, to
the date fixed for redemption, without
interest and, without duplication, an
additional amount equal to the amount of
dividends that would be payable on the
Series A Preferred Shares in respect of the
period from the first day of the Dividend
Period in which the date fixed for
redemption occurs to the date fixed for
redemption (assuming all such dividends
were to be declared) (the "Redemption
Price"). Upon the occurrence of a Tax
Event, the Company will have the right at
any time to redeem the Series A Preferred
Shares in whole (but not in part) for the
Redemption Price. See "Description of
Series A Preferred Shares Redemption."
Voting Rights . . Holders of Series A Preferred Shares will
not have any voting rights, except as
required by law or as expressly described
herein. In matters as to which the holders
of Series A Preferred Shares may vote, each
Series A Preferred Share shall be entitled
to one vote. See "Description of Series A
Preferred Shares Voting Rights."
Ownership Limits Ownership of more than % of the
lesser of the number of issued and
outstanding shares of Preferred Stock,
including the Series A Preferred Shares
offered hereby, or the value of all issued
and outstanding shares of the Company, is
restricted in order to preserve the
Company's status as a REIT for federal
income tax purposes.
Trading . . . . . Application will be made to list the Series
A Preferred Shares on the New York Stock
Exchange.
Ratings . . . . . It is expected that the Series A Preferred
Shares will be rated by Standard & Poor's
Corporation ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors
Service, L.P. ("Fitch") and Duff and Phelps
Credit Rating Co. ("DCR"). 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.
THE COMPANY
The Company is a newly formed Ohio corporation incorporated
on September 9, 1996 created for the purpose of acquiring,
holding and managing Mortgage Assets. The Company will elect to
be subject to tax as a REIT under the Code and will generally not
be subject to federal income tax to the extent that it
distributes its earnings to its stockholders and maintains its
qualification as a REIT. All of the shares of the Company's
Common Stock are owned by the Bank. The Bank has agreed that, so
long as any Series A Preferred Shares are outstanding, it will
maintain direct or indirect ownership of at least 80% of the
outstanding Common Stock of the Company.
The Company's principal business objective is to acquire,
hold and manage Mortgage Assets that will generate net income for
distribution to stockholders. The Company expects that all of its
Mortgage Assets will be acquired from the Bank, affiliates of the
Bank or third parties as Mortgage Backed Securities (as defined
herein) or whole loans ("Mortgage Loans") secured by first
mortgages or deeds of trust on single family residential or
commercial real estate properties.
Simultaneously with the consummation of the Offering, the
Bank will purchase shares of Common Stock for a price equal to $
million. The Company will use the aggregate proceeds of
approximately $100 million received in connection with both the
Offering and such sale of shares of Common Stock to the Bank to
purchase a portfolio of Mortgage Assets (the "Initial Portfolio")
from the Bank, its affiliates and third parties. If the
Underwriters exercise their option to purchase additional Series
A Preferred Shares to cover over-allotments, the Bank will
purchase additional shares of Common Stock for a price equal to
the aggregate public offering price of the additional Series A
Preferred Shares purchased pursuant to the Underwriters'
over-allotment option, and the Company will use the additional
proceeds from any such additional sales of Series A Preferred
Shares and Common Stock to purchase additional Mortgage Loans of
the types described in "Business and Strategy Description of the
Initial Portfolio." See "Use of Proceeds." Simultaneously with
the consummation of the Offering (or upon the exercise by the
Underwriters of their over-allotment option), the Bank will also
purchase additional shares of Common Stock for a price equal to
the aggregate amount of underwriting discounts and expenses
incurred by the Company in connection with the Offering
(including without limitation any underwriting discounts
associated with the exercise by the Underwriters of their
over-allotment option) and all expenses incurred by the Company
in connection with its formation in order to provide the Company
with funds sufficient to pay such expenses.
On , 1996, the Mortgage Assets to be included in the
Initial Portfolio had an aggregate outstanding principal balance
of at least $100,000,000. The Initial Portfolio will consist
entirely of cash, Mortgage Backed Securities and Mortgage Loans
secured solely by first mortgages or deeds of trust on single
family residential (one- to four-family) properties ("Residential
Mortgage Loans") and commercial properties ("Commercial Mortgage
Loans"). Approximately % of the Initial Portfolio (measured
by the aggregate outstanding principal balance as of ,
1996 (the "Cut-Off Date")) will be Residential Mortgage Loans and
the remainder will be Commercial Mortgage Loans. See "Business
and Strategy Description of the Initial Portfolio Mortgage
Loans." The Bank will act as the servicer for the Commercial and
Residential Mortgage Loans included in the Initial Portfolio and
will be entitled to receive fees in connection with the servicing
of such Mortgage Loans. The Bank has contracted, and may
continue to subcontract, the servicing of the Residential
Mortgage Loans to a subservicer. See "Business and
Strategy Servicing."
The Company and the Bank believe that the fair value of the
Initial Portfolio will equal or exceed the amount that the
Company will pay for the Initial Portfolio (approximately
$100,000,000). However, no third party valuations of the Mortgage
Loans portions of the Initial Portfolio have been or will be
obtained for purposes of the Offering. See "Risk Factors No Third
Party Valuation of the Mortgage Loans; No Arm's-Length
Negotiations with Affiliates."
The Company will enter into an advisory agreement with the
Bank (the "Advisory Agreement") pursuant to which the Bank will
administer the day-to-day operations of the Company. The Bank in
its role as advisor under the terms of the Advisory Agreement is
hereinafter referred to as the "Advisor." The Advisor will be
responsible for (i) monitoring the credit quality of Mortgage
Assets held by the Company, and (ii) advising the Company with
respect to the acquisition, management, financing and disposition
of the Company's Mortgage Assets. The Advisor may from time to
time subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in
the business of managing Mortgage Assets. If no affiliate of the
Advisor is engaged in the business of managing Mortgage Assets,
the Advisor may, with the approval of a majority of its 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 unrelated third parties. The Advisor will
not, in connection with the subcontracting of any of its
obligations under the Advisory Agreement, be discharged or
relieved in any respect from its obligations under the Advisory
Agreement. The Advisor and its personnel have substantial
experience in mortgage finance and in the administration of
Mortgage Loans.
The Advisory Agreement will have an initial term of five
years, and will be renewed automatically for additional five-year
periods unless notice of nonrenewal is delivered to the Advisor
by the Company. The Advisory Agreement may be terminated by the
Company at any time upon 90 days' prior notice. As long as any
Series A Preferred Shares remain outstanding, any decision by the
Company to terminate 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 Advisor will be entitled to
receive an advisory fee equal to % per annum of the principal
amount of the Mortgage Assets then owned by the Company. See
"Management The Advisor."
The initial Board of Directors of the Company is composed of
seven members, five of whom will be Independent Directors. An
"Independent Director" is a director who is not a current officer
or employee of the Company, the Bank or any affiliate of the
Bank. Pursuant to the Articles of Incorporation, the Independent
Directors are required to take into account the interests of the
holders of both the Series A Preferred Shares and the Common
Stock in assessing the benefit to the Company of any proposed
action requiring their approval. The Company currently has four
officers, each of whom is also an employee of the Advisor. The
Company has no other employees and does not anticipate that it
will require additional employees. See "Management."
The Company may from time to time purchase additional
Mortgage Loans or interests in new Mortgage Loans or other
assets (as long as such assets can be purchased in compliance
with applicable REIT rules) out of proceeds received in
connection with the repayment or disposition of Mortgage Assets
or the issuance of additional shares of Common Stock and
Preferred Stock. Up to 25% of the assets of the REIT may be
assets other than Mortgage Assets. Additional shares of
Preferred Stock ranking senior to the Series A Preferred Shares
may not be issued by the Company without the approval of holders
of at least 66 2/3% of the outstanding Preferred Stock, including
the Series A Preferred Shares. Additional shares of Preferred
Stock ranking on a parity with the Series A Preferred Shares may
not be issued by the Company without the approval of a majority
of the Independent Directors. See "Description of Series A
Preferred Shares Voting Rights" and " Independent Director
Approval." The Company does not currently intend to issue any
additional shares of Preferred Stock unless it simultaneously
issues additional shares of Common Stock to the Bank and the
aggregate proceeds to be received from such issuance of Common
Stock approximately equals the sum of the aggregate offering
price of such additional Preferred Stock and the Company's
expenses (including any underwriting discounts or placement fees)
incurred in connection with the issuance of such additional
shares of Preferred Stock.
The Company currently anticipates that all of the Mortgage
Loans that it may acquire in the future will be purchased from
the Bank, affiliates of the Bank or from third parties. The
Company expects that any such later-acquired Mortgage Loans will
represent first lien positions, will be acquired on a basis
consistent with secondary market standards and will have been
originated and underwritten in conformity with standards
generally applied by the Bank or affiliates of the Bank at the
time the Mortgage Loans were originated. The Company's current
policy also prohibits the acquisition of any Mortgage Loan or any
interest in a Mortgage Loan, which Mortgage Loan (i) is
delinquent in the payment of principal or interest; or (ii) is or
was at any time during the preceding 12 months (a) classified,
(b) in nonaccrual status, or (c) renegotiated due to financial
deterioration of the borrower. The Company anticipates that the
right to service Mortgage Loans acquired by the Company in the
future will be retained by the Bank and that the Bank will
service the Commercial Mortgage Loans acquired by the Company and
subcontract the servicing of the Residential Mortgage Loans to a
subservicer.
As a newly formed entity, the Company has no prior operating
history. As of the date hereof, it has $1,000 in assets, $1,000
in stockholder's equity and no indebtedness. Immediately after
the issuance by the Company of the Series A Preferred Shares to
the public and the Common Stock to the Bank and the purchase by
the Company of the Initial Portfolio, the Company (assuming that
(i) the Underwriters' over-allotment option is not exercised and
(ii) there are $ in aggregate offering and
organizational expenses), will have $100,000,000 in Mortgage
Assets, $1,000 of capital attributable to the Series A Preferred
Shares, $50,000,000 of capital attributable to the Common Stock
and $49,999,000 of additional paid-in capital. See
"Capitalization."
The principal executive offices of the Company are located
at One East Fourth Street, Cincinnati, Ohio 54202, telephone
number (513) 579-2000.
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"), commencing with its initial taxable year ending
December 31, 1996. As a REIT, the Company generally will not be
subject to federal income tax on net income and capital gains
that it distributes to the holders of its Common Stock and
Preferred Stock, including the Series A Preferred Shares.
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. Notwithstanding qualification for taxation as a
REIT, the Company may be subject to certain state and/or local
taxes on its income and property and federal income and excise
taxes on its undistributed income. See "Risk Factors Tax Risks"
and "Federal Income Tax Considerations."
RISK FACTORS
Prospective investors should carefully consider the
following information in conjunction with the other information
contained in this Prospectus before purchasing Series A Preferred
Shares in the Offering.
NO OPERATING HISTORY; DEPENDENCE UPON THE BANK AS ADVISOR AND
SERVICER
The Company is a newly organized corporation with no
operating history and has no revenues to date. The Company will
be dependent for the selection, structuring and monitoring of its
Mortgage Assets on the diligence and skill of its officers and
the officers and employees of the Advisor. See "Management." In
addition, the Company will be dependent upon the expertise of the
Bank for the servicing of its Mortgage Loans. The Advisor 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 each of the Seller's Warranties, Sale
and Servicing Agreements, to one or more affiliates and under
certain conditions to non-affiliates involved in the business of
managing Mortgage Assets. In the event the Advisor or the Bank
subcontracts its obligations in such a manner, the Company will
be dependent upon the subcontractor to provide services. See
"Management The Advisor" and "Business and Strategy Servicing."
RISKS ASSOCIATED WITH THE COMPANY BEING A SUBSIDIARY OF THE BANK
Because the Company is a subsidiary of the Bank, federal and
state banking authorities will have the right to examine the
Company and its activities. Under certain circumstances,
including any determination that the Bank's relationship to the
Company results in an unsafe and unsound banking practice, such
banking authorities will have the authority to restrict the
ability of the Company to transfer assets or to make dividends or
other distributions to its stockholders. Such actions could
potentially result in the Company failing to qualify as a REIT.
DIVIDENDS NOT CUMULATIVE
Dividends on the Series A Preferred Shares are not
cumulative. Consequently, if the Board of Directors does not
declare a dividend on the Series A Preferred Shares for any
period, the holders of the Series A Preferred Shares would not be
entitled to recover such dividend whether or not funds are or
subsequently become available therefor. 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 dividends on the Series A Preferred Shares or no
dividends for any quarter notwithstanding that funds are
available therefor. Factors that would be considered by the
Board of Directors in making this determination are the Company's
financial condition and capital needs, the impact of legislation
and regulations as then in effect or as may be proposed, economic
conditions, and such other factors as the Board may deem
relevant. Notwithstanding the foregoing, to remain qualified as
a REIT, the Company must distribute annually at least 95% of its
annual REIT taxable income to stockholders.
INTEREST RATE RISK
The Company's income will consist primarily of interest
payments on the Mortgage Assets held by it. The Company
anticipates most of its Mortgage Loans will bear interest at
floating rates. Further, some Mortgage Loans may mature prior to
any date on which the Series A Preferred Shares may be redeemed.
Likewise, since generally the Mortgage Loans amortize, the
Company expects to purchase other Mortgage Loans with the funds
made available from such amortization. To mitigate the impact
fluctuations in the rate of interest on such assets, the Initial
Portfolio includes Mortgage Assets having a principal amount
equal to at least twice the principal amount of the Series A
Preferred Shares to be issued. However, since the rate at which
dividends are required to be paid on the Series A Preferred
Shares is fixed and as Mortgage Loans amortize there can be no
assurance that they can be replaced by Mortgage Loans calculating
interest at similar rates, there can be no assurance that an
interest rate environment in which there is a significant decline
in interest rates would not adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be
adversely affected by, among other things, a decline in real
estate values. In the event that the Mortgage Loans held by the
Company become nonperforming, the Company may not have funds
sufficient to pay dividends on the Series A Preferred Shares.
Factors that could affect the value of the Mortgage Assets held
by the Company include the following:
STRUCTURAL RISKS OF MORTGAGE LOANS
The Company generally does not intend to obtain credit
enhancements such as primary mortgage insurance or mortgagor
bankruptcy insurance or to obtain special hazard insurance for
its Mortgage Loans or letters of credit, which will in each case
only relate to individual Mortgage Loans. Accordingly, during the
time that it holds Mortgage Loans for which third party insurance
is not obtained, the Company will be subject to risks of borrower
delinquencies and defaults and bankruptcies and special hazard
losses that are not covered by standard hazard insurance (such as
those occurring from earthquakes or floods). In addition, in the
event of a default on any Mortgage Loan held by the Company
resulting from declining property values or worsening economic
conditions, among other factors, the Company would bear the risk
of loss of principal to the extent of any deficiency between (i)
the value of the related mortgaged property, plus any payments
from an insurer and (ii) the amount owing on the Mortgage Loan.
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 conditions
affecting real estate values; (ii) the ability of tenants to make
lease payments; (iii) the ability of a property to attract and
retain tenants, which may in turn be affected by local conditions
such as an oversupply of space or a reduction in demand for
rental space in the area, the attractiveness of properties to
tenants, competition from other available space, the ability of
the owner to pay leasing commissions, provide adequate
maintenance and insurance, pay tenant improvement costs and make
other tenant concessions; (iv) interest rate levels and the
availability of credit to refinance such loans at or prior to
maturity; and (v) increased operating costs, including energy
costs, real estate taxes and costs of compliance with
environmental controls and regulations. The results of the
Company's operations depend on, among other things, the level of
interest income generated by the Mortgage Assets, the market
value of such Mortgage Assets and the supply of and demand for
such Mortgage Assets. Further, no assurance can be given that the
values of the properties securing the Mortgage Loans included in
the Initial Portfolio have remained or will remain at the levels
existing on the dates of origination of such Mortgage Loans.
COMMERCIAL MORTGAGE LENDING
The Initial Portfolio includes Commercial Mortgage Loans and
the Company intends to acquire additional Commercial Mortgage
Loans with funds made available from the Mortgage Loans.
Commercial mortgage lending is generally viewed as exposing the
lender to a greater risk of loss than one- to- four-family
residential ("Single Family") lending. Commercial lending
typically involves larger loans to single borrowers or groups of
related borrowers than residential one- to four-family mortgage
loans. Accordingly, a decline in the financial condition of the
obligor may have a disproportionately greater effect on the net
operating income from such properties than would be the case with
respect to properties with multiple tenants. Further, the
repayment of Mortgage Loans secured by income producing
properties is typically dependent upon the successful operation
of the related real estate project. If the cash flow from the
project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be
impaired. Commercial real estate can be affected significantly
by the supply and demand in the market for the type of property
securing the loan and, therefore, may be subject to adverse
economic conditions. Market values may vary as a result of
economic events or governmental regulations outside the control
of the borrower or lender, such as rent control laws in the case
of multifamily mortgage loans, which impact the future cash flow
of the property. Furthermore, the liquidation value of any
property may be adversely affected by risks generally incident to
interests in real property, including changes in general or local
economic conditions and/or specific industry segments; declines
in real estate values; declines in rental or occupancy rates;
increases in interest rates, real estate and personal property
tax rates and other operating expenses, including energy costs;
changes in governmental rules, regulations and fiscal policies,
including environmental legislation; acts of God; and other
factors.
Additionally, real estate underlying each Mortgage Loan (the
"Mortgaged Property") may not readily be converted to an
alternative use in the event that the operation of such property
for its original purpose becomes unprofitable for any reason. In
such cases, the conversion of the property to an alternative use
would generally require substantial capital expenditures. Thus,
if the borrower becomes unable to meet its obligations under the
related Mortgage Loan, the liquidation value of any such Mortgage
Asset may be substantially less, relative to the amount
outstanding on the related Mortgage Loan, than would be the case
if such Mortgage Loan were readily adaptable to other uses.
Further, of the properties, representing approximately
% of the Initial Portfolio (by principal balance), are retail
properties. Retail properties are affected by the success of the
retail industry which has been subject to increased competition
in recent years.
Office properties may also be adversely affected if there is
an economic decline in the business operated by their tenants.
The risk of such an adverse effect is increased where revenue is
dependent on a single tenant or if there is a significant
concentration of tenants in a particular business or industry.
of the properties, representing approximately % of the
Initial Portfolio (by principal balance), are office properties.
Industrial and warehouse properties may be adversely
affected by reduced demand for industrial space occasioned by a
decline in a particular industry segment (e.g., a decline in
defense spending), and a particular industrial or warehouse
property that suited the needs of its original tenant may be
difficult to relet to another tenant or may become functionally
obsolete related to newer properties. of the properties,
representing approximately % of the Initial Portfolio (by
principal balance), are industrial or warehouse properties.
LIMITED RECOURSE
The Commercial Mortgage Loans are not insured or guaranteed
by any governmental entity or private mortgage insurer. Although
certain of the Commercial Mortgage Loans may be guaranteed by, or
provide for recourse to, the partners, shareholders or affiliates
of the related borrowers, it is unclear whether such guarantees
or recourse will provide any future value to the Company in the
event that a default occurs on the related Commercial Mortgage
Loan. As a result, it should be assumed that recourse in the
case of a default of a Commercial Mortgage Loan will be limited
to the related Mortgaged Property and such other assets, if any,
as were pledged to secure repayment thereof.
GEOGRAPHIC CONCENTRATION
In addition to the foregoing, certain geographic regions of
the United States from time to time will experience natural
disasters or weaker regional economic conditions and housing
markets and, consequently, may experience higher rates of loss
and delinquency on Mortgage Loans generally. Any concentration of
the Mortgage Loans in such a region may present risks in addition
to those generally present with respect to Mortgage Loans
generally. The Company currently anticipates that approximately
% of the Mortgage Properties underlying the Commercial Mortgage
Loans included in the Initial Portfolio will be located in Ohio,
and % of the Mortgaged Properties underlying the Residential
Mortgage Loans included in the Initial Portfolio will be located
in Ohio. These Mortgage Loans may be subject to a greater risk
of default than other comparable mortgage loans in the event of
adverse economic, political or business developments or natural
hazards that may affect the region and the ability of property
owners in the region to make payments of principal and interest
on the underlying mortgages. See "Business and
Strategy Description of Initial Portfolio Geographic
Distribution" herein for further information regarding the
geographic concentration of the Mortgage Loans in the Initial
Portfolio.
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS
Even assuming that the Mortgaged Properties underlying the
Mortgage Loans held by the Company provide adequate security for
such Mortgage Loans, substantial delays could be encountered in
connection with the liquidation of defaulted Mortgage Loans, with
corresponding delays in the receipt of related proceeds by the
Company. An action to foreclose on a Mortgaged Property is
regulated by state statutes and rules, and is subject to many of
the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years
to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale
of a Mortgaged Property. In the event of a default by a borrower,
these restrictions, among other things, may impede the ability of
the Company to foreclose on or sell the Mortgaged Property or to
obtain proceeds sufficient to repay all amounts due on the
related Mortgage Loan. In addition, any servicer of the Mortgage
Loans will likely be entitled to deduct from collections received
all expenses reasonably incurred in attempting to recover amounts
due and not yet repaid on liquidated Mortgage Loans, including
legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses, thereby reducing amounts
available to the Company.
ENVIRONMENTAL CONSIDERATIONS
In the event that the Company is forced to foreclose on a
defaulted Mortgage Loan to recover its investment in such
Mortgage Loan, the Company may be subject to environmental
liabilities in connection with such real property that could
exceed the value of the real property. Although the Company
intends to exercise due diligence to discover potential
environmental liabilities prior to the acquisition of any
property through foreclosure, hazardous substances or wastes,
contaminants, pollutants or sources thereof (as defined by state
and federal laws and regulations) may be discovered on properties
during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property,
the Company may be required to remove those substances and clean
up the property. There can be no assurance that the Company would
not incur full recourse liability for the entire costs of any
removal and clean-up, that the cost of such removal and clean-up
would not exceed the value of the property or that the Company
could recoup any of such costs from any third party. The Company
may also be liable to tenants and other users of neighboring
properties. In addition, the Company may find it difficult or
impossible to sell the property prior to or following any such
clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF
DIRECTORS
The Board of Directors has established the investment
policies, operating policies and strategies of the Company,
certain of which are described in this Prospectus. These
policies, which are discussed herein, may be amended or revised
from time to time at the discretion of the Board of Directors (in
certain circumstances subject to the approval of a majority of
the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares.
The ultimate effect of any change in the policies and strategies
set forth in this Prospectus on a holder of Series A Preferred
Shares may be positive or negative. See "Business and
Strategy Management Policies and Programs."
RISK ASSOCIATED WITH LEVERAGE
Although the Company does not currently intend to incur any
indebtedness in connection with the acquisition and holding of
Mortgage Loans, the Company may do so at any time (although
indebtedness in excess of 20% of the aggregate amount of net
proceeds received in connection with the issuance of Preferred
Stock and Common Stock may not be incurred without the approval
of a majority of the Independent Directors of the Company). To
the extent the Company were to change its policy with respect to
the incurrence of indebtedness, the Company would be subject to
risks associated with leverage, including, without limitation,
changes in interest rates, prepayment risks and risks of various
hedging strategies.
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 of the Company and administers the day-to-day
activities of the Company in its role as Advisor under the
Advisory Agreement. In addition, the Bank also services the
Mortgage Loans pursuant to the Seller's Warranties, Sale and
Servicing Agreements (the "Servicer"). In addition all of the
officers and directors of the Company are also officers and
directors of the Bank or its affiliates. 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 Company is dependent for the selection, structuring and
monitoring of its Mortgage Assets on the diligence and skill of
its officers and the officers and employees of the Bank in the
Bank's role as Advisor and any affiliates with which the Advisor
enters into sub-advisory agreements. In addition, the Company is
dependent on the Bank (and affiliates with which it enters into
sub-servicing agreements) for the servicing of its Mortgage
Loans. 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 Company's acquisition of the Initial
Portfolio, future acquisitions of Mortgage Assets from the Bank,
its affiliates or any third parties, future dispositions of
Mortgage Loans to the Bank or any of its non-bank subsidiaries
and the modification of the Advisory Agreement or any servicing
agreement entered into with the Bank or any other affiliate of
the Bank. 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, are fair
to all parties and consistent with market terms, including the
prices paid and received for Mortgage Assets, including those in
the Initial Portfolio, on their acquisition or disposition by the
Company. The requirement in the Articles of Incorporation 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."
NO THIRD PARTY VALUATION OF THE MORTGAGE ASSETS; NO ARM'S-LENGTH
NEGOTIATIONS WITH AFFILIATES
The Company and the Bank intend that the fair value of the
Initial Portfolio will approximately equal the amount that the
Company will pay for the Initial Portfolio (approximately
$100,000,000). However, no third party valuations of any of the
Mortgage Assets constituting the Initial Portfolio were obtained
for purposes of the Offering, and there can be no assurance that
the fair value of the Initial Portfolio is not less than the
purchase price payable by the Company.
In addition, it is not anticipated that third party
valuations will be obtained in connection with future
acquisitions and dispositions of Mortgage Assets even in
circumstances where an affiliate of the Company is selling the
Mortgage Loans to, or purchasing the Mortgage Assets from, the
Company. Accordingly, although the Company and the Bank intend
that future acquisitions or dispositions of Mortgage Assets be on
a fair value basis, there can be no assurance that the
consideration to be paid (or received) by the Company to (or
from) the Bank or any of its affiliates in connection with future
acquisitions or dispositions of Mortgage Assets will not differ
from the fair value of such Mortgage Assets .
TAX RISKS
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company intends to operate so as to qualify as a REIT
under the Code, commencing with its initial taxable year ending
December 31, 1996. Although the Company believes that it will be
owned and organized and will operate in such a manner, 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 satisfaction of
numerous requirements (some on an annual and quarterly basis)
established under highly technical and complex Code provisions
for which there are only limited judicial or administrative
interpretations, and involves the determination of various
factual matters and circumstances not entirely within the
Company's control.
If in any taxable year the Company fails to qualify as a
REIT, the Company would not be allowed a deduction for
distributions to stockholders in computing its taxable income and
would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular
corporate rates. In addition, unless entitled to relief under
certain statutory provisions, the Company would also be
disqualified from qualifying as a REIT for the four taxable years
following the year during which qualification was lost. As a
result, the amount available for distribution to the Company's
stockholders would be reduced for the year or years involved. A
failure of the Company to qualify as a REIT would not by itself
give the Company the right to redeem the Series A Preferred
Shares. See "Description of Series A Preferred
Shares Redemption."
Notwithstanding that the Company currently intends to
operate in a manner designed to qualify as a REIT, future
economic, market, legal, tax or other considerations may cause
the Company to determine that it is in the best interests of the
Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. As long as any Series A Preferred
Shares are outstanding, any such determination by the Company may
not be made without the approval of a majority of the Independent
Directors. The federal tax law prohibits the Company from
electing treatment as a REIT for the four taxable years following
the year of such revocation. See "Federal Income Tax
Considerations."
REIT REQUIREMENTS WITH RESPECT TO STOCK OWNERSHIP
In order for the Company to qualify, and to continue to
qualify, as a REIT under the Code, not more than 50% of the value
of its outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in 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
constructive ownership and attribution rules. Immediately after
the Offering, certain significant shareholders of Provident
Bancorp, Inc. ("Holdings") (i.e., ) will, through their
constructive ownership of a beneficial interest in the Bank,
constitute individuals for purposes of this test and, under
the IRS's rules for determining percentages of ownership, will be
deemed to own constructively approximately % of the value of
the outstanding shares of beneficial interest in the Company (the
"Significant Shareholders"). Presently, there are no
restrictions that prevent either (i) any Significant Shareholder
from increasing or decreasing its percentage ownership of
Holdings (and thus its percentage ownership in the REIT) or (ii)
any other person from becoming a significant constructive
shareholder of the REIT by acquiring an equity interest in
Holdings. Moreover, any increase or decrease in the value of the
Common Stock as compared to the value of the Preferred Stock will
increase or decrease the percentage of the value of the
outstanding shares of capital stock of the REIT held by the
Significant Shareholders.
Because the Company believes that it is essential to
qualify, and to maintain its qualification as a REIT, the
Articles of Incorporation of the Company, subject to certain
exceptions, provide that no holder may own, or be deemed to own
by virtue of the attribution rules of the Code, more than %
of the lesser of the number of the issued and outstanding shares
of Preferred Stock or the value of the issued and outstanding
shares of the Company (the "Ownership Limit"). The Board of
Directors may (but will not be required to), upon the receipt of
a ruling from the IRS or an opinion of counsel satisfactory to
it, 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. See "Description of Capital Stock
Restrictions on Ownership and Transfer."
REIT REQUIREMENTS WITH RESPECT TO STOCKHOLDER DISTRIBUTIONS
To obtain favorable tax treatment as a REIT qualifying under
the Code, the Company generally will be required each year to
distribute as dividends to its stockholders at least 95% of its
REIT taxable income. Failure to comply with this requirement
would result in the Company's income being subject to tax at
regular corporate rates. In addition, the Company will 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.
REDEMPTION UPON OCCURRENCE OF A TAX EVENT
At any time following the occurrence of a Tax Event (as
defined under "Description of Series A Preferred
Shares Redemption"), even if such Tax Event occurs prior to
, 20[01], the Company will have the right to redeem the
Series A Preferred Shares in whole but not in part. See
"Description of Series A Preferred Shares Redemption."
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES
Prior to the Offering, there has been no public market for
the Series A Preferred Shares and there can be no assurance that
an active trading market will develop or be sustained or that the
Series A Preferred Shares may be resold at or above the initial
public offering price.
THE COMPANY
The Company is a newly formed Ohio corporation created for
the purpose of acquiring, holding and managing Mortgage Assets
that will generate net income for distribution to stockholders.
The Company anticipates that its portfolio of Mortgage Assets
will consist principally of interests in Residential and
Commercial Mortgage Loans.
The Company expects that all of its Mortgaged Backed
Securities and Mortgage Loans will be acquired from the Bank, its
affiliates and third parties. The Mortgage Loans will be
acquired as whole loans. The Bank will administer the day-to-day
operations of the Company in its role as Advisor under the
Advisory Agreement. The Company will elect to qualify as a REIT
under the Code and will generally not be subject to federal
income tax to the extent that it distributes at least 95% of its
REIT taxable income to its stockholders and maintains its
qualification as a REIT.
All of the Common Stock of the Company is owned by the Bank,
and all of the common stock of the Bank is owned by Holdings.
Holdings is a bank holding company organized under the laws of
the State of Ohio and is registered under the Bank Holding
Company Act of 1956, as amended. Holdings is % owned by
and % owned by .
At June 30, 1996, the Bank had approximately $6.3 billion in
assets and approximately $4.2 billion in deposits and, as of
March 31, 1996, was ranked as the largest commercial
bank in the United States, in terms of assets, based on published
sources.
For a further description of the operations of the Company,
see "Business and Strategy," "Management," "Risk Factors" and
"Federal Income Tax Considerations."
USE OF PROCEEDS
The proceeds to the Company from the sale of the Series A
Preferred Shares offered hereby are expected to be $50,000,000
(assuming the Underwriters' over-allotment option is not
exercised). Simultaneously with the consummation of the Offering,
the Bank will purchase shares of Common Stock from the Company
for $50,000,000. The Company will use the aggregate proceeds of
$100,000,000 received in connection with both the Offering and
the sale of shares of Common Stock to the Bank to purchase the
Initial Portfolio from the Bank. See "Business and Strategy."
If the Underwriters exercise their option to purchase
additional Series A Preferred Shares to cover over-allotments in
the Offering, the Bank will purchase additional shares of Common
Stock for a price equal to the aggregate initial public offering
price of such additional Series A Preferred Shares. The Company
will use the additional proceeds from any such additional sales
of Series A Preferred Shares and shares of Common Stock to
purchase additional Mortgage Assets of the types described in
"Business and Strategy Description of Initial Portfolio." The
Company expects that it will purchase any such additional
Mortgage Assets within months from the exercise by the
Underwriters of their over-allotment option. Pending such
purchases, the Company will invest such additional proceeds in
Mortgage-Backed Securities or short-term money market
investments.
Simultaneously with the consummation of the Offering, the
Bank will also purchase additional shares of Common Stock for a
price equal to the aggregate amount of underwriting discounts and
expenses incurred by the Company in connection with the Offering
and all expenses incurred by the Company in connection with its
formation (currently estimated by the Company to be approximately
$ in the aggregate) in order to provide the Company with
funds sufficient to pay such expenses. Simultaneously with the
consummation of any sale of additional Series A Preferred Shares
in connection with the exercise by the Underwriters of their
over-allotment option, the Bank will also purchase additional
shares of Common Stock for a price equal to the aggregate amount
of underwriting discounts and expenses incurred by the Company in
connection with the exercise of such over allotment option in
order to provide the Company with funds sufficient to pay such
expenses.
The following table illustrates the use of proceeds by the
Company from the sale of the Series A Preferred Shares offered
hereby (assuming the Underwriters' over-allotment option is not
exercised) and the sale of shares of Common Stock to the Bank
described above.
Gross proceeds from the offering of
Series A Preferred Shares . . . . . . . . . . . . $ 50,000,000
Gross proceeds from the issuance of shares
of Common Stock to the Bank . . . . . . . . . . $ 1
Public Offering Expenses:
Underwriting discounts . . . . . . . . . . . .
Other expenses of the formation and Offering . . ______1
Net proceeds to be applied to the purchase
of Mortgage Assets to be acquired
from the Bank . . . . . . . . . . . . . . . . . . $100,000,000
Neither the Bank nor any of its affiliates will receive any
transaction fees upon completion of the Offering, including any
advance payment in respect of servicing or advisory fees.
-----------------------
1 Assumes that expenses incurred by the Company in
connection with its formation and the Offering of the
Series A Preferred Shares, other than underwriting
discounts, are $ . If such expenses are in excess
of $ , the Bank will purchase additional shares of
Common Stock for a purchase price equal to such excess.
CAPITALIZATION
The following table sets forth the capitalization of the
Company as of October 1, 1996 and as adjusted to reflect (i) the
consummation of the Offering (assuming the Underwriters'
over-allotment option is not exercised) and (ii) the transactions
described in "Certain Transactions Constituting The Formation"
and the use of the net proceeds therefrom as described under "Use
of Proceeds."
October 1, 1996
Actual As Adjusted 2
DEBT $
Total long-term debt $ __ __
______ ______
STOCKHOLDERS' EQUITY
Preferred Stock, par value $25.00 per
share; 1,000 authorized, none issued and
outstanding, actual; and 2,200,000 shares
authorized, 2,000,000 shares issued and
outstanding, as adjusted $50,000,000
Common Stock, no par value; 1,000
authorized, 100 issued and outstanding,
actual; and 1,000 shares authorized, and
1,000 shares issued and outstanding, as
adjusted $0 $0
Additional paid-in capital $1,000 50,000,000
Total stockholders' equity $1,000 $100,000,000
TOTAL CAPITALIZATION $1,000 $100,000,000
------------------------
2 The Company was formed with an initial capitalization
of $1,000. Prior to consummation of the Offering, the
Articles of Incorporation of the Company will be
amended to increase the authorized capital of the
Company. Since the par value per share of the
Preferred Stock equals the issue price of a Series A
Preferred Share, the full $50,000,000 million raised in
the Offering will represent Preferred Stock capital.
The Bank will be acquiring 900 additional shares of Common Stock
upon the consummation of the Offering for an aggregate
purchase price of $_______ million (such number of
shares of Common Stock includes Common Stock acquired
by the Bank in order to provide sufficient funds to pay
aggregate offering and organization expenses, currently
estimated by the Company to be approximately $______
million). As a result of these issuances of Common
Stock, the Common Stock capital amount, upon
consummation of the Offering, will equal $_____ million.
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire,
hold and manage Mortgage Assets that will generate net income for
distribution to stockholders. The Company will acquire the
Initial Portfolio of Mortgage Assets from the Bank, its
affiliates and third parties for an aggregate purchase price of
approximately $100,000,000. See "Certain Transactions
Constituting the Formation."
In order to preserve its status as a REIT, the assets of the
Company will consist of Mortgage Loans and other qualified REIT
assets of the type permitted by the Code. See "Federal Income Tax
Considerations."
DIVIDEND POLICY
In order to remain qualified as a REIT, the Company must
distribute annually at least 95% of its REIT taxable income to
its stockholders. The Company currently expects to distribute
annually dividends equal to approximately 100% of the Company's
REIT taxable income.
Dividends will be declared at the discretion of the Board of
Directors after considering the Company's distributable funds,
financial requirements, tax considerations and other factors. The
Company currently expects that both its cash available for
distribution and its REIT taxable income will be significantly in
excess of amounts needed to pay accrued dividends on the Series A
Preferred Shares. Accordingly, the Company expects that it will,
after paying all accrued and unpaid dividends on the Series A
Preferred Shares, pay dividends on an annual basis to holders of
its Common Stock. However, there are several limitations that
restrict the Company's ability to pay dividends on the Common
Stock. See "Risks Associated with the Company Being a Subsidiary
of a Bank".
First, under the Company's current dividend policy, the
Company may not make any distribution to the holders of the
Common Stock with respect to any year 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 with respect to that 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 limitations on payment of dividends in respect of
Common Stock may not be modified without the approval of a
majority of the Independent Directors. Second, no cash or
property dividends may be paid on the Common Stock unless all
accrued and unpaid dividends on the Series A Preferred Shares,
and all other capital stock of the Company ranking senior to the
Common Stock, have been paid. Third, Ohio law provides that
dividends may not be paid, if, after giving effect to the
dividend payment, there is reasonable ground to believe that the
Company has been rendered "insolvent" (defined by statute to mean
"unable to pay its obligations as they become due in the usual
course of its affairs"). Ohio law also prohibits the payment of
dividends in excess of the "surplus" of the Company, the excess
of the Company's assets over its liabilities, and the payment of
dividends to the holders of shares of any class in violation of
the rights of the holders of shares of any other class. Because
upon the consummation of the Offering, the aggregate par value of
the Series A Preferred Shares and the outstanding shares of
Common Stock and additional paid in capital will equal $
million (assuming the Underwriters' over-allotment option is not
exercised and there are $ million of offering and
organizational expenses in the aggregate), the amount of
dividends which the Company could legally pay on its Common Stock
cannot exceed an amount that would cause the Company's net assets
to be less than $ million.
GENERAL DESCRIPTION OF MORTGAGE LOANS; INVESTMENT POLICY
RESIDENTIAL MORTGAGE LOANS
The Company may from time to time acquire both conforming and
nonconforming Residential Mortgage Loans; however, the Company
expects that substantially all of the Residential Mortgage Loans
it acquires will be nonconforming. Conventional conforming
Residential Mortgage Loans comply with the requirements for
inclusion in a loan guarantee program sponsored by either the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
National Mortgage Association ("FNMA"). Under current
regulations, the maximum principal balance allowed on conforming
Residential Mortgage Loans ranges from $________ ($________ for
Residential Mortgage Loans secured by mortgaged properties
located in either Alaska or Hawaii) for one-unit residential
loans to $________ ($________ for Residential Mortgage Loans
secured by mortgaged properties located in either Alaska or
Hawaii) for four-unit residential loans. Nonconforming
Residential Mortgage Loans are Residential Mortgage Loans that do
not qualify in one or more respects for purchase by FNMA or
FHLMC. The Company expects that a majority of the nonconforming
Residential Mortgage Loans that it purchases will be
nonconforming because they vary in certain other respects from
the requirements of such programs other than the requirements
relating to creditworthiness of the mortgagors. A substantial
portion of the Company's nonconforming Residential Mortgage Loans
are expected to meet the requirements for sale to national
private mortgage conduit programs or other investors in the
secondary mortgage market.
Each Residential Mortgage Loan will be evidenced by a
promissory note secured by a mortgage or deed of trust or other
similar security instrument creating a first lien on Single
Family residential properties, [including stock allocated to a
dwelling unit in a residential cooperative housing corporation].
Residential real estate properties underlying Residential
Mortgage Loans consist of Single Family dwelling units[,
individual cooperative apartment units, individual condominium
units, planned unit developments and townhouses]. The Company
currently expects that most of the Residential Mortgage Loans to
be acquired by it will be adjustable rate Mortgage Loans.
However, the Company may also purchase fixed rate Residential
Mortgage Loans.
COMMERCIAL MORTGAGE LOANS
The Company may from time to time acquire Commercial Mortgage
Loans. The Company currently intends that the Commercial
Mortgage Loans will be acquired from the Bank, or its affiliates.
However, they may be acquired from third parties. The Commercial
Mortgage Loans acquired from the Bank will have either been
originated by the Bank or acquired by the Bank in arm's-length
transactions.
Each Commercial Mortgage Loan will be evidenced by a
promissory note secured by a mortgage or deed of trust or other
similar security instrument creating a first lien on the
mortgaged property. Generally, the Commercial Mortgage Loans
will be secured by retail, hotel, restaurant and industrial
properties. Presently, the Company does not intend that the
Commercial Mortgage Loans will include multi-family Mortgage
Loans. The Commercial Mortgage Loans are non-recourse mortgage
loans. Each Commercial Mortgage Loan may be secured by other
collateral, including in certain cases, guaranties of the
borrowers, which will be assigned to the Company. The borrowers
are not limited purpose finance entities. The Commercial
Mortgage Loans will be fixed rate mortgage loans that amortize on
a , or year amortization schedule. The maturity
dates for the Commercial Mortgage Loans will occur between
and years after their origination dates. Thus, substantial
balloon payments will be due on the Mortgage Loans at maturity.
See "Risk Factors Increased Risk of Default Associated with
Balloon Payments."
MORTGAGE-BACKED SECURITIES
The Company may from time to time acquire multi-class
mortgage pass-through certificates issued by the Government
National Mortgage Association ("GNMA"), FNMA or FHLMC
("Mortgage-Backed Securities") representing interests in or
obligations backed by pools of Residential Mortgage Loans. The
Residential Mortgage Loans underlying the Mortgage-Backed
Securities will be secured by residential real estate properties
located throughout the United States.
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the
Company will acquire the Mortgage Loans contained in the Initial
Portfolio from the Bank pursuant to the terms of two Seller's
Warranties, Sale and Servicing Agreements, separately covering
the Residential Mortgage Loans and the Commercial Mortgage Loans,
(the "Seller's Warranties, Sale and Servicing Agreements") and
each dated as of , 1996. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the
appropriate agreement (the "Mortgage Loan Schedule"). The
Mortgage Loan Schedule will specify, among other things, with
respect to each Mortgage Loan: (i) the interest rate or interest
rate formula applicable to each Mortgage Loan, (ii) the original
principal amount and the unpaid principal balance as of the
purchase date, (iii) the monthly payment, (iv) the maturity date,
(v) the borrower, and (vi) the type and location of the
Mortgaged Property.
In addition, the Bank will deliver or cause to be delivered
to the Company the mortgage note with respect to each Mortgage
Loan (together with all amendments and modifications thereto)
endorsed in blank, the original or certified copy of the mortgage
(together with all amendments and modifications thereto) with
evidence of recording indicated thereon, if available, an
original or certified copy of an assignment of the mortgage in
recordable form and, in the case of any Commercial Mortgage Loans
any assignment of leases and rents. None of the assignments of
the Mortgage Loans in the Initial Portfolio will be recorded
since the Bank will hold record title in its role as Servicer of
the Mortgage Loans. Originals of the foregoing documents along
with the contents of the Mortgage File will be delivered by the
Company to the Custodian designated by the Bank, pursuant to the
Custodial Agreement between the Company and the Custodian to be
executed contemporaneously with the Seller's Warranties, Sale and
Servicing Agreements (the "Custodial Agreement"). The Custodian
shall provide such originals or copies as needed to the Company
or the Servicer in accordance with the terms of the Custodial
Agreement. The Bank will service the Mortgage Loans and may from
time to time retain third parties to subservice certain of the
Mortgage Loans. As to the Residential Mortgage Loans, the Bank
has entered into a Subservicing Agreement with Wendover Funding
Inc. See " Servicing" and " Description of Initial
Portfolio General."
Further, the Bank will make certain representations and
warranties with respect to certain of the Mortgage Loans in the
Initial Portfolio for the benefit of the Company and to the
extent that Company discovers any material breach of any such
representations and warranties with respect to any Mortgage Loan
[during the 120 days following the Closing Date], the Bank will
be obligated to cure such defect, replace such affected Mortgage
Loan with a Qualified Substitute Mortgage Loan or repurchase such
Mortgage Loan sold by it to the Company. The representations and
warranties made with respect to the Residential Mortgage Loans
will differ from those made for the Commercial Mortgage Loans.
The repurchase price for any Mortgage Loan will be its
outstanding principal amount plus accrued and unpaid interest on
the date of repurchase less amounts received or advanced on such
Mortgage Loan and held for distribution in the month of the
repurchase less expenses reasonably incurred by the Company as a
result of the breach or defect giving rise to the repurchase
obligation. The obligations of the Bank to cure, substitute or
repurchase a defective Mortgage Loan and indemnify the Company
will constitute the sole remedies available to the Company for a
breach of such representations or warranties. In addition, under
the terms of the Seller's Warranties, Sale and Servicing
Agreements, the Company will acquire, in addition to certain
Mortgage Loans included in the Initial Portfolio, (i) the amounts
held in one or more accounts maintained in the name of the
Company pursuant to the Seller's Warranties, Sale and Servicing
Agreements attributable to such Mortgage Loans, and (ii) all
insurance policies relating to the Mortgaged Properties and the
proceeds thereof.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, the Advisor
has a high degree of autonomy. The Board of Directors, however,
has adopted certain policies to guide administration of the
Company and the Advisor with respect to the acquisition and
disposition of assets, use of capital and leverage, credit risk
management and certain other activities. These policies, which
are discussed below, may be amended or revised from time to time
at the discretion of the Board of Directors (in certain
circumstances subject to the approval of a majority of the
Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares.
See also " Dividend Policy."
ASSET ACQUISITION AND DISPOSITION POLICIES
Subsequent to the acquisition of the Initial Portfolio, the
Company anticipates that it will from time to time purchase
additional Mortgage Assets on a basis consistent with secondary
market standards from the Bank, its affiliates and third parties,
out of payments from or proceeds received in connection with the
repayment or disposition of Mortgage Assets or the issuance of
additional shares of Common Stock and Preferred Stock. The
Company currently anticipates that such Mortgage Assets will be
of the types described in " Description of Initial Portfolio,"
although if the Bank or its affiliates develop additional
Mortgage Asset products, the Company may purchase such additional
types of Mortgage Asset products if such products otherwise
comply with the Mortgage Asset acquisition policies of the
Company.
The Company currently intends to maintain % by principal
amount of its portfolio of Mortgage Assets in Commercial Mortgage
Loans and % by principal amount of its portfolio Residential
Mortgage Loans. In addition, the Company's current policy
prohibits the acquisition of any Mortgage Loan or any interest in
a Mortgage Loan (other than an interest resulting from the
acquisition of Mortgage-Backed Securities), which Mortgage Loan
(i) is delinquent in the payment of principal or interest at the
time of proposed acquisition, (ii) is or was at any time during
the preceding 12 months (a) classified, (b) in nonaccrual status,
or (c) renegotiated due to financial deterioration of the
borrower or (iii) has been more than once during the proceeding
12 months, more than 30 days past due in the payment of principal
or interest.
The Company currently maintains a policy of disposing of any
Mortgage Loan that subsequent to its
acquisition by the Company (i) becomes classified, (ii) falls
into nonaccrual status, or (iii) has to be renegotiated due to
the financial deterioration of the borrower. The Bank has
indicated to the Company that it will not purchase any Mortgage
Loans of the Company that fall into any of the foregoing
categories; accordingly, the Company currently anticipates that
any such Mortgage Loan would be sold at its then current fair
value by the Company only to Holdings or an unrelated third
party.
The Company will develop forms of assignment and a policy
regarding recording of mortgage assignments.
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, debt financing or retention
of cash flow (after considering both the provisions of the Code
that require the distribution by a REIT of a certain percentage
of REIT taxable income and the 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 Offering and the Company does not currently
intend to incur any indebtedness. However, the organizational
documents of the Company do not contain any limitation on the
amount or percentage of debt, funded or otherwise, the Company
might incur. Notwithstanding the foregoing, the Company may not,
without the approval of a majority of the Independent Directors,
incur debt for borrowed money other than debt not in excess of
20% of the aggregate amount of net proceeds received in
connection with the issuance of all outstanding Preferred Stock
and Common Stock of the Company. Any such debt incurred may
include intercompany advances made by the Bank to the Company.
The Company may also issue additional series of Preferred
Stock. However, the Company may not issue additional shares of
Preferred Stock senior to the Series A Preferred Shares or on a
parity with the Preferred Stock but having a cumulative dividend
feature without the consent of holders of at least 66 2/3% of the
outstanding shares of Preferred Stock at that time, including the
Series A Preferred Shares, and the Company may not issue
additional shares of Preferred Stock on a parity with the Series
A Preferred Shares without the approval of a majority of the
Company's Independent Directors. In addition, the Company does
not currently intend to issue any additional series of Preferred
Stock unless it simultaneously issues additional Common Stock to
the Bank and the proceeds to be received from the issuance of the
Common Stock are approximately equal to the aggregate offering
price of such additional Preferred Stock plus the Company's
expenses (including underwriting discounts or placement fees) in
connection with the issuance of such additional shares of
Preferred Stock.
CREDIT RISK MANAGEMENT POLICIES
The Company expects that each Mortgage Loan acquired in the
future will represent a first lien position and will be
originated by the Bank, its affiliates or a third party in the
ordinary course of its real estate lending activities based on
the underwriting standards generally applied (at the time of
origination) for its own account by the Bank, its affiliates or
such third party which originated the Mortgage Loan. See
" Description of Initial Portfolio Underwriting Standards." In
addition, as stated above, the Company currently maintains a
policy of disposing of any Mortgage Loan or any interest in a
Mortgage Loan (other than an interest through a Mortgage-Backed
Security) held by it, which Mortgage Loan (i) is or has been at
any time during the preceding 12 months (a) classified, (b) in
nonaccrual status, or (c) renegotiated due to financial
deterioration of the borrower. The Bank has indicated to the
Company that it will not purchase any Mortgage Loans of the
Company that fall into any of the foregoing categories;
accordingly, the Company currently anticipates that any such
Mortgage Loan would be sold at its then current fair value by the
Company only to Holdings or an unrelated third party.
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 inter-affiliate 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 modification of the Advisory
Agreement or the Seller's Warranties, Sales and Servicing
Agreements. It is the Company's policy that the terms of any
financial dealings with the Bank, as Servicer or Advisor, or
mortgage loan Seller, Holdings and their respective affiliates
will be consistent with those available from third parties in the
mortgage lending industry. In addition, neither the Advisory
Agreement nor the Seller's Warranties, Sale and Servicing
Agreements may be modified or terminated 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 the borrower.
The Seller's Warranties, Sales and Servicing Agreements
provide that servicing of the Mortgage Loans is performed solely
with a view to the interests of the Company as owner of the
Mortgage Loans and without regard to the interests of the Bank or
its other affiliates. Conflicts could also arise in connection
with actions taken by the Bank as a controlling person 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, are fair to
all parties and are consistent with market terms for such types
of transactions. The requirement in the Articles of
Incorporation that certain actions of the Company be approved by
a majority of the Independent Directors is also intended to
ensure fair dealings among the Company, the Bank and their
respective affiliates. However, there can be no assurance that
any such agreement or transaction will be on terms as favorable
to the Company as would have been obtained from unaffiliated
third parties.
There are no provisions in the Company's Articles of
Incorporation limiting any officer, director, securityholder 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 acquiring, holding and managing
the Mortgage Assets. As described herein, it is expected that
the Bank and its affiliates will have direct interests in
transactions with the Company (including without limitation the
sale of Mortgage Loans to the Company); however, it is not
currently anticipated that any of the officers or directors of
the Company will have any interests in such Mortgage Loans.
OTHER POLICIES
The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act of
1940. The Company does not intend to (i) invest in the securities
of other issuers for the purpose of exercising control over such
issuers, (ii) underwrite securities of other issuers, (iii)
actively trade in loans or other investments, (iv) offer
securities in exchange for property or (v) make loans to third
parties, including, without limitation, officers, directors or
other affiliates of the Company. The Company may, under certain
circumstances, purchase the Series A Preferred Shares and other
shares of its capital stock in the open market or otherwise;
provided, however, that the Company will not redeem or repurchase
any shares of its Common Stock for so long as any Series A
Preferred Shares are outstanding without the approval of a
majority of the Independent Directors. The Company has no present
intention to repurchase any shares of its capital stock, and any
such action would be taken only in conformity with applicable
federal and state laws and the requirements for qualifying as a
REIT.
The Company intends to publish and distribute to
stockholders, in accordance with rules of the New York Stock
Exchange, annual reports containing financial statements prepared
in accordance with generally accepted accounting principles and
certified by the Company's independent public accountants. The
Articles of Incorporation provide that the Company shall maintain
its status as a reporting company under the Exchange Act for so
long as any of the Series A Preferred Shares are outstanding.
The Company currently intends to make investments and operate
its business at all times in such a manner so as 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 Independent Directors, to determine
that it is in the best interests of the Company and its
stockholders to revoke its REIT status. The current tax law
prohibits the Company from electing REIT status for the four
taxable years following the year of such revocation.
DESCRIPTION OF INITIAL PORTFOLIO
Information with respect to the Initial Portfolio is
presented as of the Cut-Off Date. Factual data with respect to
Mortgage Loans included in the Initial Portfolio relates to
Mortgage Loans that the Company currently believes will be
purchased simultaneously with the consummation of the Offering.
The composition of the Initial Portfolio as actually purchased
contemporaneously with the consummation of the Offering may
differ in certain respects from the Initial Portfolio as
described in this Prospectus; provided, however, that (i) at
least % of the Mortgage Loans included in the actual Initial
Portfolio measured by aggregate outstanding principal balance
shall include Mortgage Loans described herein, and (ii) the
Company shall have determined that any changes in the Initial
Portfolio from the description herein are not material.
References herein to percentages of Mortgage Loans included
in the Initial Portfolio refer in each case to the percentage of
the aggregate outstanding principal balance of the Mortgage Loans
in the Initial Portfolio as of , 1996, based on the
outstanding principal balances of such Mortgage Loans as of such
date, after giving effect to scheduled monthly payments due on or
prior to such date, whether or not received.
The detailed information set forth in this Prospectus with
respect to the Mortgage Loans applies only to the Initial
Portfolio. The Company's portfolio of Mortgage Loans may or may
not have the characteristics described below at future dates.
GENERAL
The Initial Portfolio will contain Mortgage-Backed
Securities, cash and Commercial and Residential Mortgage Loans
that on the Cut-off Date had an aggregate outstanding principal
balance of approximately $100,000,000.
All of the Mortgage Assets to be included in the Initial
Portfolio were issued or originated by either the Bank, one of
its affiliates or an unrelated third party or in the ordinary
course of their respective real estate lending activities.
Certain of the Residential Mortgage Loans included in the Initial
Portfolio may have been originated by mortgagees approved by the
Secretary of Housing and Urban Development or institutions (such
as banks, credit unions and insurance companies) subject to
supervision and examination by federal and state authorities and
then sold to the Bank, or one of its affiliates or an unrelated
third party. All of the Mortgage Loans included in the Initial
Portfolio were originated generally in accordance with the
underwriting standards customarily employed by the originator
during the period in which such Mortgage Loans were originated.
% the Mortgage Loans are Residential Mortgage Loans (by
principal balance). % of the Mortgage Loans are Commercial
Mortgage Loans (by principal balance). All of the Residential
Mortgage Loans included in the Initial Portfolio were originated
between and and have original terms to stated maturity
of years. As of the Cut-Off Date, the weighted average number
of months since origination of the Residential Mortgage Loans
included in the Initial Portfolio was approximately
months. All of the Commercial Mortgage Loans included in the
Initial Portfolio were originated between and
and are adjustable rate Mortgages that have original terms to
stated maturity of either , , or years.
Generally such Commercial Mortgage Loans are balloon Mortgage
Loans which amortize on a , or year schedule.
The Mortgage Notes with respect to certain of the Mortgage
Loans included in the Initial Portfolio, whether Residential or
Commercial Mortgage Loans, contain "due-on-sale" provisions that
prevent the assumption of the Mortgage Loan by a proposed
transferee and accelerates the payment of the outstanding
principal balance of the Mortgage Loan.
None of the Mortgage Loans included in the Initial Portfolio
(i) is currently delinquent in the payment of principal or
interest (ii) is or was at any time during the preceding 12
months (a) classified, (b) in nonaccrual status, or (c)
renegotiated due to financial deterioration of the borrower or
(iii) was, more than once during the preceding 12 months, or more
than twice during the last 36 months, more than 30 days past due
in the payment of principal or interest. If, prior to the
acquisition of the Initial Portfolio, any Mortgage Loan included
in the description of the Initial Portfolio herein falls within
any of the foregoing categories, the Company will not purchase
such Mortgage Loan but will instead purchase a Mortgage Loan
similar in aggregate outstanding principal balance and product
type which does not fall into any of these categories.
RESIDENTIAL MORTGAGE LOANS
The Residential Mortgage Loans may include only Single Family
properties, including Condominium Units and Cooperative
Dwellings. The Mortgage Assets may consist of detached
individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit
developments and other attached dwelling units. Each Single
Family property will be located on land owned in fee simple by
the borrower. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit
is built, with the remaining adjacent land owned in common or
dwelling units subject to a proprietary lease or occupancy
agreement in a cooperatively owned apartment building. The
proprietary lease or occupancy agreement securing a Cooperative
Loan is generally subordinate to any blanket montage on the
related cooperative apartment building and/or on the underlying
land. Additionally, in the case of a Cooperative Loan, the
proprietary lease or occupancy agreement is subject to
termination and the cooperative shares are subject to
cancellation by the cooperative if the tenant-stockholder fails
to pay maintenance or other obligations or charges owed by such
tenant-stockholder.
% of the aggregate principal balance of Residential
Mortgage Loans are owner-occupied. Unless otherwise specified
herein, the sole basis for a representation that a given
percentage of the Mortgage Loans are secured by Single Family
properties which are owner-occupied will be either (i) the making
of a representation by the mortgagor at origination of the
Mortgage Loan either that the underlying Mortgaged Property will
be used by the borrower for a period of at least six months every
year or that the borrower intends to use the Mortgaged Property
as a primary residence, or (ii) a finding that the address of the
underlying Mortgage Asset is the borrower's mailing address as
reflected in the Servicer's records. The Mortgaged Properties
may also include non-owner occupied investment properties and
vacation and second homes. Mortgage Loans secured by investment
properties and multifamily property may also be secured by an
assignment of leases and rents and operating or other cash flow
guarantees relating to the Loans.
All of the Residential Mortgage Loans having Loan-to-Value
Ratios (i.e., the ratio (expressed as a percentage) of the
original principal amount of such Residential Mortgage Loan to
the lesser of (i) the appraised value at origination of the
underlying mortgaged property and (ii) if the Residential
Mortgage Loan was made to finance the acquisition of property,
the purchase price of the Mortgaged Property) of greater than
85%, and approximately % of the Residential Mortgage Loans
having Loan-to-Value Ratios of greater than 80%, are insured
under primary mortgage insurance policies. Not more than
approximately % of the Residential Mortgage Loans are insured
by any one primary mortgage insurance policy issuer. At the time
of origination of the Mortgage Loans, each of the primary
mortgage insurance policy insurers was approved by FNMA or FHLMC.
A standard hazard insurance policy is required to be maintained
by the mortgagor with respect to each Residential Mortgage Loan
in an amount equal to the maximum insurable value of the
improvements securing such Residential Mortgage Loan or the
principal balance of such Residential Mortgage Loan, whichever is
less. If the Mortgage Property underlying a Residential Mortgage
Loan is located in a flood zone, such Residential Mortgage Loan
may also be covered by a flood insurance policy as required by
law. No special hazard insurance policy or mortgagor bankruptcy
insurance will be maintained by the Company with respect to the
Residential Mortgage Loans in the Initial Portfolio, nor will any
Residential Mortgage Loan be insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
Each Residential Mortgage Loan bears interest at a rate that
is subject to adjustment, in the case of % of the
Residential Mortgage Loans, annually (the "Annual Adjustment
Loans") and in the case of % of the Residential Mortgage
Loans, semi-annually (the "Semi-Annual Adjustment Loans").
Effective on the first day of the months specified in the related
Mortgage Note (each such date, a "Rate Adjustment Date") the
Mortgage Rate on each Residential Mortgage Loan is adjusted to
equal the sum, generally rounded to the nearest 0.125%, of (i)
the weekly average yield on United States Treasury Securities
adjusted to a constant maturity of either one year (the "One-Year
CMT"), three years (the "Three-Year CMT") or five years (the
"Five-Year Weekly CMT") (each, an "Index"), as made available by
the Federal Reserve Board and most recently available as of [45]
days prior to such Rate Adjustment Date, and (ii) a fixed
percentage amount specified in the related Mortgage Note (the
"Adjustment Margin") (such sum as rounded based on the applicable
Index at the date of any determination, the "Fully Indexed
Rate"). Notwithstanding the foregoing, however, the Mortgage
Rate (i) with respect to % of the Residential Mortgage Loans
(which are Annual and Semi-Annual Adjustment Mortgage Loans) will
not increase, [or decrease] by more than % per annum (a
"Periodic Rate Adjustment Cap"), and (ii) will not [be (a) less
than the rate set forth in the Mortgage Note as the minimum
Mortgage Rate (if any) thereunder (each, a "Lifetime Minimum
Rate") or (b) greater than the rate set forth in the Mortgage
Note as the maximum Mortgage Rate, if any, thereunder (each, a
"Lifetime Maximum Rate")]. The Annual and Semi-Annual Adjustment
Loans shall, over their terms, increase or decrease by more than
% and % respectively from their initial Mortgage Rates.
The following selection criteria shall apply with respect to
the Mortgage Loans comprising the Residential Mortgage Loans:
(a) no Mortgage Loan that is a Residential Mortgage Loan
secured by a Single Family property may have a Loan-to-Value
Ratio in excess of %, unless covered by a primary
mortgage insurance policy as described herein;
(b) each Residential Mortgage Loan must have an original
term to maturity of not less than 15 years and not more than
30 years;
(c) no Residential Mortgage Loan may be included that, as
of its date of purchase by the Company is more than 30 days
delinquent as to the payment of principal or interest, or
with respect to which, more than two payments have been made
30 days or more delinquent during the 3 year period ending on
such date of purchase; and
(d) no Residential Mortgage Loan (other than a Cooperative
Loan) may be included unless a title insurance policy or, in
lieu thereof, an attorney's opinion of title, and a standard
hazard insurance policy (which may be a blanket policy) are
in effect with respect to the Mortgaged Property securing
such Mortgage Loan.
The Company may not materially change this policy without the
approval of a majority of the Independent Directors.
The following tables set forth certain information with
respect to the Residential Mortgage Loans expected to be included
in the Initial Portfolio:
Types of Residential Mortgage Loans
Percentage
Aggregate of Residential
Number of Principal Mortgage Loans
Residential Balance by Aggregate
Type Mortgage Loans (In thousands) Principal Balance
One Year ARM $ %
. . . . . . . . .
. . . . . . . . .
. . . . . . . . .
. . . . . . . . .
. . . . . . . . .
. . . . . . . . . -------------- ------------- ----------------
Total . . . . $ %
Current Interest Rates of Residential Mortgage Loans
Percentage
of Residential
Aggregate Mortgage Loans
Number of Outstanding by Aggregate
Residential Principal Principal
Mortgage Loans Balance Balance
Interest Rate
% to % . . $ %
% to % . .
% to % . . ------------- --------- ------------
Total . . . . $ %
------------- --------- ------------
ADJUSTMENT MARGINS
Percentage of
Residential
Number of Aggregate Mortgage Loans by
Range of Residential Outstanding Aggregate Outstanding
Adjustment Margins (%) Mortgage Loans Principal Balance Principal Balance
[0.751-1.000] . . . $ %
[1.001-1.250] . . .
[1.251-1.500] . . .
[1.501-1.750] . . .
[1.751-2.000] . . .
[2.001-2.250] . . .
[2.251-2.500] . . .
[2.501-2.750] . . .
[2.751-3.000] . . .
[3.001-3.250] . . .
[3.251-3.500] . . .
[3.501-3.750] . . .
[3.751-4.000] . . . ------------- --------------- -------------------
Total $ %
LIFETIME RATE CAPS OF RESIDENTIAL MORTGAGE LOANS
Percentage of
Residential
Number of Aggregate Mortgage Loans by
Range of Residential Outstanding Aggregate Outstanding
Lifetime Rate Caps (%) Mortgage Loans Principal Balance Principal Balance
None . . . . . . . . . $ %
[9.501-10.000] . . . .
[10.001-10.500] . . . .
[10.501-11.000] . . . .
[11.001-11.500] . . . .
[11.501-12.000] . . . .
[12.001-12.500] . . . .
[12.501-13.000] . . . .
[13.001-13.500] . . . .
[13.501-14.000] . . . .
[14.001-14.500] . . . .
[14.501-15.000] . . . .
[15.501-16.000] . . . .
[16.001-16.500] . . . .
[16.501-17.000] . . . .
[17.001-17.500] . . . .
[17.501-18.000] . . . .
[18.001-18.500] . . . . ------------ ---------------- -----------------
Total . . . . . . $ %
LIFETIME RATE FLOORS OF RESIDENTIAL MORTGAGE LOANS
Percentage of
Residential
Number of Aggregate Mortgage Loans by
Range of Residential Outstanding Aggregate Outstanding
Lifetime Rate Floors (%) Mortgage Loans Principal Balance Principal Balance
0.000 . . . . . . . . . $ %
[0.001-2.000] . . . . .
[2.001-4.000] . . . . .
[4.001-6.000] . . . . .
[6.001-8.000] . . . . .
[8.001-10.000] . . . . ------------ ----------------- ------------------
TOTAL . . . . . . . $ %
PERIODIC RATE ADJUSTMENT CAP OF RESIDENTIAL MORTGAGE LOANS
Percentage of
Residential
Number of Aggregate Mortgage Loans by
Residential Outstanding Aggregate Outstanding
Periodic Cap (%) Mortgage Loans Principal Balance Principal Balance
0.000 . . . . . . . . . $ %
0.000 . . . . . . . . . ------------ -------------- -----------------
Total . . . . . $ %
MONTHS TO NEXT PAYMENT DATE OF LOANS
Percentage of
Initial Portfolio
Residential
Months Number of Aggregate Mortgage Loans by
to Next Payment Residential Outstanding Aggregate Outstanding
Adjustment Date Mortgage Loans Principal Balance Principal Balance
2 . . . . . . . . . . . $ %
3 . . . . . . . . . . .
4 . . . . . . . . . . .
5 . . . . . . . . . . .
6 . . . . . . . . . . .
7 . . . . . . . . . . .
8 . . . . . . . . . . .
9 . . . . . . . . . . .
10 . . . . . . . . . .
11 . . . . . . . . . .
12 . . . . . . . . . .
13 . . . . . . . . . .
14 . . . . . . . . . .
17 . . . . . . . . . .
29 . . . . . . . . . . ----------- ---------------- ------------------
Total . . . . . . $ %
NEXT RATE ADJUSTMENT DATE
Percentage of
Initial Portfolio
Residential
Number of Aggregate Mortgage Loans by
Next Rate Residential Outstanding Aggregate Outstanding
Adjustment Date Mortgage Loans Principal Balance Principal Balance
October 1, 1996 . . . . $ %
November 1, 1996 . . .
December 1, 1996 . . .
January 1, 1997 . . . .
February 1, 1997 . . .
March 1, 1997 . . . . .
April 1, 1997 . . . . .
May 1, 1997 . . . . . .
June 1, 1997 . . . . .
July 1, 1997 . . . . .
August 1, 1997 . . . .
September 1, 1997 . . .
December 1, 1997 . . .
January 1, 1998 . . . . ---------- ---------------- -------------------
Total $ %
Historic levels of CMT's are shown as described below. See
"The Index."
The interest rates of the Residential Mortgage Loans included
in the Initial Portfolio range from % per annum to % per
annum. The weighted average current interest rate of the
Residential Mortgage Loans included in the Initial Portfolio is
approximately % per annum. The Residential Mortgage Loans
generally amortize the initial principal amount of such Mortgage
Loans over the term of each such Mortgage Loan.
COMMERCIAL MORTGAGE LOANS
The Commercial Mortgage Loans will include properties that
are secured by retail, hotel, restaurant and industrial
properties. The Commercial Mortgage Loans will be income-
producing properties that are currently not delinquent. The
Company will obtain an assignment of leases and rents with
respect to all rental income produced by such Mortgaged
Properties. The Initial Portfolio of Commercial Mortgage Loans
will be acquired from the Bank, its affiliates and third parties.
The Commercial Mortgage Loans in the Initial Portfolio will be
adjustable rate mortgage loans that amortize on a , or
-year amortization schedule. The interest rates on the
Commercial Mortgage Loans will be calculated on the basis of the
[one-year CMT] (as described above). [describe rate calculation]
The maturity dates for such Commercial Mortgage Loans will occur
between 5 and 10 years after their origination dates. See "Risk
Factors Increased Risk of Default Associated with Balloon
Payments." Under certain circumstances, the Commercial Mortgage
Loans may be prepaid. At certain times, the Commercial Mortgage
Loans may be locked-out from voluntary prepayment by the
borrowers, and at certain times, a prepayment premium may be due
upon such prepayment.
The following selection criteria shall apply to the Mortgage
Loans comprising the Commercial Mortgage Loans:
(a) no Commercial Mortgage Loan shall have had a Loan-to-
Value Ratio at origination in excess of %;
(b) each Commercial Mortgage Loans shall have an original
term to maturity of not less than years and not more
that years;
(c) no Commercial Mortgage Loan may be included which, as
of its date of purchase by the Company, is more than 30 days
delinquent as to payment of principal or interest, or, as to
which more than two payments have been made 30 days or more
delinquent during the three year period ending on such date
of purchase;
(d) no Commercial Mortgage Loan may be included unless a
title insurance policy, appropriate assignments of mortgage
and leases and rents and commercially reasonable insurance
policies are in effect with respect to the Mortgaged Property
securing such Mortgage Loan;
(e) Mortgage Loans with respect to a single borrower will
not exceed 5% of the aggregate principal balance of such
Commercial Mortgage Loans as of such date of purchase; and
(f) the current debt service coverage ratio with respect
to each Mortgage Loan will not be less than .
The Company may not materially change this policy without the
approval of a majority of its Independent Directors.
The following tables set forth certain information with
respect to the Commercial Mortgage Loans expected to be included
in the Initial Portfolio:
Types of Commercial Mortgage Loans
Percentage
of Commercial
Number of Mortgage Loans
Commercial Aggregate by Aggregate
Type Mortgage Loans Principal Balance Principal Balance
Retail . . . . $ %
Hotel . . . .
Restaurant . .
Industrial . .
Other . . . . . -------------- --------------- ----------------
Total . . . $ %
Current Interest Rates of Commercial Mortgage Loans
Percentage
of Commercial
Number of Mortgage Loans
Commercial Aggregate by Aggregate
Interest Rates Mortgage Loans Principal Balance Principal Balance
% to % . . $ %
% to % . .
% to % . . ----------- --------------- --------------
Total . . . . . $ %
ADJUSTMENT MARGINS
Percentage
of Commercial
Mortgage Loans
Number of by Aggregate
Range of Commercial Aggregate Outstanding Outstanding
Adjustment Margins (%) Mortgage Loans Principal Balance Principal Balance
[0.751-1.000] . . . . . $ %
[1.001-1.250] . . . . .
[1.251-1.500] . . . . .
[1.501-1.750] . . . . .
[1.751-2.000] . . . . .
[2.001-2.250] . . . . .
[2.251-2.500] . . . . .
[2.501-2.750] . . . . .
[2.751-3.000] . . . . .
[3.001-3.250] . . . . .
[3.251-3.500] . . . . .
[3.501-3.750] . . . . .
[3.751-4.000] . . . . . ------------- ---------------- --------------
Total $ %
DEBT SERVICE COVERAGE RATIOS
Percentage
Commercial
Number of Aggregate Mortgage Loans
Debt Service Commercial Outstanding by Aggregate
Coverage Ratio Mortgage Loans Principal Balance Principal Balance
[1.1501-1.2500x] $ %
[1.2501-1.3500x]
[1.3501-1.4500x]
[1.4501-1.5500x]
[1.5501-1.6500x]
[1.6501-1.7501x]
[1.7501-1.8500x]
[1.8501-2.0000x]
Greater than [2.0001x] ------------ -------------- -------------
Total $ %
THE INDEX
The Index for some of the Mortgage Loans is the weekly or quarterly
average yield on United States Treasury Securities adjusted to a constant
maturity of one year, three years or five years, as made available by the
Federal Reserve Board. The following table sets forth the monthly
averages of the Index for each of the six calendar years or portions
thereof, based on information published by the Federal Reserve Board
in Statistical Release.
Year
1 YR CMT
Month 1995 1994 1993 1992 1991 1990
January . . . . . 7.05% 3.54% 3.50% 4.15% 6.65% 7.92%
February . . . . 6.70 3.87 3.39 4.29 6.27 8.11
March . . . . . . 6.43 4.32 3.33 4.63 6.40 8.35
April . . . . . . 6.27 4.82 3.24 4.30 6.24 8.40
May . . . . . . . 6.00 5.31 3.36 4.19 6.13 8.32
June . . . . . . 5.64 5.27 3.54 4.17 6.36 8.10
July . . . . . . 5.59 5.48 3.47 3.60 6.31 7.94
August . . . . . - 5.56 3.44 3.47 5.78 7.78
September . . . . - 5.76 3.36 3.18 5.57 7.76
October . . . . . - 6.11 3.39 3.30 5.33 7.55
November . . . . - 6.54 3.58 3.68 4.89 7.31
December . . . . - 7.15 3.61 3.71 4.38 7.05
Year
3 YR CMT
Month 1995 1994 1993 1992 1991 1990
January . . . . . 7.66% 4.48% 4.93% 5.40% 7.38% 8.13%
February . . . . 7.25 4.83 4.58 5.72 7.08 8.39
March . . . . . . 6.89 5.40 4.40 6.18 7.35 8.63
April . . . . . . 6.68 5.99 4.30 5.93 7.23 8.78
May . . . . . . . 6.27 6.34 4.40 5.81 7.12 8.69
June . . . . . . 5.80 6.27 4.53 5.60 7.39 8.40
July . . . . . . 5.89 6.48 4.43 4.91 7.38 8.26
August . . . . . - 6.50 4.36 4.72 6.80 8.22
September . . . . - 6.69 4.17 4.42 6.50 8.27
October . . . . . - 7.04 4.18 4.64 6.23 8.07
November . . . . - 7.44 4.50 5.14 5.90 7.74
December . . . . - 7.71 4.54 5.21 5.39 7.47
Year
5 YR CMT
Month 1995 1994 1993 1992 1991 1990
January . . . . . 7.76% 5.09% 5.83% 6.24% 7.70% 8.12%
February . . . . 7.37 5.40 5.43 6.58 7.47 8.42
March . . . . . . 7.05 5.94 5.19 6.95 7.77 8.60
April . . . . . . 6.86 6.52 5.13 6.78 7.70 8.77
May . . . . . . . 6.41 6.78 5.20 6.69 7.70 8.74
June . . . . . . 5.93 6.70 5.22 6.48 7.94 8.43
July . . . . . . 6.01 6.91 5.09 5.84 7.91 8.33
August . . . . . - 6.88 5.03 5.60 7.43 8.44
September . . . . - 7.08 4.73 5.38 7.14 8.51
October . . . . . - 7.40 4.71 5.60 6.87 8.33
November . . . . - 7.72 5.06 6.04 6.62 8.02
December . . . . - 7.78 5.15 6.08 6.19 7.73
If The Index is not published or is otherwise unavailable,
the Servicer will select an alternative index as provided in the
mortgage note; provided, that such alternative index may be used
only if counsel provides an opinion that the use of such index
will not jeopardize the REIT status of the Company.
UNDERWRITING STANDARDS
The Bank has represented to the Company that all of the
Mortgage Loans to be included in the Initial Portfolio (including
those which were not actually originated by the Bank or its
affiliates) were originated generally in accordance with the
underwriting policies customarily employed by the Bank or its
affiliates during the period in which the Mortgage Loans in the
Initial Portfolio were originated.
GEOGRAPHIC DISTRIBUTION
The Company currently anticipates that approximately %
of the real estate properties underlying the Company's
Residential and Commercial Mortgage Loans included in the Initial
Portfolio will be located in Ohio. Consequently, these Commercial
Mortgage Loans may be subject to a greater risk of default than
other comparable Commercial Mortgage Loans in the event of
adverse economic, political or business developments or natural
hazards in the region that may affect the ability of property
owners in the region to make payments of principal and interest
on the underlying mortgages.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be
sold to the Company on a servicing retained basis. With respect
to the Mortgage Loans sold by the Bank and included in the
Initial Portfolio, the Bank will retain the right to service such
loans and will service such loans pursuant to the terms of each
of the Seller's Warranties, Sale and Servicing Agreements. The
Bank, as servicer, will receive fees generally ranging from %
to % per annum, on the principal balances of the Mortgage
Loans serviced. The Bank currently subcontracts the servicing of
Residential Mortgage Loans pursuant to a sub-servicing agreement
between the Bank and Wendover Funding, Inc., dated as of November
3, 1995, certain relevant provisions of which are summarized
below. Unless terminated by the Company, the Bank will be
required to service the Mortgage Loans as long as the Series A
Preferred Shares are outstanding.
The Seller's Warranties, Sale and Servicing Agreements
require the Bank to service the Company's Mortgage Loans in a
manner generally consistent with accepted secondary market
practices, with any servicing guidelines promulgated by the
Company and, in the case of the Residential Mortgage Loans, with
FNMA and FHLMC guidelines and procedures. The Bank will collect
and remit principal and interest payments, administer mortgage
escrow accounts, submit and pursue insurance claims and initiate
and supervise foreclosure proceedings on the Mortgage Loans it
services. The Bank will also provide accounting and reporting
services with respect to the Mortgage Loans as required by the
Company. The Bank will be required to follow such collection
procedures as are customary in the industry. The Bank may, in
its discretion, arrange with a defaulting borrower a schedule for
the liquidation of delinquencies, provided that any primary
mortgage insurance coverage is not adversely affected. The Bank
may from time to time subcontract all or a portion of its
servicing obligations under the Seller's Warranties, Sale and
Servicing Agreements to other affiliates of the Bank. If no
affiliate of the Bank is engaged in the business of servicing
Mortgage Loans, the Bank may subcontract all or a portion of its
obligations under the Seller's Warranties, Sale and Servicing
Agreements to an unrelated third party subject to approval of a
majority of the Independent Directors. The Bank does not service
residential mortgage loans. At December 31, 1995, the Bank
serviced commercial mortgage loans having an aggregate principal
balance of approximately $ billion. The Bank will not, in
connection with subcontracting any of the obligations under the
Seller's Warranties, Sale and Servicing Agreements, be discharged
or relieved in any respect from its obligation to the Company to
perform its obligations under such agreements.
The Bank will be required to pay all expenses related to the
performance of its duties under the Seller's Warranties, Sale and
Servicing Agreements. The Bank will be required to make advances
of principal and interest, taxes and required insurance premiums
that are not collected from borrowers with respect to any
Mortgage Loan, unless (with respect to advances of principal and
interest) 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 from
proceeds related to such Mortgage Loan. The Bank also will be
entitled to reimbursement by the Company for expenses incurred by
it in connection with the liquidation of defaulted Mortgage Loans
and in connection with the restoration of Mortgaged Property. If
claims are not made or paid under applicable insurance policies
or if coverage thereunder has ceased, the Company will suffer a
loss to the extent that the proceeds from liquidation of the
Mortgaged Property, after reimbursement of the Bank's expenses in
the sale, are less than the outstanding principal balance of the
related Mortgage Loan. The Bank will be 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 as servicer which cause the
policies to be cancelled by the insurer. The Bank will be
required to represent and warrant that the Mortgage Loans will
comply with any loan servicing guidelines promulgated by the
Company and to agree to repurchase, at the request of the
Company, any Mortgage Loan in the event that it fails to make
such representations or warranties, or any such representation or
warranty is untrue. The repurchase price for any such Mortgage
Loan will be the outstanding principal amount thereof plus
accrued and unpaid interest thereon at the date of repurchase.
The Bank may institute foreclosure proceedings, exercise any
power of sale contained in any mortgage or deed of trust, obtain
a deed in lieu of foreclosure or otherwise acquire title to a
Mortgaged Property by operation of law or otherwise in accordance
with the terms of the Seller's Warranties, Sale and Servicing
Agreements.
The Company may terminate the Seller's Warranties, Sale and
Servicing Agreements upon the happening of one or more events
specified in such agreements. Such events relate generally to
the Bank's proper and timely performance of its duties and
obligations under the Seller's Warranties, Sale and Servicing
Agreements. In addition, the Company may also terminate either of
the agreements without cause upon 90 days' notice and payment of
a termination fee that is competitive with that which is
generally payable in the industry. The termination fee will be
based on the aggregate outstanding principal amount of the loans
then serviced under the terminated agreement. As long as any
Series A Preferred Shares remain outstanding, the Company may not
terminate either of the Seller's Warranties, Sale and Servicing
Agreements without the approval of a majority of the Independent
Directors.
As is customary in the mortgage loan servicing industry, the
Bank will be entitled to retain any late payment charges,
prepayment fees, penalties and assumption fees collected in
connection with the Mortgage Loans. 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 from interest earned on tax and
insurance impound funds with respect to Mortgage Loans. The Bank
will be required to remit to the Company no later than the th
day of each month all principal and interest due from borrowers
of Mortgage Loans (unless deemed nonrecoverable by the Servicer)
on the [first] day of such month.
When any Mortgaged Property 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
under the related mortgage note. Upon any assumption of a
Mortgage Loan by a transferee, a fee equal to a specified
percentage of the outstanding principal balance of the Mortgage
Loan is typically required, which sum will be retained by the
Bank as additional servicing compensation. To the extent the Bank
has subcontracted the servicing to its Residential Mortgage
Loans, the subservicer may retain such fees.
SUBSERVICING
The Bank and Wendover Funding, Inc. (the "Subservicer")
have entered into a Subservicing Agreement, dated as of November
3, 1995 (the "Subservicing Agreement") pursuant to which the Bank
may from time to time retain Subservicer to service Mortgage
Loans. The Subservicer agrees to service such loans in
accordance with the terms of the Subservicing Agreement and
Customary Servicing Procedures (as defined therein), in
consideration for a subservicing fee, the amount of which is
determined by: (i) the number of loans subject to the
Subservicing Agreement, and (ii) the types of loans serviced.
Each party agrees to indemnify the other for costs and expenses
related to its failure to comply with the terms of the
Subservicing Agreement and for breaches of its representations
and warranties. The Subservicing Agreement terminates December
31, 2000. Each party may, however, earlier terminate the
Subservicing Agreement at its option upon six months' prior
written notice. In the event the Bank terminates the
Subservicing Agreement without cause it must pay an Exit Fee (as
defined in the Subservicing Agreement). The Bank may, however,
terminate the Subservicing Agreement, without payment of an Exit
Fee if the delinquency rate of the portfolio exceeds the MBA Ohio
Conventional Loan overall delinquency rate by 50% or more for two
consecutive quarters. If the Subservicer terminates the
Subservicing Agreement for cause (as described therein) it may be
eligible to receive an Exit Fee.
In addition to this agreement, the Company may enter
into other agreements which establish similar relationships with
respect to the subservicing of the Mortgage Loans.
EMPLOYEES
The Company has four officers, each of whom is described
further below under "Management." The Company does not anticipate
that it will require any additional employees, because it has
retained the Advisor to perform certain functions pursuant to the
Advisory Agreement described below under "Management The
Advisor." It is currently anticipated that all of the officers of
the Company will also be officers or employees of the Bank or its
affiliates. The Company will maintain corporate records and
audited financial statements that are separate from those of the
Bank or any of its affiliates. None of the officers, employees or
directors of the Company will have 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 will engage in acquiring, holding and
managing Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the
business of originating Mortgage Loans. It does anticipate that
it will purchase Mortgage Assets in addition to those in the
Initial Portfolio and that substantially all of these Mortgage
Loans will be purchased from the Bank, affiliates of the Bank or
from third parties. The Company does not expect to 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.
LEGAL PROCEEDINGS
The Company is not the subject of any litigation. None of
the Company, the Advisor, the Bank or any of its affiliates is
currently involved in nor, to the Company's knowledge, is
currently threatened with any material litigation with respect to
the Mortgage Assets to be included in the Initial Portfolio,
other than routine litigation arising in the ordinary course of
business, most of which is expected to be covered by liability
insurance.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors will initially be composed
of seven members, five of whom will be Independent Directors. An
"Independent Director" is a director who is not a current officer
or employee of the Company, the Bank or any affiliate of the
Bank. Pursuant to the Articles of Incorporation, the Independent
Directors are required to take into account the interests of the
holders of both the Series A Preferred Shares and the Common
Stock in assessing the benefit to the Company of any proposed
action requiring their consent. The Company currently has four
officers. The Company has no other employees and does not
anticipate that it will require additional employees. See
"Business and Strategy Employees."
The persons who are directors and executive officers of the
Company are as follows:
Name Age Position and Offices Held
Allen L. Davis . . . . 54 Chairman, Chief
Executive Officer and
Director
Phillip R. Myers . . . 53 Executive Vice President
and Director
John R. Farrenkopf . . 47 Vice President and Chief
Financial Officer,
Controller and Assistant
Secretary
Mark E. Magee . . . . . 48 Vice President,
Secretary and General
Counsel
Jack M. Cook . . . . . 51 Director
Thomas D. Grote, Jr. . 41 Director
Joseph A. Pedoto . . . 54 Director
Sidney A. Peerless . . 74 Director
Joseph A. Steger . . . 59 Director
The following is a summary of the experience of the executive
officers and directors of the Company:
ALLEN L. DAVIS is President and Chief Executive Officer of
Holdings and the Bank and a Director of LSI Industries, Inc. Age
54.
JOHN R. FARRENKOPF is Vice President and Chief Financial Officer
of Holdings and Senior Vice President and Chief Financial Officer
of the Bank since August 1992. Age 47.
MARK E. MAGEE is Vice President, Secretary and General Counsel of
Holdings and Senior Vice President, Secretary and General Counsel
of the Bank. Age 48
JACK M. COOK is President and Chief Executive Officer of Health
Alliance of Greater Cincinnati which includes Christ, University,
Jewish and St. Luke Hospitals. Age 51.
THOMAS D. GROTE, JR. is President of the Thomas J. Dyer Company.
Age 41.
PHILIP R. MYERS is Senior Executive Vice President of the Bank
and Senior Vice President of Holdings. Age 53.
JOSEPH A. PEDOTO is President of JLM Financial, Inc., a financial
consulting firm. Age 54.
SIDNEY A. PEERLESS is President of E.N.T. Associates and a staff
member at several local hospitals. In addition, he is a Clinical
Professor at the University of Cincinnati and a director of
Jewish Hospital in Cincinnati, Ohio. Age 74.
JOSEPH A. STEGER is President of the University of Cincinnati and
a Director of Cincinnati Milacron, Inc. Age 59.
INDEPENDENT DIRECTORS
The Company's Articles of Incorporation require that, so
long as any Series A Preferred Shares are outstanding, certain
actions by the Company must be approved by a majority of the
Independent Directors of the Company. See "Description of Series
A Preferred Shares Independent Director Approval." Jack M. Cook,
Thomas D. Grote, Jr., Joseph A. Pedoto, Sidney A. Peerless and
Joseph Steger are the Company's initial Independent Directors.
If at the time of any annual meeting of the Company's
stockholders the aggregate amount of accrued and unpaid dividends
on the Series A Preferred Shares equals or exceeds an amount
equal to four quarterly dividend payments on such Series A
Preferred Shares, the number of directors then constituting the
Board of Directors of the Company will be increased by two, and
the holders of Series A Preferred Shares will be entitled to
elect two additional directors to serve on the Company's Board of
Directors. Any member of the Board of Directors elected by
holders of the Company's 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. See
"Description of Series A Preferred Shares Voting Rights."
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will
establish an audit committee which will review the engagement of
independent accountants and review the independence of its
auditors. The audit committee will also review the adequacy of
the Company's internal accounting controls. The audit committee
will be comprised of and .
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the
Company fees for their services as directors. The Independent
Directors will receive annual compensation of $ plus a
fee of $ for attendance (in person or by telephone) at
each meeting of the Board of Directors.
The Company will not pay any compensation to its officers or
employees or to directors who are not Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Ohio General Corporation Law generally eliminates the
personal liability of directors for monetary damages for breaches
of fiduciary duty unless it can be demonstrated by clear and
convincing evidence that the director acted with deliberate
intent to cause injury to the corporation or acted with reckless
disregard for the best interests of the corporation. The
Company's Articles of Incorporation do not opt out of this
liability limiting statutory scheme.
The regulations of the Company (the "Regulations") require
indemnification of the Company's directors and officers and
specify that the right to indemnification is a contractual right,
setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the Regulations.
The Regulations also entitle any director or officer to be
reimbursed for the expenses of prosecuting any claim against him
or her arising out of his or her status as such. The Regulations
of the Company also provide that the Company may enter into
contracts with any director or officer in furtherance of the
indemnification provisions contained in the Regulations and allow
the Company to create a trust fund to ensure payment of amounts
indemnified.
THE ADVISOR
In connection with the consummation of the Offering and the
formation of the Company as described herein, the Company will
enter into an Advisory Agreement with the Bank to administer the
day-to-day operations of the Company. The Bank in its role as
Advisor under the terms of the Advisory Agreement is herein
referred to as the "Advisor." The Advisor will be responsible for
(i) monitoring the credit quality of the Mortgage Assets held by
the Company and (ii) advising the Company with respect to the
acquisition, management, financing and disposition of the
Company's Mortgage Assets. The Advisor may from time to time
subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in
the business of managing Mortgage Assets. If no affiliate of the
Advisor is engaged in the business of managing Mortgage Assets,
the Advisor 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 unrelated third parties. The Advisor will
not, in connection with the subcontracting of any of its
obligations under the Advisory Agreement, be discharged or
relieved in any respect from its obligations under the Advisory
Agreement.
The Advisor and its affiliates have substantial experience
in the mortgage lending industry, both in the origination and in
the servicing of mortgage loans. At December 31, 1995, the
Advisor and its affiliates held approximately $ mortgage
loans. In their mortgage loan business, the Advisor and its
affiliates originate and the Bank purchases, commercial and
residential mortgage loans, and then generally sell such loans to
investors, primarily in the secondary markets, while retaining
the rights to service certain such loans.
The Advisory Agreement has an initial term of five years,
and will be renewed automatically for additional five-year
periods unless notice of nonrenewal is delivered to the Advisor
by the Company. The Advisory Agreement may be terminated by the
Company at any time upon 90 days' prior notice. As long as any
Series A Preferred Shares remain outstanding, any decision by the
Company either not to renew the Advisory Agreement or to
terminate 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 Advisor will be entitled to receive an
advisory fee equal to with respect to the advisory and
management services provided by it to the Company.
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
Prior to or simultaneously with the completion of the
Offering, the Company and the Bank and its affiliates will engage
in the transactions described below which are designed (i) to
facilitate the Offering, (ii) to transfer the ownership of the
Initial Portfolio to the Company and (iii) to enable the Company
to qualify as a REIT for federal income tax purposes commencing
with its initial taxable year ending December 31, 1996.
The transactions constituting the formation of the Company
will include the following:
* The Articles of Incorporation of the Company will
be amended to provide for 2,200,000 authorized
shares of Preferred Stock and to establish the
terms of the Series A Preferred Shares.
* The Company will sell to the public 2,000,000
Series A Preferred Shares in the Offering
(assuming the Underwriters' over-allotment option
is not exercised).
* The Bank will acquire 900 additional shares of Common
Stock for an aggregate purchase price equal to $50,000,000.
In addition, the Bank will acquire additional shares
of Common Stock for a purchase price equal to the
aggregate amount of underwriting discounts and
expenses of the Offering. The Bank currently
owns, and following the completion of the Offering
intends to continue to own, all of the issued and
outstanding shares of Common Stock of the Company.
* The Bank will sell the Initial Portfolio to the
Company for an aggregate purchase price equal to
or exceed $100,000,000 pursuant to the terms of
the Seller's Warranties, Sale and Servicing
Agreements.
* The Company will enter into the Advisory Agreement
with the Advisor pursuant to which the Advisor
will manage the Mortgage Assets held by the
Company and administer the day-to-day operations
of the Company. See "Management The Advisor."
* The Bank will enter into the Seller's Warranties,
Sale and Servicing Agreements pursuant to which it
will separately service the Residential Mortgage
Loans and the Commercial Mortgage Loans included
in the Initial Portfolio. See "Business and
Strategy Servicing."
In addition to its ownership of 100% of the Common Stock of
the Company, the Bank will also have responsibility for the
day-to-day management of the Company's assets in its capacity as
Advisor under the Advisory Agreement. See "Management The
Advisor" and "Risk Factors Relationship with the Bank and its
Affiliates; Conflicts of Interest."
The Company and the Bank intend that the fair value of the
Initial Portfolio will equal or exceed the amount that the
Company will pay for the Initial Portfolio (approximately
$100,000,000). However, no third party valuations of the Mortgage
Assets constituting the Initial Portfolio have been or will be
obtained for purposes of the Offering, and there can be no
assurance that the fair value of the Initial Portfolio will not
differ from the purchase price to be paid by the Company. See
"Risk Factors No Third Party Valuation of the Mortgage Assets,"
"No Arm's-Length Negotiations with Affiliates" and " Relationship
with the Bank and its Affiliates; Conflicts of Interest."
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and
provisions of the Series A Preferred Shares, and is qualified in
its entirety by reference to the terms and provisions of the
Company's Articles of Incorporation, the form of which has been
filed with the Commission as an exhibit to the Registration
Statement of which this Prospectus forms a part. See "Description
of Capital Stock" below.
GENERAL
The Series A Preferred Shares form a series of the Preferred
Stock of the Company, which Preferred Stock may be issued from
time to time in one or more series with such rights, preferences
and limitations as are determined by the Company's Board of
Directors. The Board of Directors has authorized the amendment
of the Company's Articles of Incorporation to create the Series A
Preferred Shares and the issuance of the Series A Preferred
Shares.
When issued, the Series A Preferred Shares will be validly
issued, fully paid and nonassessable. The holders of the Series A
Preferred Shares will have no preemptive rights with respect to
any shares of the capital stock of the Company or any other
securities of the Company convertible into or carrying rights or
options to purchase any such shares. The Series A Preferred
Shares are perpetual and will not be convertible into shares of
Common Stock or any other class or series of capital stock of the
Company and will not be subject to any sinking fund or other
obligation of the Company for its repurchase or retirement.
The transfer agent, registrar and dividend disbursement
agent for the Preferred Stock will be . The
registrar for shares of Preferred Stock will send notices to
shareholders of any meetings at which holders of the Preferred
Stock have the right to elect directors of the Company or to vote
on any other matter.
The Series A Preferred Shares will rank prior to the Common
Stock and to all other classes and series of equity securities of
the Company now or hereafter issued (collectively, "Junior
Stock"), other than any class or series of equity securities of
the Company expressly designated as being on a parity with
("Parity Stock")(such stock having either cumulative or non-
cumulative right to dividends) or senior to ("Senior Stock") the
Series A Preferred Shares as to dividend rights and rights upon
liquidation, winding up or dissolution. The Company has the
power to create and issue additional Preferred Stock or other
classes of stock ranking on a parity with the Series A Preferred
Stock, or that constitute Junior Stock, without any approval or
consent of the holders of Series A Preferred Shares. The Company
may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares or on a parity with the Preferred Stock
but having a cumulative dividend feature, without the consent of
holders of at least 66 2/3% of the outstanding shares of
Preferred Stock at that time, including the Series A Preferred
Shares. The Company also may not issue additional shares of
Preferred Stock on a parity with the Series A Preferred Shares
without the approval of a majority of the Company's Independent
Directors.
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to
receive, if, when and as declared by the Board of Directors of
the Company out of assets of the Company legally available
therefor, non-cumulative cash dividends at the rate of % per
annum of the initial liquidation preference (equivalent to $25.00
per share). Dividends on the Series A Preferred Shares will be
payable, if declared, quarterly on March 31, June 30, September
30 and December 31 (or, if any such day is not a business day, on
the next business day) of each year (each such date, a "Dividend
Payment Date"), commencing on , 1996. Quarterly
Dividend Periods will commence on and include the first day, and
end on and include the last day, of the calendar quarter that
immediately precedes the calendar quarter in which the
corresponding Dividend Payment Date occurs; provided, however,
that the first Dividend Period (the "Initial Dividend Period")
shall commence on and include the original issue date of the
Series A Preferred Shares and shall end on and include
, 1996. Each such dividend will be payable to holders of record
as they appear on the stock register of the Company on such
record dates, not exceeding 45 days preceding the Payment Date
thereof, as shall be fixed by the Board of Directors of the
Company. Dividends payable on the Series A Preferred Shares for
the Initial Dividend Period and for any other 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. Dividends payable on the
Series A Preferred Shares for each full Dividend Period shall be
$ .
The right of holders of Series A Preferred Shares to receive
dividends is non-cumulative. Accordingly, if the Board of
Directors does not declare a dividend payable in respect of any
Dividend Period, holders of Series A Preferred Shares will have
no right to receive a dividend in respect of such Dividend
Period, and the Company will have no obligation to pay a dividend
in respect of such Dividend Period, whether or not dividends are
declared payable in respect of any future Dividend Period. The
Company, however, intends to maintain its status as a REIT and
plans to distribute at least 95% of its REIT taxable income. See
"Federal Income Tax Considerations."
VOTING RIGHTS
Except as expressly required by applicable law, or except as
indicated below, the holders of the Series A Preferred Shares
will not be entitled to vote. In the event the holders of Series
A Preferred Shares are entitled to vote, each Series A Preferred
Share will be entitled to one vote.
If at the time of any annual meeting of the Company's
shareholders the aggregate amount of accrued and unpaid dividends
on any series of Preferred Stock of the Company, including the
Series A Preferred Shares, equals or exceeds an amount equal to
four quarterly dividend payments on such series of Preferred
Stock, the number of directors then constituting the Board of
Directors of the Company will be increased by two, and the
holders of the Series A 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 Company's 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 such director for the
full term for which he or she shall have been elected,
notwithstanding that prior to the end of such term such default
shall cease to exist.
The affirmative vote or consent of the holders of at least
66 2/3% of the outstanding shares of each series of Preferred
Stock of the Company, including the Series A Preferred Shares,
voting as a single class without regard to series, will be
required (a) to create any class or series of stock which shall
have preference as to dividends or distribution of assets over
any outstanding series of Preferred Stock of the Company other
than a series which shall not have any right to object to such
creation or (b) alter or change the provisions of the Company's
Articles of Incorporation so as to adversely affect the voting
powers, preferences or special rights of the holders of a series
of Preferred Stock of the Company; provided that if such
amendment shall not adversely affect all series of Preferred
Stock of the Company, such amendment need only be approved by at
least 66 2/3% of the holders of shares of all series of Preferred
Stock adversely affected thereby.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior
to , 20[01] (except upon the occurrence of a Tax Event). On or
after such date, the Series A Preferred Shares will be redeemable
at the option of the Company, 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 a redemption price of $25.00 per share, plus
declared and unpaid dividends to the date of redemption, if any,
and without duplication, an additional amount equal to the amount
of dividends that would be payable on the Preferred Stock in
respect of the period from the first day of the Dividend Period
in which the date fixed for redemption occurs to the date fixed
for redemption (assuming all such dividends were to be declared).
The Company will also have the right at any time, upon the
occurrence of a Tax Event, to redeem the Series A Preferred
Shares, in whole (but not in part) at a redemption price of
$25.00 per share, plus declared and unpaid dividends to the date
of redemption, if any, and without duplication, an additional
amount equal to the amount of dividends that would be payable on
the Preferred Stock in respect of the period from the first day
of the Dividend Period in which the date fixed for redemption
occurs to the date fixed for redemption (assuming all such
dividends were to be declared). "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, treaties or any
regulations thereunder of the United States or any political
subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure,
notice or announcement (including any notice or announcement of
intent to adopt such procedures or regulations) ("Administrative
Action") or (iii) any amendment to, clarification of, or change
in the official position or the interpretation of such
Administrative Action or any interpretation or pronouncement that
provides for a position with respect to such Administrative
Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court,
governmental authority or regulatory body, irrespective of the
manner in which such amendment, clarification or change is made
known, which amendment, clarification, or change is effective or
such pronouncement or decision is announced on or after the date
of issuance of the Series A Preferred Shares, there is more than
an insubstantial risk that (a) dividends paid or to be paid by
the Company with respect to the capital 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.
If all funds necessary for such redemption are set aside or
delivered to the redemption agent with irrevocable instructions
to effect the redemption, then all shares so called for
redemption will be deemed to be no longer outstanding and all
rights with respect to such shares will terminate, except for the
right to receive the funds so deposited, without interest.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of the
Series A Preferred Shares at the time outstanding will be
entitled to receive out of assets of the Company available for
distribution to stockholders, before any distribution of assets
is made to holders of any Junior Stock, liquidating distributions
in the amount of $25.00 per share, plus declared and unpaid
dividends thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series A
Preferred Shares will have no right or claim to any of the
remaining assets of the Company. In the event that, upon any such
voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Company are insufficient to pay the
amount of the liquidation distributions on all outstanding Series
A Preferred Shares and the corresponding amounts payable on any
Parity Stock, then the holders of the Series A Preferred Shares
and any Parity Stock shall share ratably in any such distribution
of assets in proportion to the full liquidating 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 a
liquidation, dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Articles of Incorporation require that, so long as any
Series A Preferred Shares are outstanding, certain actions by the
Company be approved by a majority of its Independent Directors.
Jack M. Cook, Thomas D. Grote, Jr., Joseph A. Pedoto, Sidney A.
Peerless and Joseph Steger are the Company's initial Independent
Directors. See "Management Independent Directors." In order to be
considered "independent," a director must not be a current
employee of the Company, Holdings, the Bank or any affiliate of
the Bank. In addition, any members of the Board of Directors of
the Company elected by holders of Preferred Stock, including the
Series A Preferred Shares, will be deemed to be Independent
Directors for purposes of approving actions requiring the
approval of a majority of the Independent Directors. The actions
which require approval of a majority of the Independent Directors
include (i) the issuance of additional Preferred Stock ranking on
a parity with the Series A Preferred Shares, (ii) the incurrence
of debt for borrowed money in excess of 20% of the aggregate
amount of net proceeds received in connection with the issuance
of Preferred Stock and Common Stock, (iii) the modification of
the general distribution policy or the declaration of any
distribution in respect of Common Stock for any year if, after
taking into account any such proposed distribution, total
distributions on the Series A Preferred Shares and the Common
Stock would exceed an amount equal to the sum of 105% of the
Company's REIT taxable income for such year plus net capital
gains of the Company for that year, (iv) the acquisition of real
estate assets other than Commercial or Residential Mortgage Loans
or Mortgage Securities, (v) the redemption of any shares of
Common Stock, (vi) the termination or modification of, or the
election not to renew, the Advisory Agreement or the Seller's
Warranties, Sale and Servicing Agreements or the subcontracting
of any duties under either Agreement to third parties
unaffiliated with the Bank (other than any current subservicing
arrangement with Wendover Funding, Inc.), (vii) the determination
to revoke the Company's REIT status; and, (viii) any material
change in any of the Company's policies. The Articles of
Incorporation require that, in assessing the benefits to the
Company of any proposed action requiring their consent, the
Independent Directors take into account the interests of holders
of both the Common Stock and the Preferred Stock, including,
without limitation, holders of the Series A Preferred Shares.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the
Series A Preferred Shares, see "Description of Capital
Stock Restrictions on Ownership and Transfer."
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the capital stock of
the Company does not purport to be complete and is subject in all
respects to the applicable provisions of the Ohio General
Corporation Law and the Articles of Incorporation of the Company.
COMMON STOCK
GENERAL
The Company will be authorized to issue up to 1,000 shares
of Common Stock. Upon consummation of the Offering and the
transactions described in "Transactions Constituting the
Formation," the Company will have outstanding 1,000 shares of
Common Stock, all of which will be held by the Bank. In addition,
Holdings has agreed that, so long as any Series A Preferred
Shares are outstanding, it will maintain direct or indirect
ownership of at least 80% of the outstanding Common Stock of the
Company.
DIVIDENDS
Holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds
legally available therefor, provided that, so long as any shares
of Preferred Stock are outstanding, no dividends or other
distributions (including redemptions and purchases) may be made
with respect to the Common Stock unless full dividends on the
shares of all series of Preferred Stock, including accumulations
in the case of cumulative Preferred Stock, have been paid. In
order to remain qualified as a REIT, the Company must distribute
annually at least 95% of its annual REIT taxable income to
stockholders.
VOTING RIGHTS
Subject to the rights, if any, of the holders of any class
or series of Preferred Stock as set forth herein, all voting
rights are vested in the Common Stock. The holders of Common
Stock are entitled to one vote per share and may cumulate their
votes in the election of the Company's Board of Directors. All
of the issued and outstanding shares of Common Stock are
currently held by the Bank.
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 Common Stock will be
entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
PREFERRED STOCK
Subject to limitations prescribed by Ohio General
Corporation Law and the Company's Articles of Incorporation, the
Board of Directors is authorized to amend the Company's Articles
of Incorporation and thereby to issue, from the authorized but
unissued shares of capital stock of the Company, Preferred Stock
in such 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 and other rights,
voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the
shares of any such series, and such other subjects or matters as
may be fixed by resolution of the Board of Directors.
Preferred Stock, upon issuance against full payment of the
purchase price therefor, will be fully paid and nonassessable.
The specific terms of a particular class or series of Preferred
Stock will be described in the Articles relating to that class or
series.
The Articles of Incorporation set forth the preferences and
other terms of each series of Preferred Stock, including, without
limitation, the following: (i) the title and stated value of such
series; (ii) the number of shares of such class or series offered
and the liquidation preference per share of such class or series;
(iii) the dividend rate(s), period(s), and/or payment date(s) or
method(s) of calculation thereof applicable to such class or
series; (iv) whether such class or series of Preferred Stock is
cumulative or not and, if cumulative, the date from which
dividends on such class or series shall accumulate; (v) the
provision for a sinking fund, if any, for such class or series;
(vi) the provision for redemption, if applicable, of such class
or series; (vii) 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;
(viii) 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; (ix) 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; (x) any other specific terms, preferences, rights,
limitations or restrictions of such class or series; and (xi) any
voting rights of such class or series. For information regarding
dividends, redemption, voting and other characteristics of the
Series A Preferred Shares, see "Description of Series A Preferred
Shares".
RESTRICTIONS ON OWNERSHIP AND TRANSFER
FIVE OR FEWER TEST
In order for the Company to qualify, and to continue to
qualify, as a REIT under the Code, not more than 50% of the value
of its outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in 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
constructive ownership and attribution rules. Immediately after
the Offering, certain significant shareholders of Holdings (i.e.,
) will, through their constructive ownership of a
beneficial interest in the Bank, constitute individuals for
purposes of this test and, under the IRS's rules for determining
percentages of ownership, will be deemed to own constructively
approximately % of the value of the outstanding shares of
beneficial interest in the Company (the "Significant
Shareholders"). Presently, there are no restrictions which
prevent either (i) any Significant Shareholder from increasing or
decreasing its percentage ownership of Holdings (and their
percentage ownership in the REIT) or (ii) any other person from
becoming a significant constructive shareholder of the REIT by
acquiring an equity interest in Holdings. Moreover, any increase
or decrease in the value of the Common Stock as compared to the
value of the Preferred Stock will increase or decrease the
percentage of the value of the outstanding shares of capital
stock of the REIT held by the Significant Shareholders.
Because the Company believes that it is essential to
qualify, and to continue to qualify, as a REIT, the Articles of
Incorporation of the Company, subject to certain exceptions,
provide that no holder may own, or be deemed to own by virtue of
the attribution rules of the Code, more than % of the lesser
of the number of the issued and outstanding shares of Preferred
Stock or the value of the issued and outstanding shares of the
Company (the "Ownership Limit"). The Board of Directors may (but
will not be required to), upon the receipt of a ruling from the
IRS or an opinion of counsel satisfactory to it, 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 constructive ownership rules of the Code are complex and
may cause Preferred Stock owned, directly or indirectly, by one
individual or entity to be deemed to be owned by other related
individuals or entities. As a result, the acquisition by an
individual or entity of less than % of the lesser of the
number of the issued and outstanding shares of Preferred Stock or
the value of the issued and outstanding shares of the Company (or
the acquisition of an entity that owns such shares) may cause
that individual or entity (or another individual or entity) to
violate the Ownership Limit.
The Articles of Incorporation provide that shares of any
class or series of Preferred Stock owned, or deemed to be owned,
by or transferred to a stockholder in excess of the Ownership
Limit (the "Excess Shares") will automatically be transferred, by
operation of law, to a trustee as a trustee of a 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 prior to the discovery of the prohibited
transfer are to be repaid by the original transferee to the
Company and by the Company to the trustee; any vote of the shares
while the shares were held by the original transferee prior to
the Company's discovery thereof shall be void ab initio and the
original transferee shall be deemed to have given its proxy to
the trustee. Any unpaid distributions with respect to the
original transferee will be rescinded as void ab initio. In
liquidation, the original transferee stockholder'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 shares to any person whose ownership is
not prohibited, whereupon the interest of the trust shall
terminate. Proceeds of the 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 its date of
acquisition) and any remaining proceeds shall be paid to a
charity to be named by the Company. All certificates
representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions 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 Company determines that it is no longer in
the best interests of the Company to attempt to qualify, or
continue to qualify, as a REIT.
ONE HUNDRED PERSONS TEST
In addition, the REIT provisions of the Code require that
the capital stock of the Company must be beneficially owned by
100 or more persons during at least 335 days of a taxable year or
during a proportionate part of a shorter taxable year (the "One
Hundred Persons Test"). The Articles of Incorporation of the
Company contain restrictions in order to ensure compliance with
the One Hundred Persons Test. Specifically, such provisions
require that if any transfer of shares of capital stock of the
Company would cause the Company to be beneficially owned by fewer
than 100 persons, such transfer shall be null and void and the
intended transferee will acquire no rights to the stock.
The Articles of Incorporation require that any person who
beneficially owns 1% (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 of the Company
must provide certain information to the Company within 30 days of
June 30 and December 31 of each year. In addition, each
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 Five or Fewer and One
Hundred Persons Tests.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax
considerations regarding the Offering is based upon current law,
is for general information only and is not tax advice. The
information set forth below, to the extent that it constitutes
summaries of legal matters or legal conclusions, has been
reviewed by Skadden, Arps, Slate, Meagher & Flom, and it is their
opinion that such information is accurate in all material
respects. The discussion below is based on existing federal
income tax law, which is subject to change, with possible
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, 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 federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, AND SALE OF THE SHARES AND OF THE COMPANY'S
ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL
The Company believes that, commencing with its initial
taxable year ending December 31, 1996, it will be owned and
organized and will operate in such a manner as to qualify for
taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner, but no assurance can be
given that it will operate in a manner so as to qualify or remain
qualified. The Company will elect to be taxed as a REIT under
Sections 856 through 860 of the Code and the applicable Treasury
Regulations (the "REIT Provisions"), which are the requirements
for qualifying as a REIT, commencing with its initial taxable
year ending December 31, 1996. The REIT Provisions 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 Skadden, Arps, Slate, Meagher & Flom, 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, commencing with the Company's
initial taxable year ending December 31, 1996. Such 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 Prospectus. Moreover, such
qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code discussed below, the
results of which will not be reviewed by Skadden, Arps, Slate,
Meagher & Flom 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 " Failure to
Qualify."
If the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on
that portion of its ordinary income or capital gain that is
currently distributed to stockholders. Such treatment
substantially eliminates the federal "double taxation" on
earnings (tax at both the corporate and the stockholder level)
that generally results from investment in a corporation.
Despite the REIT election, the Company may be subject to
federal income and excise tax as follows: (i) the Company will be
taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains, (ii)
under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax
preferences, if any, (iii) if the Company has (a) net income from
the sale or other disposition of "foreclosure property" that is
held primarily for sale to customers in the ordinary course of
business or (b) other nonqualifying net income from foreclosure
property, it will be subject to tax at the highest corporate rate
on such income, (iv) if the Company has net income from
prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to
customers in the ordinary course of business, other than sales of
foreclosure property and sales that qualify for a statutory safe
harbor), such income will be subject to a 100% tax, (v) if the
Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on
the net income attributable to the greater of the amount by which
the Company fails the 75% or 95% test, multiplied by a fraction
intended to reflect the Company's profitability, and (vi) if the
Company should fail to distribute, or fail to be treated as
having distributed, with respect to each calendar year at least
the sum of (a) 85% of its REIT ordinary income for such year, (b)
95% of its REIT capital gain net income for such year, and (c)
any undistributed taxable income from prior periods, the Company
would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The
Company does not now intend to acquire any appreciated assets
from a corporation generally subject to full corporate-level tax
in a transaction in which any gain on the transfer is not fully
recognized. However, in the event of such an acquisition, the
Company could, under certain circumstances, be subject to tax
upon disposition of such assets.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust, or
association (i) that is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic
corporation, but for the REIT Provisions; (iv) that is neither a
financial institution nor an insurance company subject to certain
provisions of the Code; (v) the beneficial ownership of which is
held by 100 or more persons; (vi) not more than 50% in value of
the outstanding stock of which is owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of each
taxable year; and (vii) meets certain other tests, described
below, regarding the nature of its income and assets. The Code
provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12
months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made to be taxed as a
REIT. For purposes of condition (vi), certain tax-exempt entities
are generally treated as individuals, and the beneficiaries of a
pension trust that qualifies under Section 401(a) of the Code and
that holds shares of a REIT will be generally treated as holding
shares of the REIT in proportion to their actuarial interests in
the pension trust. See " Taxation of United States
Stockholders Treatment of Tax-Exempt Stockholders."
The Company believes that it will issue sufficient shares
pursuant to the Offering to allow it to satisfy conditions (v)
and (vi) above. In addition, the Company's Articles of
Incorporation includes certain restrictions regarding transfer of
its shares, which restrictions are intended to assist the Company
in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such transfer and ownership
restrictions are described under "Description of Capital
Stock Restrictions on Ownership and Transfer."
In addition, a corporation may not elect to become a REIT
unless its taxable year is the calendar year. The Company
satisfies this requirement.
INCOME TESTS
The Company must annually satisfy three gross income
requirements. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real
property (as interest on obligations secured by mortgages on real
property, certain "rents from real property" or as gain on the
sale or exchange of such property and certain fees with respect
to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross
income. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments
as aforesaid and from dividends, interest, and gain from the sale
or other disposition of stock or securities and certain other
types of gross income (or from any combination of the foregoing).
Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions, and gain
on the sale or other disposition of real property (apart from
involuntary conversions and sales of foreclosure property) held
for less than four years from the date of acquisition must
represent less than 30% of the Company's gross income (including
gross income from prohibited transactions) for each taxable year.
For all of the interest paid with respect to an obligation
to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation
must be secured by real property having a fair market value at
the time of acquisition at least equal to the principal amount of
the loan. The term "interest" includes only an amount that
constitutes compensation for the use or forbearance of money. For
example, a fee received or accrued by a lender which is in fact a
charge for services performed for a borrower rather than a charge
for the use of borrowed money is not includible as interest;
amounts earned as consideration for entering into agreements to
make loans secured by real property, although not interest, are
otherwise treated as within the 75% and 95% classes of qualifying
gross income so long as the determination of those amounts does
not depend on the income or profits of any qualifying person. By
statute, the term interest does not include any amount based on
income or profits except that the Code provides that (i) interest
"based on a fixed percentage or percentages of receipts or sales"
is not excluded and (ii) when the REIT makes a loan that provides
for interest based on the borrower's receipts or sales and the
borrower leases under one or more leases based on income or
profits, only a portion of the contingent interest paid by the
borrower will be disqualified as interest.
Rents received or deemed to be received by the Company will
qualify as "rents from real property" in satisfying the gross
income requirements for a REIT described above only if certain
statutory conditions are met that limit rental income essentially
to rentals on investment-type properties. In the event that a
REIT acquires by foreclosure property that generates income that
does not qualify as "rents from real property," such income will
be treated as qualifying for two years following foreclosure
(which period may be extended by the IRS so long as (i) all
leases entered into after foreclosure generate only qualifying
rent, (ii) only limited construction takes place and (iii) within
90 days of foreclosure, any trade or business in which the
property is used is conducted by an independent contractor from
which the REIT derives no income). In the event that the special
foreclosure property rule applies to qualify otherwise
unqualified income, the net income that qualifies only under the
special rule for foreclosure property will be subject to tax, as
described above.
RELIEF PROVISIONS
If the Company fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may nevertheless
qualify as a REIT for such year if it is entitled to relief under
certain provisions of the Code. These relief provisions will be
generally available if the Company's failure to meet such tests
was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its
tax return, and any incorrect information on the schedule was not
due to fraud with the intent to evade tax. It is not possible,
however, to state whether in all circumstances the Company would
be entitled to the benefit of these relief provisions. As
discussed above in " Taxation of the Company General," even if
these relief provisions apply, the Company will, however, still
be subject to a special tax based upon the greater of the amount
by which it fails either the 75% or 95% gross income test for
that year. See "Federal Income Tax Considerations Taxation of
the Company General."
ASSET TESTS
At the close of each quarter of its taxable year, the
Company must satisfy two tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total
assets must be represented by real estate assets (including stock
or debt instruments held for not more than one year that were
purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company), cash, cash
items, and government securities. Second, although not more than
25% of the Company's total assets may be represented by
securities other than those in the 75% asset class, (i) the value
of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and (ii) the
Company may not own more than 10% of any one issuer's outstanding
voting securities.
After initially meeting the asset tests at the close of any
quarter, the Company will not lose its status as a REIT if it
fails to satisfy the asset tests at the end of a later quarter
solely by reason of changes in asset values. If the failure to
satisfy the asset tests results from an acquisition of securities
or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain
adequate records of the value of its assets to ensure compliance
with the asset tests, and to take such action within 30 days
after the close of any quarter as may be required to cure any
noncompliance but no assurance can be given that such asset tests
will be met.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is required to
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. To the extent that the Company
does not distribute (or is not treated as having distributed) all
of its net capital gain or distributes (or is treated as having
distributed) at least 95%, but less than 100% of its REIT taxable
income, as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates, as the case may
be. The Code permits a stockholder to elect to be treated for tax
purposes as having (i) received a distribution in the amount
specified in the election and (ii) contributed the amount thereof
to the capital of the Company. In the event the Company fails to
distribute 100% of its income and capital gains, the Bank may
elect to be so treated. Furthermore, if the Company should fail
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% excise tax on the excess of such
required distribution over the amounts actually distributed. The
Company intends to make timely distributions sufficient to
satisfy the annual distribution requirement.
It is possible that, from time to time, the Company may not
have sufficient cash or other liquid assets to meet the 95%
distribution requirement due to timing differences between (i)
the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company.
In the event that such an insufficiency or such timing
differences occur, in order to meet the 95% distribution
requirement the Company may find it necessary to arrange for
borrowings or to pay dividends in the form of taxable stock
dividends if it is practicable to do so.
Under certain circumstances, the Company may be able to
rectify a failure to meet the distribution requirement for a year
by paying "deficiency dividends" to stockholders in a later year,
which may be included in the Company's deduction for dividends
paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in
any taxable year, and the relief provisions described above do
not apply, the Company will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any
year in which the Company fails to qualify will not be deductible
by the Company nor will they be required to be made. In such
event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders will be taxable as
ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation
as a REIT for the four taxable years following the year during
which qualification was lost.
TAXATION OF UNITED STATES STOCKHOLDERS
Distributions Generally. As long as the Company qualifies as
a REIT, distributions to a United States Stockholder out of the
Company's current or accumulated earnings and profits (and not
designated as capital gains dividends) will be taken into account
as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are
designated by the Company as capital gains dividends will be
treated as long-term capital gain (to the extent they do not
exceed the Company's actual net capital gain) for the taxable
year without regard to the period for which the stockholder has
held its stock. However, corporate stockholders may be required
to treat up to 20% of certain capital gains dividends as ordinary
income pursuant to Section 291(d) of the Code. A distribution in
excess of current or accumulated earnings and profits will first
be treated as a tax-free return of capital, reducing the tax
basis in the United States Stockholder's Series A Preferred
Shares, and a distribution in excess of the United States
Stockholder's tax basis in its Series A Preferred Shares will be
taxable gain realized from the sale of such shares. Dividends
declared by the Company in October, November or December of any
year payable to a stockholder of record on a specified date in
any such month shall be treated as both paid by the Company and
received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January
of the following calendar year. Stockholders may not claim the
benefit of any tax losses of the Company on their own income tax
returns.
The Company will be treated as having sufficient earnings
and profits to treat as a dividend any distribution by the
Company up to the amount required to be distributed in order to
avoid imposition of the 4% excise tax discussed under " Taxation
of the Company General" and " Taxation of the Company Annual
Distribution Requirements" above. As a result, stockholders may
be required to treat as taxable dividends certain distributions
that would otherwise result in a tax-free return of capital.
Moreover, any "deficiency dividend" will be treated as a
"dividend" (an ordinary dividend or a capital gain dividend, as
the case may be), regardless of the Company's earnings and
profits.
Losses incurred on the sale or exchange of Series A
Preferred Shares held for less than six months will be deemed a
long-term capital loss to the extent of any capital gain
dividends received by the selling stockholder with respect to
such stock.
Treatment of Tax-Exempt Stockholders. Distributions from the
Company to a tax-exempt employee's pension trust or other
domestic tax-exempt stockholder will not constitute "unrelated
business taxable income" unless the stockholder has borrowed to
acquire or carry its shares of the Company or the shares are used
in an unrelated trade or business of the shareholder. A
tax-exempt employee's pension trust that holds more than 10% of
the shares of a "pension-held" REIT might be required to treat a
certain portion of the dividends paid as unrelated business
taxable income. The Company will be treated as a "pension-held"
REIT if either (i) at least one "qualified trust" (as defined in
the Code) owns more than 25% (by value) of the issued and
outstanding shares of the Company or (ii) one or more qualified
trusts (each owning more than 10% (by value) of the issued and
outstanding shares of the Company) own, in the aggregate, more
than 50% (by value) of all of the issued and outstanding shares
of the Company.
TAXATION OF NON-UNITED STATES STOCKHOLDERS
The following is a discussion of certain anticipated U.S.
federal income and estate tax consequences of the ownership and
disposition of the Company's stock applicable to Non-United
States Holders of such stock. A "Non-United States Holder" is any
person other than (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized in the
United States or under the laws of the United States or of any
state thereof, or (iii) an estate or trust whose income is
includible in gross income for U.S. federal income tax purposes
regardless of its source. The discussion is based on current law
and is for general information only. The discussion addresses
only certain and not all aspects of U.S. federal income and
estate taxation.
Ordinary Dividends. The portion of dividends received by
Non-United States Holders payable out of the Company's earnings
and profits (which are not attributable to capital gains of the
Company and which are not effectively connected with a U.S. trade
or business of the Non-United States Holder) will be subject to
U.S. withholding tax at the rate of 30% (unless reduced by
treaty). In general, Non-United States Holders will not be
considered engaged in a U.S. trade or business solely as a result
of their ownership of stock of the Company. In cases where the
dividend income from a Non-United States Holder's investment in
stock of the Company is (or is treated as) effectively connected
with the Non-United States Holder's conduct of a U.S. trade or
business, the Non-United States Holder generally will be subject
to U.S. tax at graduated rates, in the same manner as a United
States Stockholder with respect to such dividends (and may also
be subject to the 30% branch profits tax in the case of a
Non-United States Holder that is a foreign corporation).
Non-Dividend Distributions. Distributions by the Company
which are not dividends out of the earnings and profits of the
Company will not be subject to U.S. income or withholding tax. If
it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and
accumulated earnings and profits, the distribution will be
subject to withholding at the rate applicable to dividends.
However, the Non-United States Holder may seek a refund of such
amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
Capital Gain Dividends. Under the Foreign Investment in
Real Property Tax Act of 1980 ("FIRPTA"), a distribution made by
the Company to a Non-United States Holder, to the extent
attributable to gains from dispositions of United States Real
Property Interests ("USRPIs") will be considered effectively
connected with a U.S. trade or business of the Non-United States
Holder and subject to U.S. income tax at the rate applicable to
U.S. individuals or corporations, without regard to whether such
distribution is designated as a capital gain dividend (a "USRPI
Capital Gain"). Shares of a corporation are treated as a USRPI
only if the fair market value of the USRPIs owned by the
corporation equals or exceeds 50% of the fair market value of its
total assets. If at no time during the five years preceding the
sale of exchange of shares in the Company the shares of
constituted a USRPI, gain or loss on the sale or exchange will
not be treated as effectively connected with a U.S. trade or
business by reason of FIRPTA. While ownership of real property
in the U.S. is always a USRPI, a loan secured by a mortgage on
U.S. real property does not constitute a USRPI unless the amounts
payable by the borrower are contingent on the income or receipts
of the borrower or the property or otherwise based on the
property. [Because such contingent interest is not likely to be
present in residential mortgage loans to be owned by the Company
that are expected to represent approximately % of the assets
of the Company (although such interest is fairly common in
commercial loans), the Company believes that it is unlikely that
its shares will be USRPIs or that it will derive significant gain
from USRPIs, although whether its shares are USRPIs or it derives
income from USRPIs will depend on the facts as they ultimately
develop]. If the shares do constitute USRPIs, the Company will
be required to withhold tax equal to 35% of the amount of
dividends to the extent such dividends constitute USRPI Capital
Gains. Distributions subject to FIRPTA may also be subject to a
30% branch profits tax in the hands of a foreign corporate
stockholder that is not entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's
stock constitutes a USRPI, a sale of such stock by a Non-U.S.
Holder generally will not be subject to U.S. taxation under
FIRPTA. The stock will not constitute a USRPI if the Company is
a "domestically controlled REIT." A domestically controlled REIT
is a REIT in which, at all times during a specified testing
period, less than 50% in value of its shares is held directly or
indirectly by Non-United States Holders. The Company believes
that it is, and it expects to continue to be a domestically
controlled REIT, and therefore that the sale of the Company's
stock will not be subject to taxation under FIRPTA. Because the
Company's stock will be publicly traded, however, no assurance
can be given the Company will continue to be a domestically
controlled REIT.
If the Company does not constitute a domestically controlled
REIT, a Non-United States Holder's sale of stock generally will
still not be subject to tax under FIRPTA as a sale of a USRPI
provided that (i) the stock is "regularly traded" (as defined by
applicable Treasury regulations) on an established securities
market (e.g., the NYSE, on which the Company's Series A Preferred
Stock is listed) and (ii) the selling Non-United States Holder
held 5% or less of the Company's outstanding stock at all times
during a specified testing period.
If gain on the sale of stock of the Company were subject to
taxation under FIRPTA, the Non-United States Holder would be
subject to the same treatment as a United States Stockholder with
respect to such gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of
nonresident alien individuals) and the purchaser of the stock
could be required to withhold 10% of the purchase price and remit
such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be
taxable in the United States to a Non-United States Holder in two
cases: (i) if the Non-United States Holder's investment in the
stock of the Company is effectively connected with a U.S. trade
or business conducted by such Non-United States Holder, the
Non-United States Holder will be subject to the same treatment as
a United States Stockholder with respect to such gain, or (ii) if
the Non-United States Holder is a nonresident alien individual
who was present in the United States for 183 days or more during
the taxable year and has a "tax home" in the United States, the
nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.
Estate Tax. Shares of the Company owned or treated as owned
by a nonresident alien decedent are includible in such
individual's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides
otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the
amount of dividends paid or deemed paid during each calendar
year, and the amount of tax withheld, if any.
United States Stockholders. Under certain circumstances, a
United States Stockholder of Series A Preferred Shares may be
subject to backup withholding at a rate of 31% on payments made
with respect to, or cash proceeds of a sale or exchange of,
Series A Preferred Shares. Backup withholding will apply only if
the holder (i) fails to furnish the person required to withhold
with its Taxpayer Identification Number ("TIN") which, for an
individual, would be his or her Social Security Number, (ii)
furnishes an incorrect TIN, (iii) is notified by the IRS that it
has failed properly to report payments of interest or dividends,
or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has
not been notified by the IRS that the holder is subject to backup
withholding for failure to report interest or dividend payments.
Backup withholding will not apply with respect to payments made
to certain exempt recipients, such as corporations and tax-exempt
organizations. A United States Stockholder should consult with a
tax advisor regarding qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
Backup withholding is not an additional tax. Rather, the amount
of any backup withholding with respect to a payment to a United
States Stockholder will be allowed as a credit against such
United States Stockholder's United States federal income tax
liability and may entitle such United States Stockholder to a
refund, provided that the required information is furnished to
the IRS.
Non-United States Stockholders. Additional issues may arise
pertaining to information reporting and backup withholding with
respect to Non-United States Holders and a Non-United States
Holder should consult with a tax advisor with respect to any such
information reporting and backup withholding requirements. Backup
withholding with respect to a Non-United States Holder is not an
additional tax. Rather, the amount of any backup withholding with
respect to a payment to a Non-United States Holder will be
allowed as a credit against any United States federal income tax
liability of such Non-United States Holder. If withholding
results in an overpayment of taxes, a refund may be obtained
provided that the required information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or
local taxation in various state or local 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 federal income tax consequences discussed
above. Consequently, prospective stockholders should consult
their tax advisors regarding the effect of state and local tax
laws on an investment in the Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a
fiduciary of a qualified profit-sharing, pension or stock bonus
plan, including a plan for self-employed individuals and their
employees or any other employee benefit plan subject to the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in
which such plans invest and any other investor using assets that
are treated as the assets of an employee benefit plan subject to
ERISA (each, a "Plan" and collectively, "Plans") should consider
(a) whether the ownership of Series A Preferred Shares is in
accordance with the documents and instruments governing such
Plan; (b) whether the ownership of Series A Preferred Shares is
solely in the interest of Plan participants and beneficiaries and
otherwise consistent with the fiduciary's responsibilities and in
compliance with the requirements of Part 4 of Title I of ERISA,
including, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA and the prohibited
transaction provisions of Section 406 of ERISA and Section 4975
of the Code; (c) whether the Company's assets are treated as
assets of the Plan; and (d) the need to value the assets of the
Plan annually. In addition, the fiduciary of an individual
retirement arrangement under Section 408 of the Code (an "IRA")
considering the purchase of Series A Preferred Shares should
consider whether the ownership of Series A Preferred Shares would
result in a non-exempt prohibited transaction under Section 4975
of the Code.
The fiduciary investment considerations summarized below
provide a general discussion that does not include all of the
fiduciary investment considerations relevant to Plans and, where
indicated, IRAs. This summary is based on the current provisions
of ERISA and the Code and regulations and rulings thereunder, and
may be changed (perhaps adversely and with retroactive effect) by
future legislative, administrative or judicial actions. PLANS AND
IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES
SHOULD CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN
EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what
constitutes the assets of a Plan or IRA ("Plan Assets") for
purposes of ERISA and the related prohibited transaction
provisions of the Code (the "Plan Asset Regulation," 29 C.F.R.
Sec.2510.3-101), when a Plan or IRA makes an equity investment in
another entity, the underlying assets of the entity will not be
considered Plan Assets if the equity interest is a
"publicly-offered security."
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 or IRA 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. The Series A
Preferred Shares will be registered under the Securities Act and
the Exchange Act within the time periods specified in the Plan
Asset Regulation.
The Plan Asset Regulation provides that a security is
"widely held" only if it is a part of the class of securities
that is owned by 100 or more investors independent of the issuer
and of one another. A security will not fail to be "widely held,"
because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond
the control of the issuer. The Company expects the Series A
Preferred Shares to be "widely held" upon the completion of the
Offering.
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 $10,000 or
less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding
that such securities are "freely transferable." The Company
believes that any restrictions imposed on the transfer of the
Series A Preferred Shares are limited to the restrictions on
transfer generally permitted under the Plan Asset Regulation and
are not likely to result in the failure of the Series A Preferred
Shares to be "freely transferable."
A Plan should not acquire or hold the Series A Preferred
Shares if the Company's underlying assets will be treated as the
assets of such Plan. However, the Company believes that under the
Plan Asset Regulation the Series A Preferred Shares should be
treated as "publicly-offered securities" and, accordingly, the
underlying assets of the Company should not be considered to be
assets of any Plan or IRA investing in the Series A Preferred
Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held
in trust and that the trustee, or an investment manager (within
the meaning of Section 3(38) of ERISA), have exclusive authority
and discretion to manage and control the assets of the Plan. As
discussed above, the assets of the Company under current law do
not appear likely to be assets of the Plans receiving Series A
Preferred Shares as a result of the Offering. However, if the
assets of the Company were deemed to be assets of the Plans under
ERISA, certain directors and officers of the Company might be
deemed fiduciaries with respect to the Plans that invest in the
Company and the prudence and other fiduciary standards set forth
in ERISA would apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets,
transactions between the Company and parties in interest or
disqualified persons with respect to the investing Plan or IRA
could be prohibited transactions unless a statutory or
administrative exemption is available. In addition, investment
authority would also have been improperly delegated to such
fiduciaries, and, under certain circumstances, Plan fiduciaries
who make the decision to invest in the Series A Preferred Shares
could be liable as co-fiduciaries for actions taken by the
Company that do not conform to the ERISA standards for
investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are
prohibited from causing the Plan to engage in certain types of
transactions. Section 406(a) prohibits a fiduciary from knowingly
causing a Plan to engage directly or indirectly in, among other
things: (a) a sale or exchange, or leasing, of property with a
party in interest; (b) a loan or other extension of credit with a
party in interest; (c) a transaction involving the furnishing of
goods, services or facilities with a party in interest; or (d) a
transaction involving the transfer of Plan assets to, or use of
Plan assets by or for the benefit of, a party in interest.
Additionally, Section 406 prohibits a Plan fiduciary from dealing
with Plan assets in its own interest or for its own account, from
acting in any capacity in any transaction involving the Plan on
behalf of a party (or representing a party) whose interests are
adverse to the interests of the Plan, and from receiving any
consideration for its own account from any party dealing with the
Plan in connection with a transaction involving Plan assets.
Similar provisions in Section 4975 of the Code apply to
transactions between disqualified persons and Plans and IRAs and
result in the imposition of excise taxes on such disqualified
persons.
If a prohibited transaction has occurred, Plan fiduciaries
involved in the transaction could be required to (a) undo the
transaction, (b) restore to the Plan any profit realized on the
transaction and (c) make good to the Plan any loss suffered by it
as a result of the transaction. In addition, parties in interest
or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under
Section 408(e)(2) of the Code by reason of the Company engaging
in a prohibited transaction with the individual who established
an IRA or his beneficiary, the IRA would lose its tax-exempt
status. The other penalties for prohibited transactions would not
apply.
Thus, the acquisition of the Series A Preferred Shares by a
Plan could result in a prohibited transaction if an Underwriter,
the Company, the Bank, Holdings or any of their affiliates is a
party in interest or disqualified person with respect to the
Plan. Any such prohibited transaction could be treated as exempt
under ERISA and the Code if the Series A Preferred Shares were
acquired pursuant to and in accordance with one or more "class
exemptions" issued by the Department of Labor, such as Prohibited
Transaction Class Exemption ("PTCE") 75-1 (an exemption for
certain transactions involving employee benefit plans and
broker-dealers (such as the Underwriters), reporting dealers, and
banks), PTCE 84-14 (as exemption for certain transactions
determined by an independent qualified professional asset
manager), PTCE 90-1 (an exemption for certain transactions
involving insurance company pooled separate accounts), PTCE 91-38
(an exemption for certain transactions involving bank collective
investment funds), PTCE 95-60 (an exemption for certain
transactions involving an insurance company's general account)
and PTCE 96-23 (an exemption for certain transactions determined
by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares
pursuant to the Offering if such acquisition will constitute a
non-exempt prohibited transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of
holding more than 10% of the Series A Preferred Shares if the
Company is "predominantly held" by qualified trusts. See "Federal
Income Tax Considerations Taxation of United States
Stockholders Treatment of Tax-Exempt Stockholders."
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement dated , 1996 among the Company, the Bank and
the Underwriters named below (the "Underwriting Agreement"), the
Company has agreed that the Company will sell to each of the
underwriters named below (the "Underwriters"), and each of such
Underwriters for which Lehman Brothers Inc. is acting as a
representative has severally agreed to purchase from the Company,
the respective number of Series A Preferred Shares set forth
opposite its name below:
Number of Shares
of Series A
Underwriters Preferred Stock
Lehman Brothers Inc. ---------------
Total . . . . . . . . . . . . . . 2,000,000
Under the terms and conditions of the Underwriting
Agreement, the Underwriters are committed to take and pay for all
the Series A Preferred Shares offered hereby, if any are taken.
The Company has agreed to pay to the Underwriters as compensation
for arranging the offering % per Series A Preferred Share,
except for Series A Preferred Shares sold to certain institutions
for which the Underwriters Compensation will be % per Series
A Preferred Share.
The Underwriters propose to offer the Series A Preferred
Shares in part directly to the public at the initial public
offering price set forth on the cover page of this Prospectus,
and in part to certain securities dealers at such price less a
concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $
per share to certain brokers and dealers. After the Series A
Preferred Shares are released for sale to the pubic, the offering
price and other selling terms may from time to time be varied by
the representatives.
The Company has granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to
purchase up to an aggregate of 300,000 additional Series A
Preferred Shares solely to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof
that the number of Series A Preferred Shares to be purchased by
each of them, as shown in the foregoing table, bears to the
2,000,000 Series A Preferred Shares offered hereby.
The Company has agreed that, during the period beginning
from the date of this Prospectus and continuing to and including
the date 90 days after the date of this Prospectus, it will not
offer, sell, contract to sell or otherwise dispose of any
securities of the Company which are substantially similar to the
Series A Preferred Shares or which are convertible or
exchangeable into securities which are substantially similar to
the Series A Preferred Shares without the prior written consent
of the representative, except for the Series A Preferred Shares
offered in connection with the Offering.
The representatives of the Underwriters have informed the
Company that they do not expect sales to accounts over which the
Underwriters exercise discretionary authority to exceed five
percent of the total number of shares of Series A Preferred
Shares offered by them.
Prior to the Offering, there has been no public market for
the shares.
The Series A Preferred Shares will be listed on the New York
Stock Exchange. In order to meet one of the requirements for
listing the Series A Preferred Shares on the New York Stock
Exchange, the Underwriters have undertaken to sell lots of 100 or
more shares to a minimum of 2,000 beneficial holders.
The Company and the Bank have agreed to indemnify the
several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
Certain of the Underwriters or their affiliates have
provided from time to time, and expect to provide in the future,
investment or commercial banking services to affiliates of the
Company, for which such Underwriters or their affiliates have
received or will receive customary fees and commissions.
EXPERTS
The financial statement as of , 1996 included in
this Prospectus has been so included in reliance on the report of
Ernst and Young, L.L.P. independent accountants, given on the
authority of said firm as experts in auditing and accounting.
RATINGS
It is expected that the Series A Preferred Shares will be
rated by S & P's, Moody's, Fitch and DCR. A security rating is
not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning
rating organization. No person is obligated to maintain any
rating on the Series A Preferred Shares, and, accordingly, there
can be no assurance that the ratings assigned to the Series A
Preferred Shares upon initial issuance will not be lowered or
withdrawn by the assigning rating organization at any time
thereafter.
CERTAIN LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby
will be passed upon by Keating, Muething & Klekamp, Cincinnati,
Ohio for the Company. The validity of the Series A Preferred
Shares will be passed upon for the Underwriters by Skadden, Arps,
Slate, Meagher, Flom, New York, New York. Certain tax matters
described under "Federal Income Tax Considerations" will be
passed upon for the Company by Skadden, Arps, Slate, Meagher &
Flom, New York, New York.
GLOSSARY
"Advisor" means the Bank in its role as advisor under the
Advisory Agreement.
"Advisory Agreement" means the agreement between the Bank
and the Company pursuant to which the Bank will (i) administer
the day-to-day operations of the Company, (ii) monitor the credit
quality of the Mortgage Assets held by the Company and (iii)
advise the Company with respect to the acquisition, management,
financing and disposition of the Company's Mortgage Assets.
"Articles of Incorporation" means the Articles of
Incorporation of the Company.
"Bank" means The Provident Bank, state chartered commercial
bank.
"Board of Directors" means the board of directors of the
Company.
"Closing Date" means , 1996.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loan" means a Mortgage Loan which is
secured by commercial mortgaged property.
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, no par value per
share, of the Company.
"Company" means Provident Preferred Capital Corp., an Ohio
corporation.
"Custodial Agreement" means the agreement between the
Company and the Custodian pursuant to which the Custodian will
retain certain documents related to the Mortgage Loans.
"Custodian" means the Bank in its role as custodian under
the Custodial Agreement.
"Cut-Off Date" means the end of business on
, 1996.
"DCR" means Duff & Phelps Credit Rating Co.
"Dividend Payment Date" means any of the last business day
of March, June, September and December of each year.
"Dividend Period" means each quarterly period ending May 31,
June 30, September 30 or December 31, or if such date is not a
business day, on the next business day.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Excess Shares" means the shares of any class or series of
Preferred Stock owned, or deemed to be owned, by or transferred
to a stockholder in excess of the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"FHLMC" means Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax
Act of 1980, as amended.
"Fitch" means Fitch Investors Service, L.P.
"Five or Fewer Test" means the Code requirement that not
more than 50% in value of the Company's outstanding stock may be
owned, directly or indirectly, by five or fewer individuals (as
defined in the Code).
"FNMA" means the Federal National Mortgage Association, or
any successor thereto.
"Foreign Stockholders" means holders of Series A Preferred
Shares that are for United States federal income tax purposes (i)
non-resident alien individuals, (ii) foreign corporations and
foreign partnerships or (iii) foreign trusts and estates.
"GNMA" means the Government National Mortgage Association or
any successor thereto.
"Holdings" means Provident Bancorp, Inc.
"Independent Directors" means the members of the Board of
Directors who are not current officers or employees of the
Company, Holdings, the Bank or any affiliate thereof.
"Initial Dividend Period" means the first Dividend Period.
"Initial Portfolio" means the initial portfolio of Mortgage
Loans, mortgage-backed securities and cash acquired by the
Company.
"IRA" means an individual retirement arrangement under
Section 408 of the Code.
"IRS" means the United States Internal Revenue Service.
"Junior Stock" means any class or series of equity
securities of the Company, other than classes or series of equity
securities of the Company expressly designated as being on parity
with or senior to the Series A Preferred Stock, as to dividend
rights and rights upon liquidation, winding-up or dissolution.
"Loan-to-Value Ratio" means, with respect to any Mortgage
Loan, the ratio (expressed as a percentage) of the original
principal amount of such Mortgage Loan to the lesser of (i) the
appraised value at origination of the Mortgaged Property
underlying such Mortgage Loan and (ii) if the Mortgage Loan was
made to finance the acquisition of property, the purchase price
of the mortgaged property.
"Moody's" means Moody's Investor Services Inc.
"Mortgage Assets" means mortgage loans, mortgage backed
securities and cash.
"Mortgage-Backed Securities" means multi-class mortgage pass
through certification issued by the GNMA, FNMA or FHLMC
representing and interests in, or obligations backed by, pools of
Residential Mortgage Loans on properties located in the U.S.
"Mortgage Loan" means whole loans secured by commercial or
residential real estate properties.
"Mortgaged Property" means real property that secures a
Mortgage Loan.
"Non-United States Holder" means any person other than (i) a
citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under
the laws of the United States or of any state thereof, or (iii)
an estate or trust whose income is includible in gross income for
U.S. federal income tax purposes regardless of its source.
"Offering" means the offering of Series A Preferred Shares
pursuant to the Prospectus.
"One Hundred Persons Test" means the Code requirement that
the capital stock of the Company be owned by 100 or more persons
during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year.
"Ownership Limit" means the provision in the Company's
Articles of Incorporation limiting any person from owning
(including shares deemed to be owned by the attribution
provisions of the Code) more than % of the lesser of the
number of the issued and outstanding shares of Preferred Stock or
the value of the issued and outstanding shares of the Company.
"Parity Stock means any class or series of equity securities
of the Company which is expressly designated as being on parity
with the Series A Preferred Stock.
"Plan" means a pension, profit-sharing, retirement or other
employee benefit plan.
"Plan Asset Regulation" means the DOL regulations
determining the assets of a Plan for purposes of ERISA and the
related prohibited transaction excise tax provisions of the Code.
"Preferred Stock" means preferred stock, par value $25.00
per share, of the Company.
"Prospectus" means this prospectus, as the same may be
amended.
"PTCE" means Prohibited Transaction Class Exemption.
"Registration Statement" means the registration statement
filed by the Company with the Commission on Form S-11 with
respect to the Series A Preferred Shares.
"REIT" means a real estate investment trust as defined
pursuant to the REIT Provisions, or any successor provisions
thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856
through 860 of the Code and the applicable Treasury Regulations.
"REIT taxable income" shall have the meaning set forth in
"Federal Income Tax Considerations Taxation of the Company Annual
Distribution Requirements."
"Residential Mortgage Loan" means a Mortgage Loan that is
secured by a residential mortgaged Property.
"S&P" means Standard & Poor's Corporation.
"Seller's Warranties, Sale and Servicing Agreements" means
the Seller's Warranties, Sale and Servicing Agreements executed
between the Bank and the Company as each may separately relate to
either the Commercial Mortgage Loans or Residential Mortgage
Loans.
"Senior Stock" means any and all classes or series of equity
securities of the Company expressly designated as being senior to
the Series A Preferred Stock as to dividend rights and rights
upon liquidation, winding up or dissolution.
"Securities Act" means the Securities Act of 1933, as
amended.
"Series A Preferred Shares" means the shares of Series A
Preferred Stock of the Company offered hereby.
"Servicer" means the Bank in its role as Servicer pursuant
to either of the Seller's Warranties, Sale and Servicing
Agreements, and its successor in interest and assigns or any
successor servicer appointed pursuant to either agreement.
"Significant Shareholder" means shareholders of Holdings,who
after the Offering through their constructive ownership of a
beneficial interest in the Bank, will be deemed to own
constructively approximately % of the value of the outstanding
shares of beneficial interest in the Company.
"Single Family" means one to four family residential
housing.
"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, treaties or any regulations thereunder of
the United States or any political subdivision or taxing
authority thereof or therein affecting taxation, (ii) any
judicial decision, official administrative pronouncement, 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 judicial decision
or any interpretation or pronouncement that provides for a
position with respect to such Administrative Action or judicial
decision 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 issuance of the Series A Preferred Shares, there is more than
an insubstantial risk that (a) dividends payable by the Company
with respect to the capital stock of the Company are not, or will
not be, fully deductible 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.
"Treasury Regulations" means the income tax regulations
promulgated under the Code.
"Underwriters" means those underwriters to which the Company
will sell the Series A Preferred Shares pursuant to the terms of
the Underwriting Agreement.
"Underwriters' Compensation" means compensation payable to
the underwriters as set forth in the Underwriters Agreement.
"Underwriting Agreement" means the underwriting agreement by
and among the Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A
Preferred Shares that are for United States federal income tax
purposes (i) citizens or residents of the United States, (ii)
corporations, partnerships, or other entities created or
organized in or under the laws of the United States or of any
political subdivisions thereof or (iii) an estate or trust the
income of which is subject to United States federal income
taxation regardless of its source.
"USRPI" means United States real property interest.
INDEX OF PRINCIPAL TERMS
Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . 7
Articles of Incorporation . . . . . . . . . . . . . . . . . . 3,7
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,2,4
Board of Directors . . . . . . . . . . . . . . . . . . . . . 1,4
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . 22
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Commercial Mortgage Loan . . . . . . . . . . . . . . . . . . . 6
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 2,4
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Custodial Agreement . . . . . . . . . . . . . . . . . . . . . 22
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . 6
DCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Dividend Payment Date . . . . . . . . . . . . . . . . . . . . 44
Dividend Period . . . . . . . . . . . . . . . . . . . . . . . . 4
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Excess Shares . . . . . . . . . . . . . . . . . . . . . . 50,64
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . 3
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FIRPTA . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Five or Fewer Test . . . . . . . . . . . . . . . . . . . . . 15
FNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Foreign Stockholders . . . . . . . . . . . . . . . . . . . . 65
GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Independent Directors . . . . . . . . . . . . . . . . . . . . 4,7
Initial Dividend Period . . . . . . . . . . . . . . . . . . . 45
Initial Portfolio . . . . . . . . . . . . . . . . . . . . . . . 6
IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,49
Junior Stock . . . . . . . . . . . . . . . . . . . . . . . . 44
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . 28
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . 4
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . 23
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . 6
Mortgaged Property . . . . . . . . . . . . . . . . . . . . . 11
Non-United States Holder . . . . . . . . . . . . . . . . . 56,65
Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
One Hundred Persons Test . . . . . . . . . . . . . . . . . . 50
Ownership Limit . . . . . . . . . . . . . . . . . . . . . . . 15
Parity Stock . . . . . . . . . . . . . . . . . . . . . . . . 44
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Plan Asset Regulation . . . . . . . . . . . . . . . . . . . 59
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 4
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . 66
PTCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Registration Statement . . . . . . . . . . . . . . . . . . . . 2
REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
REIT Provisions . . . . . . . . . . . . . . . . . . . . . . 49,50
REIT taxable income . . . . . . . . . . . . . . . . . . . . 1,53
Residential Mortgage Loan . . . . . . . . . . . . . . . . . . . 6
S & P . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . 2
Seller's Warranties, Sale and
Servicing Agreements . . . . . . . . . . . . . . . . . 9,22
Senior Stock . . . . . . . . . . . . . . . . . . . . . . . . 44
Series A Preferred Shares . . . . . . . . . . . . . . . . . . . 1
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . 9,13
Significant Shareholders . . . . . . . . . . . . . . . . . 15,49
Single Family . . . . . . . . . . . . . . . . . . . . . . . 11,21
Tax Event . . . . . . . . . . . . . . . . . . . . . . . . . 1,46
Treasury Regulations . . . . . . . . . . . . . . . . . . 50,51
Underwriters . . . . . . . . . . . . . . . . . . . . . . . 1,61
Underwriters' Compensation . . . . . . . . . . . . . . . . . . 1
Underwriting Agreement . . . . . . . . . . . . . . . . . . . 61
United States Stockholders . . . . . . . . . . . . . . . . 52,55
USRPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
INDEX TO FINANCIAL STATEMENT
Report of Independent Accountants . . . . . . . . . . . . . . F-2
Balance Sheet of Provident Preferred Capital Corp. as of
, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Note to Financial Statement . . . . . . . . . . . . . . . . . F-4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Provident Preferred Capital Corp.
In our opinion, the accompanying balance sheet presents
fairly, in all material respects, the financial position of
Provident Preferred Capital Corp. (the "Company") at October 1,
1996 in conformity with generally accepted accounting principles.
This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit in
accordance with generally accepted auditing standards which
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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed
above.
New York, New York
, 1996
PROVIDENT PREFERRED CAPITAL CORP.
BALANCE SHEET
OCTOBER 1, 1996
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $1,000
STOCKHOLDER'S EQUITY
Common Stock, no par value per share, 100 shares
authorized, issued and outstanding . . . . . . . . . . $ 0
Additional Paid-in Capital . . . . . . . . . . . . . . $1,000
The Note to Financial Statement is an integral part of this
Statement.
PROVIDENT PREFERRED CAPITAL CORP.
NOTE TO FINANCIAL STATEMENT
1. ORGANIZATION
Provident Preferred Capital Corp. (the "Company"), a
wholly-owned subsidiary of The Provident Bank (the "Bank"), was
incorporated on September 9, 1996 in the State of Ohio.
The Company intends to invest in mortgage-related assets
financed by common and preferred stock offerings and expects to
generate income for distribution to its future preferred and
common stockholders primarily from the net interest income
derived from its investments in mortgage-related assets. The
Company intends to operate in a manner that permits it to elect,
and it intends to elect, to be subject to tax as a real estate
investment trust for federal income tax purposes. The Company has
not had any operations as of , 1996.
The Company intends to sell preferred stock in an
underwritten public offering. The cost of this public offering
will be paid by the Company out of proceeds from a sale of common
stock to the Bank. If the public offering is not consummated, the
Bank will pay any offering costs.
No person has been authorized
to give any information or make
any representations other than
those contained in this 2,000,000 SHARES
Prospectus, and, if given or
made, such information or
representations must not be PROVIDENT PREFERRED CAPITAL CORP.
relied upon as having been
authorized. This Prospectus
does not constitute an offer to % NON-CUMULATIVE
sell or a solicitation of an PREFERRED STOCK,
offer to buy any securities SERIES A
other than the securities to
which it relates or an offer to
sell or a solicitation of an (Liquidation Preference
offer to buy such securities in
any circumstances in which such $25 Per Share)
offer or solicitation is ____________
unlawful. Neither the delivery
of this Prospectus nor any sale
made hereunder shall, under any ____________
circumstances, create any
implication that there has been
no change in the affairs of the
Company since the date hereof
or that information contained
herein is correct as of any
time subsequent to its date.
__________
TABLE OF CONTENTS
PAGE
Additional Information . . 2
Prospectus Summary . . . . 4
Risk Factors . . . . . . . 9 Lehman Brothers
The Company . . . . . . . . 17
Use of Proceeds . . . . . . 17
Capitalization . . . 19
Business and Strategy . . . 20
Management . . . . . . . . 40
Certain Transactions
Constituting the
Formation . . . . . . . . 43
Description of Series A
Preferred Shares . . . . . 44
Description of Capital Stock 48
Federal Income Tax
Considerations . . . . . . 51
ERISA Considerations . . . 58
Underwriting . . . . . . . 61
Experts . . . . . . . . . . 62
Ratings . . . . . . . . . . 62
Certain Legal Matters . . . 63
Glossary . . . . . . . . . 64
Index of Principal Terms . 68
Index to Financial Statement F-1
Note to Financial Statement U-1
THROUGH AND INCLUDING
, 1996 (THE TH DAY AFTER
THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration Fee................................... $ 15,151.52
NYSE Listing Fee................................... $ *
Printing and Engraving Expenses.................... $ *
Legal Fees and Expenses............................ $ *
Accounting Fees and Expenses....................... $ *
Blue Sky Fees and Expenses......................... $ *
Financial Advisory Fee............................. $ *
Miscellaneous...................................... $ *
Total.............................................. $ *
* To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
See response to Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of the Company, the Company
will issue 1,000 shares of common stock, no par value per share, to The
Provident Bank. A further description of this transaction is set forth in
the Prospectus under the heading "Certain Transactions Constituting the
Formation" and is incorporated herein by reference. These shares of common
stock will be issued in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Ohio General Corporation Law ("OGCL") a
corporation may indemnify or agree to indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened, pending, or
contemplated action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right
of the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee,
member, manager, or agent of another corporation, domestic or foreign,
nonprofit or for profit, a limited lability company, or a partnership,
joint venture, trust, or to her enterprise, against expenses, including
attorney's fees, judgments, fines, and amounts paid in settlement actually
and reasonably incurred by him in connection with such action suit or
proceeding, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit, or proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was
unlawful.
The OGCL also permits indemnification by a corporation under
similar circumstances for expenses actually and reasonably incurred by such
persons in connection with the defense or settlement of a derivative action
or suit, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, except
that no indemnification shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person is
judged to be liable for negligence or misconduct in the performance of his
duty to the corporation unless, and only to the extent that, the court of
common pleas or the court in which such action or suit was brought
determines, upon application, that, despite the adjudication of liability,
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court of common
pleas or such other court shall deem proper; or
(b) Any action or suit in which the only liability asserted
against a director is pursuant to section 1701.95 of the OGCL.
The OGCL further provides that to the extent that a
director, trustee, officer, employee, member, manager, or agent has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to above, or in defense of any claim, issue, or matter
therein, he shall be indemnified against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the
action, suit, or proceeding.
The OGCL also requires a corporation, unless the Articles or
Regulations of a corporation state, by specific reference to Ohio Revised
Code Section 1701.13(E)(5), that the statutory mandatory advancement of
expenses scheme is not applicable to that corporation, and unless the only
liability asserted against a director in such litigation is with respect to
alleged illegal dividends, distributions to shareholders or loans, to
advance to a director expenses, including attorney's fees, incurred by a
director in defending an action, suit or proceeding as they are incurred
upon receipt from the director of an undertaking in the statutory form.
The indemnification and reimbursement of expenses authorized
by the OGCL are not exclusive of, and shall be in addition to, any other
rights granted to those seeking indemnification under the articles, the
regulations, any agreement, a vote of shareholders of disinterested
directors, or otherwise, both as to action in their official capacities and
as to action in another capacity while holding their offices or positions,
and shall continue as to a person who has ceased to be a director, trustee,
officer, employee, member, manager, or agent and shall inure to the benefit
of the heirs, executors, and administrators of such a person.
Corporations may purchase and maintain insurance or furnish
similar protection, on behalf of or for any person who is or was a
director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee, member, manager, or agent of another corporation, domestic or
foreign, nonprofit or for profit, a limited liability company, or a
partnership, joint venture, trust, or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the OGCL.
The Regulations of Provident Preferred Capital Corp. (the
"Registrant") require indemnification to the fullest extent permitted
under applicable law, as from time to time in effect. The Regulations
provide a clear and unconditional right to indemnification for expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by any person in connection
with any threatened, pending or completed investigation, claim, action,
suit or proceeding, whether civil, administrative or investigative
(including, to the extent permitted by law, any derivative action) by
reason of the fact that such person is or was serving as a director,
officer, employee or agent of the Registrant or, at the request of the
Registrant, of another corporation, partnership, joint venture, trust or
other enterprise (including, without limitation, an employee benefit plan).
The Regulations further specify that the right to indemnification so
provided is a contract right, and set forth certain procedural and
evidentiary standards applicable to the enforcement of a claim under the
Regulations which entitle the persons to be indemnified to be reimbursed
for the expenses of prosecuting any such claim against the Registrant
and entitle them to have all expenses incurred in advance of the final
disposition of a proceeding paid by the Registrant. Such provisions,
however, are intended to be in furtherance and not in limitation of the
general right to indemnification provided in the By-laws, which right of
indemnification and of advancement of expenses is not exclusive.
The Registrant's Regulations also provide that the
Registrant may enter into contracts with any director, officer, employee or
agent of the Registrant in furtherance of the indemnification provisions in
the Regulations, as well as create a trust fund, grant a security interest
or use other means (including, without limitation, a letter of credit) to
ensure payment of amounts indemnified.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Not applicable.
(b) Exhibits
EXHIBIT NUMBER
DESCRIPTION
1* -- Form of Underwriting Agreement among the Company, the
Bank and the Underwriters
3(a)(i) -- Articles of Incorporation of the Company
3(a)(ii) -- Regulations of the Company
4* -- Specimen of Certificate representing Series A Preferred
Shares
5* -- Opinion of Keating, Muething & Klekamp, counsel to the
Company, relating to the Series A Preferred Shares
8* -- Opinion of Skadden, Arps, Slate, Meagher & Flom, counsel
to the Company, relating to certain tax matters
10(a)* -- Form of Seller's Warranties, Sale and Purchase Agreement
(Residential Mortgages)
10(b)* -- Form of Seller's Warranties, Sale and Purchase Agreement
(Commercial Mortgages)
10(c)* -- Form of Advisory Agreement between the Company and the
Bank
23(a)* -- Consent of Ernst & Young, L.L.P.
23(b)* -- Consent of Keating, Muething & Klekamp (included in
Exhibit 5)
23(c)* -- Consent of Skadden, Arps, Slate, Meagher & Flom (included
in Exhibit 8)
* To be filed by amendment
ITEM 36. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to
the Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions
described under Item 33 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer, or controlling person of
the Registrant in the successful defense of any action, suit or
proceeding), is asserted by such director, officer, or controlling person
in connection with the securities registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under
the Act, the information omitted from the form of Prospectus filed
as part of this Registration Statement in reliance upon Rule 430A
and contained in the form of Prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this Registration Statement as of the time it
was declared effective; and
(2) For the purpose of determining any liability
under the Act, each post-effective amendment that contains a form
of Prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on form S-11 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cincinnati, Ohio on October 4,
1996.
Provident Preferred Capital Corp.
By: /s/ Allen L. Davis
Allen L. Davis
Chairman of the Board and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Allen L. Davis, John R. Farrenkopf
and Mark E. Magee, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and restitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hreby
ratifying and confirming all that said attorneys-in-fact and agents, or any
of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/s/ Allen L. Davis Chairman of the Board and October 4, 1996
Allen L. Davis Chief Executive Office
Principal Executive Officer)
/s/ John R. Farrenkopf Chief Financial Officer October 4, 1996
John R. Farrenkopf and Controller (Principal
Financial Officer and
Principal Accounting Officer)
/s/ Phillip R. Myers Executive Vice-President October 4, 1996
Phillip R. Myers and Director
/s/ Jack M. Cook Director October 4, 1996
Jack M. Cook
/s/ Thomas D. Grote, Jr. Director October 4, 1996
Thomas D. Grote, Jr.
/s/ Joseph A. Pedoto Director October 4, 1996
Joseph A. Pedoto
/s/ Sidney A. Peerless Director October 4, 1996
Sidney A. Peerless
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
OF CERTAIN REAL ESTATE COMPANIES
PROVIDENT PREFERRED CAPITAL CORP.
EXHIBIT LIST
EXHIBIT NUMBER
DESCRIPTION
1* -- Form of Underwriting Agreement among the Company, the
Bank and the Underwriters
3(a)(i) -- Articles of Incorporation of the Company
3(a)(ii) -- Regulations of the Company
4* -- Specimen of Certificate representing Series A Preferred
Shares
5* -- Opinion of Keating, Muething & Klekamp, counsel to the
Company, relating to the Series A Preferred Shares
8* -- Opinion of Skadden, Arps, Slate, Meagher & Flom, counsel
to the Company, relating to certain tax matters
10(a)* -- Form of Seller's Warranties, Sale and Purchase Agreement
(Residential Mortgages)
10(b)* -- Form of Seller's Warranties, Sale and Purchase Agreement
(Commercial Mortgages)
10(c)* -- Form of Advisory Agreement between the Company and the
Bank
23(a)* -- Consent of Ernst & Young, L.L.P.
23(b)* -- Consent of Keating, Muething & Klekamp (included in
Exhibit 5)
23(c)* -- Consent of Skadden, Arps, Slate, Meagher & Flom (included
in Exhibit 8)
* To be filed by amendment